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  • SMSFs - ATO insights and perspectives

    National Superannuation Conference Session 5B

    Presented by Kasey MacFarlane, Assistant Commissioner ATO

    Address to the Tax Institute, Crown Conference Centre

    Melbourne 25-26 August 2016

    (Check against delivery)

    CONTENTS

    1. Overview
    2. SMSF compliance
      1. Compliance outcomes in 2015-16
      2. Serious enforcement action
       
    3. Areas of focus for 2016-17
      1. Regulatory issues identified in auditor contravention reports
      2. Non-lodgers
      3. Tax planning arrangements
      4. Super Scheme Smart
      5. Taxpayer alert 2015/1: Dividend stripping arrangements
      6. Taxpayer alert 2016/6: Diversion of personal services income (PSI) to an SMSF
      7. Emerging issue - SMSFs directly or indirectly involved in related business ventures
      8. Collectables
       
    4. Support and assistance
      1. Early engagement and voluntary disclosure
      2. Safe-harbour guidelines and LRBAs
      3. Proposed super reform measures
       
    5. SMSF auditors and the broader integrity of the SMSF sector
      1. Independence
      2. Auditors auditing their auditor's fund - reciprocal audit arrangements
      3. Other independence risks
      4. SMSF audit quality - low cost auditors
      5. High volume auditors
       
    6. Conclusion

    1. Overview

    The ATO values our collaborative relationship with the SMSF sector, and we appreciate the strong support the Tax Institute provides to us in undertaking our role as regulator and tax administrator of SMSFs, and supporting SMSF trustees and their advisers to ensure good compliance and governance of the industry.

    There are clearly a number of recent developments in superannuation, including the Federal Government’s proposed reforms and the Productivity Commission inquiry into superannuation competitiveness and efficiencyExternal Link, which further heighten a number of common issues on which we will need to work together this financial year. To this end, one of our key focus areas for 2016-17 is timely and purposeful engagement with the SMSF sector to co-design and develop practical solutions to key issues as they emerge. In addition to participating in events such as this conference, we also engage more formally with the industry through consultative forums such as the Superannuation Industry Stewardship Group and via ongoing and targeted consultation about specific and emerging technical, administrative and compliance issues.

    We are also very much focused on helping individuals, and our 2016-17 compliance program will see a stronger shift towards supporting and assisting trustees who are willing to engage with us to self-correct and rectify regulatory issues in their fund. This shift in emphasis gives us more time to concentrate more intensive compliance activities on the most serious instances of non-compliance, including trustees who are unwilling to engage with us and/or are deliberately and persistently not complying with their obligations or are operating outside the system.

    Our recently introduced early engagement and voluntary disclosure service – which provides a single entry point for trustees and professionals to engage early with us in relation to unrectified contraventions – is an example of our shift in approach. The intent is to maximise opportunities for trustees to deal proactively with issues and also obtain certainty around our view of the rectification they’re proposing. We also see this service as supporting SMSF professionals in that it will encourage trustees to engage more with their SMSF auditor and SMSF professionals and work with them to devise proposals to rectify regulatory contraventions.

    The 2016-17 SMSF compliance program will also bring more intensity and focus to activities that review and assess the independence and quality of SMSF audits. Increased confidence in the independence and quality of the SMSF audit process will provide greater assurance about regulatory compliance and integrity within the sector and allow us to dedicate our more comprehensive audit and review activities, together with stronger enforcement actions, towards those who deliberately or repeatedly don’t comply with their obligations.

    SMSF compliance

    Compliance outcomes in 2015-16

    Our philosophy is to deal with minor contraventions in a collaborative way to help trustees to rectify them. Through initiatives such as our early engagement and voluntary disclosure service we seek to empower the individual to work with us to promote voluntary compliance.

    In practical terms what this means is that for less serious breaches, particularly if it is the first time, we accept enforceable undertakings, or issue education or rectification directions. However, for more serious, deliberate or persistent regulatory breaches we take firm action.

    Our compliance outcomes for 2015-16 reflected an increasing use of the new compliance enforcement tools afforded to us for regulatory breaches occurring after 1 July 2014.

    During the course of 2015-16 we saw a 38% reduction in the number of funds with enforceable undertakings. Conversely, the number of rectification directions we issued increased by 70%.

