Any mention of the word “audit” is likely to elicit a frustrated groan or a fearful shake of the head from many of us, but what self-managed superannuation fund (SMSF) trustees need to realise is an audit can be a good thing. As tedious as it may sound, an audit is useful in providing an overview of the status of your SMSF – including an assessment of the fund’s compliance as well as a report of the relevant contraventions, if any.
So when do these audits take place? SMSFs have to appoint an “approved auditor” at least 30 days before the due date of the SMSF annual return. An SMSF that is not a new entrant or that has outstanding previous year returns has a deadline of October 31 this year while newly registered SMSFs have to lodge by February 28 next year.
There is no rush as such to complete this audit but bear in mind – if any compliance contraventions are identified, the auditor should immediately alert the trustee who can then rectify these contraventions before the audit is finalised and lodged. That way, a trustee can avoid being penalised by the Tax Office or worse still, risk their fund being deemed non-compliant and losing its tax concessions. A handy tip of course is to check last year’s audit report to see what action, if any, was requested by the auditor.
Also, bear in mind that the Tax Office is homing in on three major areas under its SMSF compliance program for 2012 – non or late lodgements, compliance breaches without an auditor contravention report, and unrectified auditor contravention reports. And of all offences, the Tax Office says failure to lodge an annual return is most prevalent.
If trustees have gone through past actions and rectified them, below is a list of what else the Tax Office may be looking out for:
1. Sole purpose test
SMSFs are only eligible for the tax concessions they currently enjoy because of the sole purpose test. To adhere to this test, SMSFs need to be maintained solely to provide retirement benefits to their members, or their dependants if a member dies before retirement.
The Tax Office says the most common breaches of the sole purpose test are:
• investments that offer a pre-retirement benefit to a member or associate
• providing financial help or a pre-retirement benefit to someone, to the financial detriment of a fund.
By way of example, a breach of the sole purpose test would occur if SMSF members use, or have direct access to, collectables such as art or wine held by the fund.
To further determine if an SMSF has breached the sole purpose test, an auditor will look at:
• the SMSF’s trust deed, and
• the character and purpose of the SMSF’s investments to check that investment arrangements do not provide prohibited financial assistance and that trustees, family and friends are not given access to fund assets for private use.
Preparing an investment strategy is one of the key tasks that SMSF trustees need to complete. There is no right way to prepare a strategy; rather it is unique to your approach to investment and risk. That aside, there are common pitfalls that the Tax Office looks out for, so trustees should check that they have:
• not provided financial assistance to a member or relative using resources of the fund
• not intentionally acquired assets from related parties of the fund (unless they are listed securities, business real property or in-house assets up to the 5% limit)
• all investments revalued to current market value so it is ready for the auditor (this is typically done by June 30 each year)
• purchased and sold assets at a fair market value and that money was actually paid by looking at their valuation reports and bank statements
• made and maintained all investment transactions at arm’s length
• drawn up a formal lease agreement, where applicable
• made certain that all SMSF investments – bank accounts, shares, unit trusts – are appropriately registered in the name of the trustees of the fund.
The auditor may ask for a land title search for any property held by the fund so prepare by locating the Lot and DP numbers so they are ready in time for the audit. Also collate all insurance policy documents for the auditor to show that assets of the SMSF are appropriately insured and take the time to review all policies to ensure sufficient cover is in place.
3. Separation of assets
A basic rule for SMSF trustees is that they have to keep their SMSF money and other assets separate from all personal money and assets belonging to them – effectively operating a separate bank account for the SMSF and manage all investments, income and expenses in the name of the fund. Trustees are urged to keep appropriate records and pay meticulous attention to details to avoid a breach.
Trustees can make concessional and non-concessional contributions or can take advantage of the government’s co-contribution scheme. However, make sure any member over 65 has met the work test if they have made contributions to the fund. If a fund member fails to meet the work test, the trustees have only 30 days to refund the contributions received by the fund. If not refunded within the time limit, a breach has occurred and may result in an auditor contravention report.
5. Administrative obligations
Trustees may be surprised to learn that as important as the responsibilities above is the duty of keeping proper and accurate records. Under super laws, SMSF trustees must document and take minutes of all decisions concerning the operation of their fund. Below is what trustees should keep aside in case their auditor needs to have a look at them:
• minutes of all meetings for a minimum of 10 years or since the establishment of the fund if the fund is less than 10 years old with details of all major decisions made including asset purchases, commencement of pensions, appointment of new members and review of investment strategy
• accounting records for a minimum of five years or since the establishment of the fund if the fund is less than five years old
• signed trustee declarations for trustees who became members of the fund after July 1, 2007
• proper accounting records in a statement of financial position and an operating statement
• copy of trust deed
• election or notice to be a regulated fund
• current audit engagement letter
• trustee representation letter
• investment strategy that gives consideration to risk, return, liquidity and diversification
• financial report on the fund
• working papers including copies of all relevant documents that are important in providing evidence that support your findings and opinion
• management letter or completed audit finalisation report.
The list above is not a complete guide on how trustees can prepare for their SMSF audit, so consult this office for more information