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

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    Everybody who manages a self-managed superannuation fund (SMSF) is required to have their fund audited annually to make sure it isn't infringing on any laws.

    Getting your SMSF audited is crucial because, as we all know, if your SMSF isn't compliant with superannuation requirements, you could face serious consequences from the Tax Office.

    So what exactly is an SMSF audit and how does it operate?

    What exactly is meant by an SMSF audit?

    Your self-managed superannuation fund (SMSF) is required to undergo a financial and compliance audit by the Australian Taxation Office (ATO) at the end of each financial year to verify that it is still active. An audit needs to be completed first before you can proceed with filing the annual tax return for your SMSF.

    As was noted before, a self-managed super fund (SMSF) audit is comprised of two distinct parts: a financial audit and a compliance audit. The financial audit part of the process involves analysing the fund's financial statements to ensure that they are in line with Australian Auditing Standards (ASAs). In order to evaluate whether or not your SMSF fund complies with all of the superannuation requirements, the compliance audit component uses the Standards on Assurance Engagements (ASAE), which were released by the Auditing and Assurance Standards Board (AUASB).

    An audit of an SMSF must be carried out by a licenced and approved SMSF auditor, and the trustee is responsible for making that selection (s). In addition to this, the ATO is required to conduct an audit of the auditor (so much auditing). Auditing your own SMSF fund or the fund of a member of your immediate family is not permitted under the rules.

    Make an educated guess as to the number of times I've used the word "audit" in this essay.

    What is the price of an SMSF audit?

    Audits of SMSFs, like many other aspects of life, do not come without a cost.

    Because the majority of SMSF auditors work as independent contractors, they have the autonomy to determine their own rates, hence there is no standard pricing for an SMSF audit.

    According to the Australian Taxation Office (ATO), the following are the average, median, and pricing ranges for SMSF audit fees as of 2017–18. As can be seen, the vast majority of SMSF audit prices fall somewhere in the range between $500 and $999, with $550 serving as the median for SMSF audit fees.

    If you are looking to purchase a low-cost SMSF audit in an effort to cut costs and save money, give careful consideration to the various alternatives available to you. Several years ago, the ATO conducted an investigation into "lower-cost audits," which are audits that cost less than $400, and uncovered a number of issues associated with inexpensive SMSF audits.

    According to ATO Commissioner Chris Jordan, many low-cost SMSF audits did not meet the requirements for the most fundamental aspects of the regulation.

    At the national meeting of the SMSF Association in Melbourne, Mr. Jordan stated, "we have unearthed situations of concern where they have failed to perform any sort of proper audit that meets with any of the standards." This statement is not surprising.

    We took action in that situation because they did not have a written audit plan or trustee representation letters, both of which are things that you would normally expect to be done.

    In this instance, you most certainly receive the value that you pay for.

    Examining an SMSF that is about to close

    If you are winding up (closing) an SMSF, the trustee is the one who is responsible for appointing an SMSF auditor to carry out the final audit and ensure that the SMSF fund conforms with the rules governing wind-ups.

    On the website of the ATO, you should be able to discover a thorough list of the duties that must be followed by the auditor. If you would like to do some light reading, you can look at this list.

    Checklist for SMSF audits

    So. If you've read this far, you deserve a pat on the back. Try it out one more time. The following is a list of the documentation that you will need if an audit of your SMSF is imminent:

    During an audit of an SMSF, the following documents are required:

    • The auditor needs to have access to the source documents in order to validate the transactions that took place throughout the fiscal year. This category may include things like bank statements, contract notes, rental statements, and other similar documents.
    • Because certain accounting software enables financial institutions, brokerage firms, and platforms for managed funds to send electronic data, this eliminates the requirement that these entities present actual paper statements and documents. However, you shouldn't just assume this; rather, you should make sure that the accountant you work with possesses the essential software, that the data feeds are in place, and that the auditor is willing to accept this.

    The super fund's founding documents must be signed copies whenever an auditor audits the fund for the first time. For instance:

    • Trust Deed
    • ATO Trustee Statements
    • Investment Strategy
    • Resolutions and consent to serving as the fund's trustee
    • Membership request

    Ms. Brown claims that the auditor is obligated to inform the Tax Office if the trustees fail to keep the necessary documentation and records.

    The auditors are required to qualify the audit, record the case in a management letter to the trustee, report a breach, or caution the client as a result of several of the more common issues that we have come across.