    Pleasingly, there was a small reduction in the number of trustees disqualified and a significant reduction in the number of funds made non-compliant; with a 54% increase in education directions issued to SMSF trustees. These figures and compliance outcomes for 2015-16 reflect an increasing use of our new enforcement tools for regulatory breaches after 1 July 2014.

    To date we have adopted a judicious approach in applying administrative penalties, with a few hundred funds being affected.

    Serious enforcement action

    The most serious enforcement actions available to us are disqualifying trustees and making funds non-complying.

    We disqualify trustees in relevant cases so that we can remove from the sector those individuals who ignore their obligations and responsibilities as trustees. We also increasingly use this power when examining the fitness of new entrants through our new-registrant integrity checks. These actions are critical to the integrity of the SMSF industry.

    Considering there are nearly 600,000 SMSFs, the number of funds we make non-complying is relatively small. This reflects our approach of reserving this action for the most serious cases of non-compliance.

    Although there are only a very few instances where we have had to take strong enforcement actions, the following examples highlight the nature of the behaviours that require more serious compliance action.

    An audit of a fund with outstanding lodgments for five income years (2011 to 2015) revealed multiple contraventions of the regulatory provisions including non-arm’s length transactions between related parties in excess of $600,000 which appear to have depleted the SMSF of all assets; with the trustee claiming that the SMSF’s investments were ‘lost’. The trustee of the fund was a previously discharged bankrupt with sizeable individual tax debts with several years of outstanding individual income tax returns. Moreover there was a failure to give notice in writing of a change in trustee of the fund and the fund’s investments were not appropriately distinguished from the members’ personal or business assets. In these circumstances we have made the fund non-complying and are in the process of taking further action to disqualify the trustee.

    In another matter, an individual who is both a tax agent and an approved SMSF auditor was involved in adding and removing trustees from a number of SMSFs without their knowledge and in several instances he installed himself as the trustee of the funds in question. In addition, he prepared the financial accounts and SMSF annual returns for the funds and then undertook the annual audit of those funds in his capacity as an approved auditor. We are currently in the process of disqualifying the individual from being a trustee and have referred his behaviours as an approved auditor to ASIC.

    The recently reported Federal Court judgement in Deputy Commissioner of Taxation v Rodriguez saw an SMSF trustee fined $40,000 in penalties and barred from acting as a trustee for serious contraventions involving some 43 unauthorised withdrawals from the fund for their personal use over a period spanning 2005 to 2012.

    Areas of focus for 2016-17

    Our approach in 2016-17 will see some key shifts in emphasis both in terms of the activities we undertake and the levels of enforcement action we apply. Our key focus areas will be:

    • to support trustees who are willing to engage with us to self-correct and rectify regulatory issues in their fund
    • to bring more intensity and effort to our compliance activities and enforcement actions in cases where trustees won’t engage with us and/or are deliberately and persistently not complying with their obligations or are operating outside the system
    • to bring more intensity and focus to activities that review and assess the independence and quality of SMSF audits. Increased confidence in the independence and quality of the SMSF audit process will provide greater assurance about regulatory compliance and integrity within the sector and allow us to dedicate our more comprehensive audit and review activities, together with stronger enforcement actions, to those who are deliberately or repeatedly not complying with their obligations
    • to maintain and build on strategies aimed at trying to help prevent non-compliance or other issues for SMSFs. This includes identifying at-risk new entrants into the system, contacting them to ensure they understand their obligations as trustees and, where we have concerns, taking appropriate action; in some instances this will mean removing them from the system
    • making it easier for SMSF trustees to comply with their regulatory and income tax obligations. An example of this is the Practical Compliance Guide (PCG 2016/5) which sets out the 'safe-harbour' terms on which SMSF trustees may structure their LRBAs consistent with arm's-length dealing. We are also developing further material intended to provide clearer guidance and illustrative examples about circumstances when the Commissioner will exercise his powers of general administration in relation to pension underpayments
    • looking ahead, we will also focus on supporting and assisting trustees to comply with any requirements that may arise from new measures put in place by the government.

    Regulatory issues identified in auditor contravention reports

    Regulatory contraventions reported to us through auditor contravention reports (ACRs) are a key source of intelligence about levels of compliance within a fund and we consider every ACR that’s submitted. This won’t change in 2016-17 but under some circumstances our response will change.

