Taxman targets top 50 SMSF auditors in compliance probe

The ATO in August targeted owners and auditors of about 18,000 SMSFs which have more than 90 per cent of savings tied up in a single asset class.
The ATO in August targeted owners and auditors of about 18,000 SMSFs which have more than 90 per cent of savings tied up in a single asset class

Fifty of the country’s biggest self-managed super fund auditors, overseeing a collective $100bn in retirement savings, will be targeted by the Australian Taxation Office over the next six months as part of a compliance investigation that has already resulted in referrals to the corporate watchdog.

The government’s revenue agency, which regulates the $750bn sector, is aiming to complete reviews on 49 auditors, who on average check the compliance of 1500 SMSFs a year.

The probe will round out the ATO’s supervision of the most important 100 auditors in Australia, after the agency trawled through files of 51 auditors over the past financial year to check whether SMSFs are receiving proper health checks and auditors are fulfilling their legal duties.

Of the 51 auditors probed over the last year, the ATO found only 10 were fully compliant with the law and had attained “sufficient appropriate evidence” to back up the opinions contained in the audit reports.

Another 36 auditors have been ordered to undertake further education after failing to obtain documents to support asset valuations in the fund, or to gain proof that properties owned by the fund were not being rented out to family members or leased at non-market rates.

Some auditors failed to get signed financial statements in line with the law.

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A further three auditors immediately deregistered themselves once the ATO started investigating them, while two auditors were referred to ASIC for punishment and license conditions.

In a note released quietly before Christmas, the ATO also threatened legal action against those asked to lift their standards if they fail to improve compliance.

In Australia, SMSFs must be audited annually by a professional registered with the Australian Securities & Investments Commission, which ensures the financial statements are true and fair and the fund meets its legal compliance obligations. For SMSFs with a good history of compliance, the government recently reduced the audit burden to once every three years.

The top 100 auditors oversee $186bn in SMSF savings, and audit 33 per cent of the total 600,000 SMSF population. Auditing fees generally cost between $500 to $1000 a year.

“Auditors who received an education outcome will continue to be monitored and will be reviewed in another two to three years,” the ATO said. “If we find they’ve failed to improve their auditing processes, they may be referred to ASIC for further action.

“Auditors play an integral role in helping protect SMSF members’ retirement benefits and must comply with their statutory obligations and complete proper and adequate audits.”

The probe underscores growing concerns about compliance in the burgeoning SMSF sector, where the ATO and ASIC are ramping up supervision of SMSF financial advisers and auditors.

It also comes amid a parliamentary inquiry into the audit sector following a string of concerns about conflicts of interest between large audit firms and the companies they scrutinise.

Auditing firms are required to provide assurance that corporate financial statements give an accurate and fair view of a company’s financial position, liabilities, profits and losses.

The government’s Financial Reporting Council, the peak body overseeing the effectiveness of the financial reporting system, has called for a broader investigation into a trend of collapsing auditor numbers to ensure the integrity of the corporate sector.

The number of registered company auditors has fallen by a third, from more than 6000 to just above 4000, since 2005.

“The long-term success of the SMSF sector depends on showing that funds and those who advise them comply with the rules,” said Meg Heffron, managing director of Heffron SMSF Solutions.

“That necessarily means punishing and eliminating those who wish to do damage. The industry as a whole therefore welcomes active regulation.

“It is gratifying to see the ATO flex their muscles with recalcitrant funds. The tax regulator has definitely become more assertive and active. They’ve been ramping up penalties on SMSF trustees who break the rules and taking a much tougher stance on late lodgement of returns,” she said.

“It’s important the ATO keeps concentrating on the high priority targets and retains its strong focus of supporting trustees to do the right thing. It’s a focus that has been developed over the last 20 years.”

While many SMSFs have modest balances — the median balance is just under $400,000 — the top 100 funds hold a collective $8bn in retirement savings. The ATO is currently investigating about 30 of these funds over concerns they are misusing superannuation tax concessions or aggressively investing in commercial property development and reaping annual investment returns above 1000 per cent in some instances.

The ATO in August targeted owners and auditors of about 18,000 SMSFs which have more than 90 per cent of savings tied up in a single asset class, such as investment property, warning them about their duty to comply with legal requirements to adopt investment strategies that avoid risky investments.

The Council of Financial Regulators — which counts Treasury, the Australian Prudential Regulation Authority and the Reserve Bank as members — urged the government in February to ban property investment through self-managed funds, after the amount of limited recourse borrowing arrangements (LRBAs) held by the sector rose to $40bn, a ten-fold increase from the $400m figure a decade ago.

The request was ultimately knocked back by Treasurer Josh Frydenberg.

ASIC has found financial advice recommending LRBAs was unlawful 91 per cent of the time. The banking royal commission exposed a number of one-stop-shop advisories hawking SMSFs and the borrowing arrangements for high fees.