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Snapshot of the 2018 Federal Budget’s proposed change to a three-year SMSF audit cycle.

Three-year SMSF audit cycle proposal raises questions

Will the changes be in trustees’ best interests?

It’s there in black and white in the 2018 Federal Budget: “The Government will change the annual audit requirement to a three-yearly requirement for self-managed superannuation funds with a history of good record keeping and compliance.” However, the predicted benefits to trustees of having a three-year SMSF audit cycle are anything but black and white.

Snapshot of the 2018 Federal Budget’s proposed change to a three-year SMSF audit cycle.

Snapshot of the 2018 Federal Budget’s proposed change to a three-year SMSF audit cycle.

As we have seen through market backlash, these proposed changes don’t seemingly benefit anyone.

Details of the proposed consultation process and implementation method are scant at this stage. As SMSF auditors and trustees wait, with eyebrows raised, for more information, I have many questions about the proposed changes.

What are the benefits of a three-year SMSF audit cycle?

On a federal level, the budget papers show that there is no net increase or decrease to revenue from the three-year SMSF audit cycle proposal. The government must believe that this proposal will bring some other benefit to the economy and to SMSF trustees and their advisors. At this stage it is unclear what the benefits are intended to be.

The government may think that SMSF trustees will save money by switching to a three-year audit cycle. And as I run an audit business I must put my hand up and declare self-interest in not wanting to lose yearly audit fees.

However, it’s not clear that trustees will benefit.

Will a three-year SMSF audit cycle reduce costs to trustees?

SMSFs are required to complete a tax return each year. We can assume this will continue because the ATO will want its annual tax revenue. So, if accountants have to review the SMSF’s position each year, most of the pre-audit work is already complete.

Will the ATO require every year in the three-year period to be audited or just the third year? We would imagine every year would need to be audited. It will be the same amount, if not more work, for an auditor to review each year separately. In this case we can’t see audit fees dropping.

But there’s a trap with the three-year model. Waiting three years between auditing SMSF records could lead to huge problems. Documents can go missing, and this can lead to more calls, more emails, more time for the accountant and auditor, and higher costs for the trustee.

Not only that, errors can go undetected for longer. Imagine discovering an error from year one that has gone undetected for three years. Fixing a three-year old stuff-up could take a lot of time and cost the trustees a lot of money. That’s money they should have been able to use for their retirement.

If the previous years’ tax returns need to be amended, that’s an expensive process. In addition, the trustees could be liable to pay a huge amount of extra tax in the audit year to balance the account. What happens if they simply don’t have the cash to pay the unexpected tax?

My impression is that trustees won’t save money by switching to a three-year audit cycle.

What are the risks?

The change to a three-year audit cycle opens up uncertainty about compliance. How will accountants be able to inform their clients that the SMSF is compliant every year without an audit? What happens if the trustee changes accountants? There’s a major risk of loss of documents.

Market values for property can change a lot in three years. Property prices were rising steadily for years, and now they’re starting to plateau. What happens if the interest only loan reset causes a major downturn in property prices in the next few years? With a three-year gap between SMSF audits, how can trustees be sure that their funds record the true market value of their properties?

How will the ATO deal with a breach from year one that hasn’t been fixed by year three? Under the current regime this breach would have been found and dealt with, and not allowed to carry over. This puts pressure on the accountant to identify problems during the non-audit years. Otherwise, who will the trustee blame for a late discovery? Their accountant.

With a three-year gap, a major breach could mean there’s a risk that the SMSF is found non-compliant for the whole period. This could lead to hefty fines for trustees plus the risk of jail time.

The 2018 Federal Budget also proposes to let six members join an SMSF. We believe that as more members join, the need for frequent assurance increases. The three-year audit proposal seems to fly in the face of this need.

A three-year audit cycle sends a confusing message

This proposal seems to be in opposition to the objective of the ATO as regulators to maintain a compliant industry.

The ATO and ASIC place emphasis on auditor independence and the auditor’s responsibility to report breaches.

Having an audit every three years weakens this strategy. It sends a confusing message. On one hand, the ATO wants all SMSFs in ship shape. But on the other hand, things could get a bit frazzled as long as the loose ends were tied up by the three-year mark.

What is the impact of a three-year cycle on SMSF auditors?

We expect SMSF auditors will have resource issues dealing with a flood of audits in year three. There will need to be some transitional timing rules.

And that’s if SMSF auditors survive the intervening years before the flood. Lack of regular work for SMSF auditors could see smaller players go out of business. The result is a smaller pool of auditors, just when we’re discussing how auditor independence and consumer choice are so important to the industry.

SMSF auditors ask the government to explain the details further

We have so many questions. We would like the government to explain the thinking behind this proposal and ensure that they consult widely with all stakeholders.

If you would like to discuss any of the ideas expressed in this article or discuss this further, please contact TriSuper Auditors on 1300 TRISUP

 

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