    In the 2015 income year 22,000 contraventions were reported in 8,200 funds; of these, over 50% of the contraventions had been rectified when reported in the ACR. Previously, following the receipt of an ACR if we assessed a fund as high risk, we would automatically select it for a comprehensive audit.

    However, this year we will be changing our approach. Instead, where trustees are willing to engage with us, they will be supported to self-correct and rectify compliance issues through the early engagement and voluntary disclosure service and/or from targeted mail outs. Again, this reflects our principle and approach of empowering the individual to comply voluntarily.

    This shift in emphasis, together with an increased focus on SMSF auditor independence and quality, will free us to focus our more intensive compliance activities and enforcement outcomes on:

    • trustees who aren’t willing to engage with us
    • trustees who are deliberately and/or persistently not complying with their obligations
    • trustees deliberately operating outside the system, eg not lodging annual returns and/or undergoing an annual independent audit
    • trustees seeking to adopting aggressive income tax positions, eg implementing dividend stripping arrangements (as described in TA 2015/1), personal income diversion arrangements (TA 2016/6) or other contrived arrangements involving related parties.

    Non-lodgers

    In 2015-16, we conducted activities to deal with SMSFs that had never lodged or had multiple outstanding SMSF annual returns. Non-lodgment impacts the integrity of the super system. Without lodgment, there is no evidence that the funds have been audited. We are also worried that the trustees may be avoiding lodgment because they have contraventions they want to hide or are avoiding paying tax or reporting excess contributions.

    As a result of these activities, trustees in over 32% of the target group have now either lodged their outstanding annual returns or wound up their fund. Based on this early success and the importance of the work, we plan to continue these activities.

    However, 68% of the targeted population of non-lodgers have still not responded to our initial activities. If trustees are not willing to engage with us to bring lodgments up to date and rectify any fund irregularities, then this strongly indicates that the fund should be exited from the system. Our response is to facilitate this and in many cases we will disqualify the trustees.

    Tax planning arrangements

    We have identified, and are investigating, some emerging schemes which target Australians planning for their retirement. The schemes we’re looking at encourage small to medium-business owners, and professionals, to distribute business profits and/or personal services to their SMSF with a view to inappropriately taking advantage of the tax concessions available in the super system.

    Super Scheme Smart

    We do take strong action in cases of serious non-compliance. However, our preference is to provide assistance, education and support to prevent significant non-compliance occurring in the first place.

    A few weeks ago we launched the Super Scheme Smart initiative directed at educating individuals and advisers about the potential pitfalls of retirement-planning schemes. It highlights some of the schemes that people should watch out for and which we’re currently concerned about, they are as follows:

    • dividend stripping – where the shareholders in a private company transfer ownership of their shares to a related SMSF so that the company can pay franked dividends to the SMSF. The purpose being to strip profits from the company in a tax-free form
    • non-arm’s length limited recourse borrowing arrangements – when an SMSF trustee undertakes limited recourse borrowing arrangements (LRBAs) established or maintained on terms that are not consistent with an arm’s-length dealing
    • personal services income – where an individual (commonly with an SMSF in pension phase) diverts income earned from personal services to the SMSF where it is concessionally taxed or treated as exempt from tax.

    Whilst we have detected a small number of people who have entered into these schemes, pleasingly we have not found widespread implementation of these arrangements by SMSFs. The intent of Super Scheme Smart is to ensure that this does not become a problem in the future, and to make people aware of what they need to look out for so that they don’t inadvertently put their retirement savings in jeopardy by becoming involved in these risky schemes. In addition to the income tax consequences, these arrangements commonly give rise to a number of regulatory issues which may see the SMSF trustee being disqualified and/or the fund being made non-complying.

    In instances where a fund is made non-complying the SMSF stands to lose half of the value of its assets in addition to its income being taxed at the highest marginal rate. This is a significant outcome which would clearly impede the ability of members to ensure their financial needs are met in retirement.

    Taxpayer alert 2015/1: Dividend stripping arrangements

    Dividend stripping arrangements involve structures designed to channel franked dividends from a private company with accumulated profits to a fund instead of to the company's original shareholders. As a result, the original shareholders avoid tax on the dividends and they, or individuals associated with them, benefit as members of the SMSF from franking credit refunds to the SMSF.