    • You are not maintaining enough records to support the super fund's operations and transactions. You can't just hand the auditor an Excel file with the things you want to claim. Original bank statements, expense invoices, and other documents are required.
    • The legal documents that established the super fund are not saved by me. The signed trust deed, the ATO trustee Declarations, and the establishment minute are three important documents that the trustee must maintain.
    • Confirming that they have a current investment strategy in writing
    • It is imperative that the assets of the fund continue to be held in the name of the super fund. This will ensure that the assets of the fund are kept distinct from those of the trustees' assistance and the super fund.

    What will occur if I don't finish an SMSF audit?

    self managed super fund

    Given that you are unable to submit a tax return for an SMSF unless it has first been subjected to an audit, the penalty that the ATO levies for SMSF non-compliance would be applicable in this situation.

    According to Ms. Brown, some of the sanctions include monetary fines, the requirement for education, correctional instructions, trustee disqualification, the winding up of the fund, civil and criminal penalties, and the labelling of the fund as "non-complying."

    "A non-compliance notice may be issued in the event of a serious breach of the legislation governing SMSFs. The fund will no longer benefit from its favourable tax rate of 15%. Instead, a tax rate of 45 percent is applied to both the fund's revenue and the value of its assets.

    "Franking credits and the exempt current pension income deduction are not permitted. Neither is the current pension income exemption. Additionally, there is no way to "carry forwards" any tax or capital loss credits.

    Ms. Brown stated that these fines would remain in place until the SMSF fund was wound down, the violations were rectified, and the Tax Office gave its approval that the fund was once again in compliance.

    Is a self-managed super fund suitable for you?

    Self-managed super funds (SMSFs) give the kind of flexibility and control that retail and industrial super funds don't, making them excellent for people who have the time and expertise to operate one. On paper, establishing an SMSF seems like a no-brainer. After all, who wouldn't want complete control over the investments made with their hard-earned retirement savings?

    The creation of an SMSF, however, involves a good amount of legal expertise, time, and money and is a rather significant investment choice. You'll also need a respectable super balance (yes, sometimes having more is preferable) and a thorough awareness of the hazards associated with super management. After all, breaking the law can have some fairly serious repercussions.

    Don't do it because your parents are doing it if you've been considering doing your super yourself. What you need to know about running an SMSF is provided below (hint: a lot).

    What is a self-managed super fund?

    A self-managed super fund is just what its name suggests: it is managed by you. So, unlike a traditional retail or industrial superannuation fund, where you essentially delegate to a superannuation provider how to invest your retirement nest egg, you have control over where that money is placed.

    Looks good, doesn't it? So how does that appear? You can select from a variety of fundamental investment alternatives in the majority of retail and industry superannuation plans, which typically include growth, balanced, ethical, conservative, cash, etc. However, other from a general summary of how much of your super is allocated to various asset classes, you typically are unable to directly choose which shares to invest in or determine which shares your investment option is supported in (e.g. 22 percent Australian shares, 32 percent international shares, 4 percent cash, 15 percent property, etc.).

    But unlike many businesses and retail super funds, an SMSF lets you pick your investments and offers a wider variety of investing possibilities. Investments in some unlisted entities, actual gold, and artwork and other collectibles are all eligible under an SMSF.

    An SMSF can have up to four friends or family members who must all be trustees and share equal responsibility for the fund's decisions and compliance with tax and superannuation rules.

    What sort of Australian has an SMSF?

    Over a million Australians, as we've already established, have SMSFs, but they're not all old white males. The gender divide among SMSF fund members is quite even, with 47.3 percent of women and the rest 52.7 percent, according to the Australian Tax Office (ATO).

    The age ranges of those who have an SMSF fund are likewise fairly evenly distributed across the sexes, with the majority of SMSF fund members falling between the ages of 35 and 84.

    Australians under the age of 34 don't seem to have many SMSFs.

    However, the ATO reports that more young individuals are starting to create SMSFs.

    13.7 percent of new SMSF fund members in the March 2020 quarter were aged 25 to 34, and 1.4 percent were under 25.

    Age and gender of SMSF members that joined during the March 2020 quarter

    Not every person with an SMSF earns a six-figure salary. Although the average taxable income for all SMSF members was $117,000 in the fiscal year 2017–18, the median taxable income was only $64,000.

