It’s SMSF audit time: What is it and how does it work?

author-avatar By on October 09, 2020
It’s SMSF audit time: What is it and how does it work?

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Absolutely everybody (everybody, everybody) who runs a self-managed superannuation fund (SMSF) has to have their fund audited every year to make sure the fund isn’t breaking any rules.

As we all know, if your SMSF isn’t compliant with superannuation rules you can get into a lot of trouble with the Tax Office, so getting your SMSF audited is essential.

So what does an SMSF audit involve and how does it all work?

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What is an SMSF audit?

Every financial year, your SMSF must undergo a financial and compliance audit to ensure it remains in accordance with the Australian Taxation Office (ATO). An audit has to be completed before you can lodge your SMSF’s annual tax return.

As we’ve mentioned, there are two parts to an SMSF audit: a financial audit and a compliance audit. The financial audit component looks at the fund’s financial statements in accordance with Australian Auditing Standards (ASAs). The compliance audit component basically checks that your SMSF fund is compliant with all superannuation legislation in accordance with the Standards on Assurance Engagements (ASAE) produced by the Auditing and Assurance Standards Board (AUASB).

An SMSF audit has to be undertaken by a registered and approved SMSF auditor appointed by the trustee(s). The auditor also has to be audited by the ATO (so much auditing). You can’t audit your own SMSF fund or that of an immediate family member.

Now, take a shot for every time I use the word audit in this article.

How much does an SMSF audit cost?

Not many things in life are free and neither are SMSF audits.

Because many SMSF auditors are private professionals, they can pretty much set their own rates meaning there isn’t a universal SMSF audit fee.

According to the ATO, these are the average and median SMSF audit fees up to the financial year 2017/18 and SMSF audit fee price ranges. As you can see, the median SMSF audit fee is $550 with the lion’s share of SMSF audit fees falling between $500 - $999.

Average and median SMSF auditor fees, 2013–14 to 2017–18

SMSF auditor fees

2017–18

2016–17

2015–16

2014–15

2013–14

Average

$687

$694

$704

$760

$726

Median

$550

$550

$550

$550

$550

Source: ATO

Distribution of SMSFs by audit fee range, 2013–14 to 2017–18

Audit fee range

2017–18

2016–17

2015–16

2014–15

2013–14

>$0–$499

38.4%

37.5%

36.9%

36.5%

36.6%

$500–$999

49.9%

50.0%

50.1%

49.7%

48.9%

$1,000–$1,999

9.7%

10.2%

10.6%

11.0%

11.5%

$2,000 and above

2.1%

2.3%

2.4%

2.8%

3.1%

Total

100%

100%

100%

100%

100%

Source: ATO

If you’re trying to cut costs and save money by getting a cheap SMSF audit, tread carefully. A few years ago, the ATO conducted an investigation into ‘lower-cost audits’ (defined as audits that charge below $400) and found several issues with cheap SMSF audits.

ATO Commissioner Chris Jordan said many cheap SMSF audits failed to meet the most basic standards.

“No great surprise, we have found cases of concern where they’ve failed to conduct any sort of adequate audit that complies with any of the standards,” Mr Jordan told the SMSF Association’s national conference in Melbourne.

“They had no written audit plan or representation letters from trustees, all the things you would expect to be done, and we have taken action there.”

H&R Block SMSF Director, Kimberlee Brown said when it comes to SMSF audits, it’s very much a case of you get what you pay for.

“However, for example, our auditors - we get a very sharp price because of the following things: the software we use is compatible to their system and processes; we can guarantee a set volume of work; and many manual checks can now be made automatically, greatly reducing their time costs,” Ms Brown told Savings.com.au.

Auditing an SMSF that is winding up

If you’re winding up an SMSF (closing it) the trustee has to appoint an SMSF auditor to do the final audit and check that the SMSF fund is compliant with wind-up requirements.

The auditor has many responsibilities to comply with when doing this, which are listed in great detail on the ATO’s website if you want a bit of light reading.

SMSF audit checklist

So. If you’ve made it this far, congrats. Have another shot. Now, if you’re about to get your SMSF audited, these are the documents you’ll need according to H&R Block:

Documents required for an SMSF audit:

  • The auditor requires source documents to verify transactions of the fund for the financial year.  This may include bank statements, contract notes, rental statements etc.

  • Some accounting software can accept electronic data from banks, brokers and managed fund platforms, making the need to provide physical paper statements and documents not applicable. However, don’t assume this – check whether or not the accountant you work with has the applicable software, whether there are data feeds in place and if the auditor will accept this.

If it is the first year an auditor is auditing the fund, they will require signed copies of the documents that established the super fund. For example:

  • Trust Deed

  • ATO Trustee Declarations

  • Investment Strategy

  • Resolutions and acceptance of appointment as trustee of the fund

  • Membership application

Ms Brown said if trustees fail to keep accurate documentation and records, the auditor has to report it to the Tax Office.

Some of the more common issues H&R Block have seen that means auditors have to report a breach or caution the client by qualifying the audit, and recording the issue in a management letter to the trustee include:

  • Not keeping sufficient documentation to substantiate activities and transactions of a super fund. You can’t just provide an excel spreadsheet of items to the auditor that you wish to claim. You need to have original bank statements, invoices for expenses etc.

  • Not holding onto the documents that established the super fund. Signed trust deed, ATO trustee Declarations and establishment minute are just a few of the important documents that need to be kept and maintained by the trustee.

  • Ensuring they have documented a current investment strategy

  • The assets of the fund must be held in the name of the super fund to ensure separation of assets between the trustees’ personal assets and the super fund.

What happens if I don’t complete an SMSF audit?

You can’t lodge your tax return for an SMSF until it has been audited, so the penalty enforced by the ATO for SMSF non-compliance would apply here.

“Some of these penalties include monetary fines, a requirement to undertake education, rectification directions, trustee disqualification, winding up of the fund, civil and criminal penalties and the fund being made ‘non-complying’,” Ms Brown said.

“A non-compliance notice is for very serious breaches of the SMSF legislation. The fund loses its concessional tax rate of 15%. Instead, a rate of 45% is applicable on income earned by the fund AND on the value of the assets held by the fund.

“Franking credits can’t be claimed, and the exempt current pension income deduction isn’t available. Any tax or capital losses can’t be carried forward either.”

Ms Brown added these sanctions would exist until the SMSF fund is wound up or the breaches are rectified and the Tax Office advises the fund is again compliant.

Savings.com.au’s two cents

As you can see, SMSF audits are a very bland but important topic and if you’re thinking about running an SMSF (or you currently are) it’s essential to understand what your responsibilities and obligations are.

If you just can’t get enough of reading about SMSFs, you should probably get a hobby but we’ve got plenty more where that came from so knock yourself out.


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author-avatar
Emma Duffy is Assistant Editor at Your Mortgage and  Your Investment Property Mag, which are part of the Savings Media Group. In this role, she manages a team of journalists and expert contributors committed to keeping readers informed about the latest home loan and finance news and trends, as well as providing in-depth property guides. She is also a finance journalist at Savings.com.au which she joined shortly after its launch in early 2019. Emma has a Bachelor in Journalism and has been published in several other publications and been featured on radio.

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