Posted: 30 May. 2019 10 min. read

Hot SMSF Audit Issues grabbing our attention early this year

One thing we can all agree on is that the SMSF industry is constantly changing. After 20 years as an SMSF audit specialist, it still surprises me how often new strategies emerge which keep my role interesting.

Change and innovation in SMSF compliance and advice mean that the hot audit issues on my radar are always changing, and this year is as interesting as ever.

These are the five audit issues grabbing our attention early this year:
 

    1. Limited Recourse Borrowing Arrangements

The popularity of borrowing in SMSFs continues to grow, and overall this is a very positive story. The vast majority of LRBAs that cross my desk are well structured, and provide excellent opportunities for diversification and growth for members.

There are however those cases where genuine mistakes, or much worse deliberate strategies, cause major concern. Some of the tricks and traps we are noticing in our 2015 audits include:

  • Loan arrangements deliberately structured to disguise from the bank/lender that an SMSF is involved. Typically the loan is not a limited recourse loan and the borrower is the bare trustee (or less commonly the SMSF trustee).
  • Arrangements where the SMSF trustee and bare trustee are the same
  • SMSF money invested in residential property trust arrangements involving borrowings and related party tenants (not genuine LRBAs)
  • Attempting to establish an LRBA using book entries rather than actual borrowings
  • Related party loans at nil or low interest rates
  • Purchase contracts entered into before an SMSF and/or bare trust is established
  • The use of a single corporate bare trustee for multiple LRBAs where the bare trustee itself is a guarantor for multiple loans.
     

    2. Rollovers Out & Wind Ups

The number of SMSFs with large member balances being wound up appears to be rising, and many of these involve members under preservation age who are rolling their large balances into industry/retail funds.

Two high audit risks we have identified:

  • No evidence that the money has actually been rolled over to the receiving fund.

We are finding that the common practice with SMSF rollovers if for a member to request a rollover and the administrator simply prepares a draft rollover form and sends it to the member.

Where the member arranges the payment from the super fund’s bank account, and the unsigned rollover form is handled by the member (presumably to be signed and forwarded to the receiving fund), the administrator is not receiving any communication from the receiving fund that the rollover was actually received.

  • Attempting an early wind up of an SMSF while it still has significant assets / liabilities – solely to save money on another year of compliance costs.
     

   3. Lending by SMSFs

Lending by SMSFs appears to be on the rise as well. Typically these are unsecured private loans to either related parties or genuine arms-length loans.

Common mistakes:

  • No written loan documentation
  • Interest free periods
  • Withdrawals by members that are more likely to represent early access than genuine loans
  • Loans to members (specifically prohibited, even if less than 5%)
  • Investment strategy not reflecting the intention to loan money
  • Lending to a members business which exceeds 5% of the fund’s assets.
     

   4. Overseas Travel Claims

Overseas travel expenses are high on the ATO’s hit list for 2015. This follows a number of high profile cases where the ATO targeted advisers actively promoting overseas SMSF Trustee conferences paid for using SMSF funds (resulting in the disqualification of Trustees).

Any overseas travel claims, including visits to overseas rental properties, will be heavily scrutinized for compliance with the sole purpose test. Documentation is critical as the risks are high any time SMSF money is used for overseas flights and accommodation.
 

   5. A decline in record keeping

With increasing reliance on data feeds and digital record keeping, the days of Trustees being swamped with piles of paperwork are (thankfully) long gone. What the SMSF industry needs to be careful of is that the quality and accuracy of record keeping is IMPROVED by technology, and not reduced through poor systems and controls.

We are finding major gaps in document storage and online digital signing processes that can really hold up the audit process. Investment strategies, Trustee minutes, pension documents, trust deeds, ATO trustee declarations, and documents that build the SMSF’s investment story, are critical – digitizing these documents is perfect, eliminating them is bad practice!

The great news is that overall the number of breaches appears to be declining, and the resources available to Trustees to be better educated on what it takes to run an SMSF are definitely making a positive difference.

This blog was originally authored by Jo Heighway.