3 Year Audit – Good, Bad or Ugly
I confess I have a vested interest in supporting the government’s three yearly audit proposal so why am I totally opposed to it?
“The objective of the measure is to incentivise good record-keeping and compliance by SMSFs whilst maintaining system oversight and integrity.” What this measure will achieve is quite the opposite.
Significant incentives already exist for good record keeping and compliance. The possibility of sloppy compliance by trustees, accountants and administrators alike, so as not to miss a lodgement date that would lose an otherwise eligible fund its three year standing, is quite high. This will only make the eventual audit even more problematic.
A recent poll showed a sizable minority in favour of the measure. I wonder how many would still feel this way now that it is clear that all 3 years will still need to be audited – only the timing will change. This is my major concern. A contravention, or difficult to locate supporting documentation, is going to become more of an issue the longer the time frame before it’s addressed. “Issue” could easily be substituted with “expense”. The audit process will still cover all three preceding years separately so any expected reduction in cost is illusory.
In addition, a number of issues will trigger an audit within the three year period. The paper suggests the following examples;
- the commencement of a superannuation income stream by a member for the first time;
- the death of a member;
- the addition or removal of a member;
- receipt of non-arm’s length income (NALI);
- commencement or maintenance of a limited recourse borrowing arrangement (LRBA);
- acquisition of an asset from a related party;
- investments, loans or leases with a related party; or
- in-species lump sum payments to a member.
This is quite a significant list. Proponents would argue that many funds possess nothing more than a share portfolio and some cash so these would benefit. I would agree that they may be eligible but what is the benefit? The audit fee that we would expect to see applied to such a fund would be $250 per annum. Would any reduction on that be material? From an audit perspective, I think not!
If this measure proceeds it will provide a competitive advantage to our administration business as we lodge on time. It won’t fix those administrators who can’t, as they aren’t lacking in incentives to do so at the moment, but it will damage the SMSF sector by lowering compliance whilst increasing costs.
There are some proposals that are so fundamentally flawed that they cannot be improved by consultation, they should be rejected outright. This is one!
Submissions close on August 31st.
Written by David Busoli, Principal, SMSF Alliance