Unusual investments driving SMSF audit delays, compliance risks
An increase in complex and related-party investments by SMSFs is slowing down the audit process and increasing the risk of SIS compliance problems, according to a prominent auditor.
ASF Audits head of education Shelley Banton said while advancements in technology and the accuracy of data feeds have helped streamline audits, greater investment in non-standard investments is increasing the complexity of SMSF audits.
The proportion of standard investments such as cash, listed shares and managed funds has decreased from 61.4 per cent to 57.2 per cent, according to the latest Class Annual Benchmark Report.
Commenting in the Class report, Ms Banton said the increase in non-standard investments may be driven by trustees chasing higher returns through exotic or related-party investments.
However, Ms Banton warned this can increase the risk of SIS compliance problems.
“While SMSFs have slowly changed their asset allocation through an increase in the popularity of non-standard assets, auditors have to spend more time auditing funds with complex investments and higher supporting document requirements that come with low-cost fee pressures,” she said.
“The other outcome is that the types of breaches reported to the ATO in an auditor contravention report (ACR) primarily relate to complex assets.
The types of breaches reported to the ATO as a percentage of total contraventions as of 30 June 2022 included loans to members (19.7 per cent), in-house assets (16.9 per cent) and separation of assets (12.6 per cent).
“The nature of these breaches typically relates to more complicated transactions by SMSF trustees, such as illegal early access disguised as a loan to a member or investing in a related party entity that fails to meet the exceptions outlined in Reg. 13.22C SISR.76,” said Ms Banton.
“The recent spike in property development schemes designed to siphon more money into SMSFs, as outlined in TA 2023/2 also rates a mention.”
SMSF auditor population continues to drop
Ms Banton said it will be increasingly important for auditors to maximise their use of technology, particularly with the number of approved SMSF auditors in decline.
Between January 2023 and June 2023, the total number of auditors has dropped 21.2 per cent. The number of SMSFs has risen by 6.4 per cent over the same period.
The Class Benchmark report indicates the SMSF audit industry continues to see further consolidation, with large auditors growing their market share considerably in the past five years.
Auditors auditing more than 250 funds accounted for 67.8 per cent of the total market in the 2021 financial year. This is a significant increase from the 2017 financial year when their share was 53.2 per cent.
SMSF administration firms are still largely fragmented, however, with the majority of tax agents completing SMSF returns for 20 funds or less.
Lodgement rates improve for 2022 financial year
The report indicated that tax return lodgements for SMSFs have seen a slight improvement with the lodgement rate at 79 per cent as of 30 June 2022.
This is a slight increase from the previous year when only 75.4 per cent of returns had been lodged at 30 June 2021.
It was still below the lodgement rate for the 2020 financial year which was 86 per cent.
The Class Benchmark report stated that accounting staff shortages and high turnover continue to present challenges for the rate of on-time tax lodgements.
“A survey by Chartered Accountants ANZ in November and December 2022 found a majority of accountants and auditors were experiencing staff shortages,” the report stated.
“Other factors that have impacted on-time lodgements include the tail end of the COVID-19 pandemic, which contributed to further delays.”
The report also noted that the process of applying for a deferral had improved, with tax agents now able to submit a form electronically and receive an immediate response.
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