    As you can see from the table below, many fund members who started an SMSF fund in the March 2020 quarter were on a taxable income of between $0 to $100,000. Over 50% (50.9%) of all new SMSF members were represented by these members.

    My point is that SMSFs aren't just for old, wealthy, white people. SMSFs are run and managed by individuals of all ages, genders, and income levels, and you can probably do the same.

    Risks and responsibilities of running an SMSF

    Having said that, managing your superannuation is a big decision that carries a lot of risk and responsibility that not everyone can handle.

    People should be sure to know what they're getting into, according to Mr. Chapman.

    Therefore, as a trustee, you must ensure that you have a reasonable understanding of investment options and markets because poor investment choices may directly affect the fund's assets and the retirement savings of other members. Some folks simply lack this knowledge.

    According to Mr. Chapman, trustees must take seriously their obligation to ensure that their fund complies with all applicable laws and regulations.

    He advised trustees to educate themselves on the tax regulations that apply to superannuation.

    "The ATO can impose severe fines on trustees who will be held personally accountable if it determines that there has been a violation of these obligations and responsibilities. Serious violations may result in a tax rate of up to 47% being imposed.

    Yes, that is a 47 percent tax rate on the fund's remaining balance, which means you risk losing almost half of your carefully saved retirement funds in a matter of days. Serious violations of compliance may also result in civil or criminal prosecution, and for the most serious offences, jail time may even be imposed.

    But it's critical to remember that the ATO will encourage SMSF trustees to comply with super regulations by engaging in further education and will only escalate action when necessary for the majority of people who are merely attempting to do the right thing and unintentionally make a minor mistake.

    To ensure that investments are being handled properly, trustees of SMSF funds must commit a significant amount of time. According to Mr. Chapman, the amount of time required to manage an SMSF depends on how hands-on you want to be.

    "You won't need to spend much of your own time on these activities if you hire specialists to handle much of the administration and management. As an alternative, your time commitment would be bigger if you decide to do most of the difficult task yourself, he added.

    "There is a trade-off between time and costs that each person must weigh depending on their situation.

    Fortunately, there are SMSF administration managers, like Klear Pictures, who can help you keep track of your fund's accounting records and ensure that it stays compliant.

    Costs of running an SMSF

    The cost of starting and maintaining an SMSF is high.

    An SMSF's annual operating expenses average $13,900, according to a factsheet released by the Australian Securities and Investments Commission (ASIC) in October 2019. ASIC has not yet published an updated factsheet but does note that this information is out of date.

    The median annual expense for running an SMSF, on the other hand, was $3,923 in the 2017/18 financial year, according to the most latest statistics from the ATO released in June 2020.

    Mr. Chapman claims that typical SMSF start-up expenses range from $750 (if you have a person as trustee) to $1,590. (with a corporate trustee, including the ASIC set-up fee).

    In addition, "you will need to arrange for an accountant to compile the financial statements and tax return as well as perform an independent audit," he said. "You will also need to pay the annual supervisory charge to the ATO."

    "The average yearly cost of an accountant is $2,350. Additionally, you have the option to pay for member insurance and financial guidance, and you can be required to pay for asset valuations for the fund.

    The expense breakdown for maintaining an SMSF is provided below.

    Pros and cons of SMSF’s


    The vast array of investment opportunities offered by an SMSF in comparison to other superannuation funds is one of its most important advantages.

    According to Mr. Chapman, an SMSF makes it possible to invest in virtually anything.

    With a few exceptions, an SMSF can invest in just about anything as long as it satisfies the requirements and the single purpose test. This also include purchasing direct property, he added.

    "An SMSF can also take out a loan to buy an asset. However, given that so many banks have pulled their SMSF loan products off the market, this is getting more and harder.

    According to Mr. Chapman, small business owners and independent contractors may find SMSFs particularly appealing because they can use their SMSF to purchase commercial real estate.

    If the rent is set at the going rate for the property, they can then rent it to their business.


    The flexibility and control that an SMSF offers, which are not attainable with retail or industrial funds, is another important advantage.

    "Since fund members also serve as trustees, there is freedom to modify the SMSF rules to meet their unique requirements. Other superannuation plans do not offer this, according to Mr. Chapman.

    "Managing your super investments directly enables you to take advantage of unforeseen investment possibilities and make timely adjustments to your portfolio in response to market fluctuations."