    These arrangements concern us because they’re intended to shield dividend income at a low or zero rate of tax in the SMSF, rather than ‘top-up’ tax being paid at the individual shareholder’s marginal rate, and the SMSF being entitled to a refund of franking credits.

    The potential issues with these arrangements include Part IVA, application of the non-arm’s length income (NALI) provisions, and CGT implications as well as super regulatory breaches.

    In seeking to signal our concerns about these arrangements, in November 2015 we offered trustees who had implemented dividend stripping arrangements, as described in TA 2015/1, to voluntarily disclose and self-amend their annual returns in exchange for reduced or nil penalties.

    Responses to this offer have already resulted in the unwinding of approximately 17 arrangements, the repayment of some $3 million of incorrectly claimed franking credit refunds and prevented some $2.7 million franking credit refunds from 2015 onwards.

    It is important to also reiterate that these arrangements not only give rise to income tax issues and associated penalties but also often raise regulatory issues within the fund. For example, contraventions of the in-house asset rules and rules about transactions between related parties can raise questions about the sole purpose test. Whilst we acknowledge that SMSF auditors are not obligated to report income-tax related issues they are obligated to report regulatory issues that may arise from these arrangements.

    We currently have 53 cases at various stages of investigation, involving an estimated $24 million in franking credit offsets claimed arising from potential dividend stripping cases. Some of these cases also involve clear regulatory breaches and the trustees face the prospect of disqualification and potentially having their fund made non-complying.

    Taxpayer alert 2016/6: Diversion of personal services income (PSI) to an SMSF

    Another area of concern is the diversion of personal services income to an SMSF. These are contrived arrangements where income for services undertaken by an individual is paid to the individual’s SMSF, either directly or through one or more interposed entities. These arrangements concern us because their purpose is to shield personal services income earned by an SMSF member at the lower or zero rate of tax applicable to super, instead of at the marginal tax rate of the individual who has earned the income.

    The potential issues with these arrangements include whether the income may be ordinary income or personal services income of the individual and whether the SMSF is meeting its SISA obligations; including whether or not the fund is being maintained for purposes other than providing retirement benefits for members or benefits for their dependants upon members’ death. Four weeks ago we published an offer to trustees who have entered into one of these types of arrangements to voluntarily disclose so that we can work with them to resolve any issues in a manner that minimises the impact on the individual and the fund.

    Where individuals and trustees come forward and work with us to resolve relevant issues, we anticipate that in most cases the personal services income distributed to the SMSF by the non-individual entity would be taxed to the individual at their marginal rate.

    Issues will be addressed on a case-by-case basis but we will take the individual’s co-operation into account when determining the final outcome.

    Individuals and trustees who come forward before 31 January 2017 will have administrative penalties remitted in full. Shortfall interest charges will still apply.

    Emerging issue - SMSFs directly or indirectly involved in related business ventures

    We have found a small number of cases recently whereby SMSFs have become either directly or indirectly involved in business undertakings, commonly property development enterprises.

    An SMSF can undertake a property development or other business venture. However, significant caution is required because the manner in which these activities are undertaken can give rise to breaches of regulatory rules under the Superannuation Industry Supervision Act 1993 (SISA) and the Superannuation Industry Supervision Regulations 1994 (SISR). In particular, the general prohibition on borrowing by SMSFs, the related party rules and rules about non-arm’s length transactions as well as the sole-purpose test.

    Similarly, there is no specific prohibition preventing an SMSF undertaking property development or another business venture as part of a joint venture arrangement. However, once again, extreme care must be taken to ensure that the arrangement between the parties and the activities undertaken in accordance with a joint venture agreement don’t give rise to breaches of the various regulatory rules applying to SMSFs, particularly if the other party to the joint venture is a related party.

    The very small number of cases we have seen to date have raised concerns from a regulatory perspective, particularly the rules about related-party transactions and non-arm’s length transactions. The cases have also commonly involved related-party joint venturers and trusts that have raised potential application of the NALI provisions in tax law.

    This is an area we will continue to monitor closely. Our concern is that in some of these cases, involving SMSFs in related-business undertakings may be viewed as a mechanism for diverting members’ business-related income into a more tax concessionary environment. If extreme caution is not exercised significant regulatory and income tax issues can arise which may risk members’ retirement savings.

    Collectables

    The transitional rules for SMSF investment in collectables ended on 1 July 2016 and SMSFs with these investments are now required to be fully compliant with the new rules.

    As per our SMSF statistical report – March 2016 investment in collectables by SMSFs totalled $428 million. At 0.7% of the total $590 billion under management in the SMSF sector, investment in collectables is only a very small aspect of the investment landscape for SMSFs.

    The new rules relating to SMSF investments in collectables only came into full operation on 1 July 2016. Therefore, we haven’t yet undertaken any review of compliance with these rules.

    Leading up to 1 July 2016 very few SMSFs approached us for further guidance or support in terms of complying with the collectables rules. Any SMSFs with investments in collectables who haven’t acted to ensure compliance should seek immediate advice from their SMSF professional or adviser or alternatively contact us through our early engagement and voluntary disclosure service so that we can assist and support them to become compliant with the rules.

    We expect that SMSF auditors will report any non-compliance to us as they undertake annual independent audits of SMSFs for 2016-17. We will follow up and take appropriate enforcement action in instances where contraventions of the collectables rules are reported to us.

    Support and assistance

    Early engagement and voluntary disclosure

    As I mentioned in my opening, our early engagement and voluntary disclosure service designed specifically for SMSF trustees, provides a single entry point for trustees and professionals to engage early with us in relation to unrectified contraventions.

    Early engagement is in a trustee’s best interests because we take it into account when considering the level of enforcement action and penalty remissions. Since this service has been introduced we have received over 30 voluntary disclosures. To date, the type of contravention reported most often relates to loans and pension underpayments.

    The SMSF regulatory disclosure form is available on our website. The form, or a written application with supporting documentation, can be used and submitted via email, fax or post. Further details are available on our website.

    Safe-harbour guidelines and LRBAs

    Earlier this year we released Practical Compliance Guideline PCG 2016/5 which sets out safe-harbour guidelines to provide certainty for SMSF trustees about when we will accept that a limited recourse borrowing arrangement (LRBA) is structured and maintained on arm’s-length terms in the context of applying the NALI provisions to borrowings undertaken by an SMSF under an LRBA.

    This is an example of our philosophy of supporting SMSF trustees and to facilitate voluntary compliance by providing certainty through practical and transparent guidance. The development of these guidelines also reflects our ongoing desire to collaborate and co-design practical compliance solutions with the SMSF industry. The guidelines were developed in collaboration with a working group of industry representatives who contributed significant expertise and commercial knowledge.

    SMSF trustees have until 31 January 2017 to ensure that any LRBA their fund has is either consistent with arm’s-length-dealing or brought to an end.

    Proposed super reform measures

    There are some limits to the comments that the ATO can make about proposed reforms at this stage given that there are a range of policy proposals still under development through governmental, consultative legislative processes. However, it does seem more than reasonable to assume that there will be reforms in a number of areas which are likely to lead to law changes which you as advisers will need to understand in order to advise clients. The ATO as regulator is very much attuned to the need to find ways to provide ongoing certainty, transparency and at the same time undertake active monitoring of the SMSF sector in a year of significant change and transition.

    Since the announcement of the proposed reforms we’ve seen increased interest in client level and industry information. People are looking for information about super contributions made to funds by members. Since the announcement of the $500,000 lifetime cap for non-concessional contributions we’ve received an increase in enquiries from individuals or tax professionals on behalf of their clients for calculations of non-concessional contributions.

    In terms of the information the ATO provides, we’re uniquely positioned to bring together member contributions, income tax deductions and adjustments including any excess contributions, provided lodgments are up to date. We currently hold information up to 30 June 2015. Member contribution statements aren’t due until 31 October 2016 for APRA funds and 15 May 2017 for SMSFs, so our data for non-concessional contributions of members for 30 June 2016 will not be complete until then. For contribution data beyond 30 June 2015 members will need to check with their fund.

    To support the introduction of the new measures we will develop and release Law companion guidelines. When finalised, these are public rulings and will provide our view of how the law applies. A law companion guideline will usually be published in draft form for comment when the Bill is introduced into Parliament and will be finalised soon after the Bill receives Royal Assent. It provides early certainty in relation to the application of the new law.