    In most circumstances, whether a person has superannuation with an SMSF, industrial or retail super fund, or not, creditors (those who are owed money) normally cannot access a person's superannuation if that person declares bankruptcy.

    But Mr. Chapman cautions that in some circumstances, creditors would be able to obtain a person's superannuation.

    That is unless clawback rules apply in cases where someone intentionally placed assets into an SMSF in order to avoid paying creditors, the man stated.

    With SMSFs, you can pool your superannuation with up to three other people, unlike retail or industry super funds.

    This gives people the chance to invest in things they might not otherwise be able to buy, like actual property, he said.


    Unable to live overseas

    If you have an SMSF and wish to go abroad, you can run into issues with the Tax Office.

    The majority of an SMSF's members must live there continuously. Your fund might not be in compliance with the law if you plan to permanently relocate abroad or make donations while residing there, Mr. Chapman warned.

    The costs of running an SMSF can be expensive.

    As we've already said, managing and operating an SMSF can be rather expensive. If your super balance is too low, according to Mr. Chapman, they could become even more expensive to operate.

    "When the assets held under the SMSF are of little value, the cost of maintaining an SMSF might be detrimental. Numerous administration expenses for SMSFs are set, which can devalue them, according to him.

    "When the asset value of an SMSF is substantial, the costs to operate the fund do decrease accordingly. You need to do the math to see whether an SMSF is beneficial for you given your unique circumstances.

    According to him, the widespread view is that you need at least $250,000 in assets in your fund to justify the expenses of managing an SMSF.


    Again, managing SMSFs can take a lot of time, therefore they won't be appropriate for people who aren't willing to invest a lot of time in studying investments and monitoring those assets' performance.

    Of course, as Mr. Chapman has noted, it is conceivable to hire experts to handle part of this work.

    Legal risks

    One of the most significant negatives of running an SMSF is that you’re responsible for making sure your fund is compliant with all the rules and regulations, and if it’s not, be willing to accept full responsibility for that which could see you hit with a massive fine or end up facing court or even jail time - depending on how naughty you’ve been.

    Suitability of an SMSF

    You ought to consider an SMSF if:

    • You have a background in law or possess solid legal understanding.
    • You have excellent financial literacy.
    • You have a sizable super amount (the Productivity Commission claims that SMSFs with balances below $500,000 often provide inferior returns, although experts like Mr. Chapman agree that a $250,000 balance is sufficient).
    • You are prepared to commit a large amount of effort to managing your fund and researching investment choices.
    • You are aware of and can afford the expenses involved in maintaining an SMSF.
    • You desire total command of your superannuation.
    • You are covered by income and disability insurance (whatever level of cover you have within your current retail or industry super fund will be lost when you move to SMSF)

    If any of the following apply to you:

    • Your superannuation balance is inadequate.
    • You lack financial literacy.
    • You don't want to invest the time or money necessary to manage an SMSF
    • You're not ready to assume the legal risks involved in managing an SMSF

    According to Mr. Chapman, the majority of individuals who opt to establish an SMSF do so in order to select and oversee their superannuation investments.

    They frequently feel they can perform better and produce bigger returns because of their dissatisfaction with how their super has performed so far.

    Families that own their own businesses frequently establish an SMSF as part of a "whole of wealth" plan since the SMSF might be crucial to the operation of the business, for as by owning the location where the firm is operated.

    Alright, an SMSF is for me. Where do I sign up?

    Mr. Chapman advises those who determine managing an SMSF is for them to consult experts as their next step.

    It can be difficult to navigate the road to creating and administering your own SMSF, and Mr. Chapman said it helps to have skilled experts by your side to avoid mistakes and getting into trouble with the ATO.

    Professionals, such as Klear Pictures, can assist you in determining if establishing an SMSF is the best course of action for you and, if so, in setting up and maintaining the fund.

    SMSFs must be audited each year and the auditor must be independent from both the fund and the accountant or administrator who prepares the financial statements.

    Currently, an SMSF must be audited annually, and the trustees of an SMSF must appoint an approved auditor at least 45 days before their fund's annual return to the Australian Taxation Office (ATO) is due.
    Each year you need to prepare financial accounts and statements that meet the accounting standards. If you can't do this yourself, you will need an accountant. The accounts and statements must be prepared each year before the self-managed super fund is audited.
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