    Such guidelines provide insight into the practical implications or detail of recently enacted law in many ways that may go beyond mere questions of interpretation. For example, a guideline might set out factors that the ATO will consider as indicating a high or low risk of non-compliance. Taxpayers who apply the guideline in good faith will be able rely upon such material.

    SMSF auditors and the broader integrity of the SMSF sector

    We’re now three years into our co-regulatory role with ASIC and SMSF auditor registration, which has introduced clear requirements and standards for SMSF auditors.

    The number of auditors is now fairly stable, with nearly 6,700 SMSF auditors registered with ASIC; significantly fewer than the 11,500 professionals who were auditing SMSFs before the registration requirement. In 2011-12, 3,300 auditors audited fewer than five SMSFs per year. By 2014 this had decreased to 960 auditors. The introduction of auditor registration encouraged many less experienced auditors to leave the sector, allowing other auditors to increase their client base and experience with SMSF audits.

    As you’d be aware, we continue to monitor SMSF auditor compliance and refer non-compliant auditors to ASIC. We also co-chair a Stakeholder Liaison group with ASIC. This group comprises representatives from relevant associations as well as some practitioners and provides both regulators with an opportunity to engage with the SMSF auditor industry and explore how we can work with the sector to better support auditors in their role and ensure professionalism and standards are maintained.

    Our compliance approach in selecting auditors for review has to date focused on identifying independence risks through our data holdings and competence risks from intelligence, ‘dob-ins’ and fund compliance activities.

    Independence

    Historically, a significant component of our work is focused on some very fundamental cases of independence risks identified through our data holdings and intelligence, eg, an auditor auditing their own or a relative’s fund. Pleasingly, since the start of SMSF auditor registration we’ve a seen a decrease in these fundamental independence cases from about 90 in 2013-14 to about 50 in 2015-16.

    In 2015-16, we expanded our focus on SMSF auditor independence to review instances where our data and intelligence indicated that the auditor of a particular fund also acted as the tax agent for that fund.

    As part of this, we emailed about 360 SMSF auditors who we identified as being both the tax agent and auditor for a fund and asked them to complete a questionnaire and respond with details about any other services they provide to their clients. We were particularly interested to understand whether the auditors also prepared the financial statements and accounts, which would create a clear self-review threat.

    Our analysis of the responses suggests that 25% of the group, some 92 auditors, require further scrutiny as they appear to be at significant risk of being in breach of independence requirements. Primarily this relates to self-review threats. We’ll contact these auditors soon with a view to undertaking a more detailed review of their audit activities and, depending on the outcomes of this more detailed review, we will make referrals to ASIC for possible enforcement action.

    A further 17%, or 61, auditors acknowledged threats to their independence but advised they had already acted to resolve the issue or proposed a plan to do so. We continue to monitor these auditors to ensure they’re meeting their independence requirements.

    While we’re aware there is a high percentage of SMSF auditors who are also registered tax agents, our primary concern is where they may also be involved in preparing accounts and statements for the SMSFs they audit. We continue to monitor our data and information and if we identify additional cases where independence risks may be at play we will contact the auditor in question.

    Auditors auditing their auditor's fund - reciprocal audit arrangements

    Not surprisingly, a large number of SMSF auditors have their own SMSF. We’ve begun analysing the extent to which auditors engage in the practice of auditing their auditor’s SMSF – reciprocal auditing arrangements. A very early indication from our analysis is that almost 1000 auditors (500 reciprocal arrangements) could be involved in this type of arrangement.

    Our view, and that of ASIC, is that this arrangement gives rise to self-interest, familiarity and potential intimidation threats for which there are no obvious safeguards that could satisfy a reasonably informed third party that there was no threat to independence. While this scenario is not specifically drawn out in the relevant independence guides, we see parallels with the self-interest threat created in a two-partner firm where one partner audits the other’s fund – which GS009 states can’t be safeguarded against.

    We will now liaise with industry on this issue. We will contact the relevant auditors outlining our concerns, asking them to cease this practice and ensure they fully meet their independence requirements in future.

    Other independence risks

    While we’re cautious in ensuring that each identified risk is properly considered and treated by our compliance program we also work to identify and detect other independence risks. For example, a family relationship between an SMSF auditor and their referral source is something that will attract our attention. For example, we would have concerns about independence where a son appears to audit his accountant father’s SMSF clients.

    There can also be a range of potential independence threats inherent in two-partner practices where each partner audits the SMSFs for which the other provides accounting and tax services. While some of these threats might be mitigated through implementing appropriate processes and controls, we will examine this area further, look to identify where there is significant risk and address the issues with the auditors.

    Instances where an auditor relies heavily on referrals from one or two key sources also present a potential threat to independence, and our compliance program will increase its focus on these circumstances. Where necessary, we will engage with relevant SMSF auditors to better understand their practice to assess the potential level of risks to independence.

    SMSF audit quality - low cost auditors

    A key component of our work this financial year on reviewing the quality of SMSF audits will focus on ‘low-cost auditors’. This follows industry concerns about whether the quality of audits from some low-cost providers may not be up to standard.

    We appreciate there are a number of factors that could explain the prevalence of low-cost providers, such as a competitive market, economies of scale, systemisation or automation of elements of the audit and offshoring arrangements. And where low-cost audits result in quality work we’re pleased that funds have these price options in the market. However, we also appreciate industry concern that some low-cost providers may not be conducting quality audits – if in fact they’re conducting an audit at all – and it’s these behaviours, if they exist, that we intend to identify and treat.

    We’ve also been working with external stakeholders, particularly SMSF audit software providers such as MyWorkPapers (previously Auditflow) and Caseware, to understand the impact their products have on the SMSF audit process and how that might affect costs.

    All of this has helped our understanding of the market. However, to better understand the risks that may be posed by some low-cost audit providers, we’ve also conducted environmental scans in this sector. We found that even though advertised low costs are fairly widespread, many auditors only advertise low fees as a starting point for basic audits, which rise on a sliding scale for more complex work. We’re more concerned with auditors who advertise guaranteed low-cost audits and don’t take into account a fund’s complexity. We become even more concerned where this is coupled with guaranteed short turnaround times. It’s these low-cost auditors who draw our attention and on whom we will conduct compliance checks.

    We want to ensure that auditors provide quality and independent work. Where we identify a low-cost auditor not doing this (eg, perhaps just doing a basic ‘tick and flick’) we will take action. We don’t want to see diligent professionals losing clients to these sorts of operators.

    High volume auditors

    This year, we’ll continue our focus on so called ‘high-volume auditors’ (HVAs) – that is, auditors signing off on 1,000 or more audits per year. We’ve identified just fewer than 40 HVAs. Our approach to HVAs is different from our approach to other compliance risks, where we select general independence or competence cases based on identified areas of concern. With the HVA program, it isn’t that we’ve necessarily found an issue but rather that the consequence of the auditor’s work can be significant because of the number of funds they audit and we need to have a level of assurance around their operations.

    We see these compliance opportunities as a great opportunity to engage with our specialist SMSF auditors so wherever possible we arrange for a senior member of our SMSF auditor team to accompany compliance officers to the meetings. In 2015-16 we met a number of these auditors and have been pleased with what we’ve seen so far. We haven’t identified any issues of concern and found the auditors to be an engaged group. Our intention is that these opportunities benefit both the auditor and the ATO – the auditor has an opportunity to discuss issues or concerns with us and we gain valuable industry insight.

    Conclusion

    Based on the 2015-16 financial year we now have close to 600,000 SMSFs and slightly more than one million members who rely on sound investment management and governance to meet their financial needs in retirement. Therefore the importance of SMSF professionals cannot be underestimated. The number of funds is growing and we’re seeing about 2,500 new registration applications each month.

    Therefore, it’s imperative that we continue to work together with the SMSF industry. In this regard we have been working on our services to make things better and easier for you. This underpins our vision to be a contemporary and client-orientated organisation known for expertise and acting with integrity. Specifically for SMSFs, we’re working on more streamlined services to make it easier to navigate the SMSF registration and wind-up processes, and we’re laying the foundations for better online experiences including SMSF registration and change of details as well as more streamlined rollovers into SMSFs via SuperStream.

    The ATO always welcomes the opportunity to participate in events like this. They promote a sharper understanding of issues that concern industry and provide a platform for us to engage with you and to work with you to develop practical, client-based solutions to what are often complex issues.

    Thank you.

      Last modified: 30 Aug 2016QC 49975