If you have your own Self-Managed Super Fund you have more control over your retirement savings, but it also brings with it serious responsibilities. The most important of these is the annual SMSF audit. SMSF audits help to ensure that the fund is accurate, compliant and managed in accordance with the law.

What is an SMSF Audit?

An SMSF audit is an independent check of your fund’s financial statements and the super laws. In simple terms, it is an annual review by an approved SMSF auditor to verify that the accounts of the fund are correct and the trustees have followed the rules.

This audit has to be done every year, no matter whether the fund is brand new or has been around for years. The auditor reviews the fund’s financial statements, its management and whether it adheres to the legal standards for SMSFs. This gives the Australian Taxation Office (ATO) confidence the fund is being properly run and for retirement purposes only.

Why do you need an SMSF audit?

An SMSF audit is a legal requirement. This is a requirement of the Superannuation Industry (Supervision) Act 1993 (the SIS Act). The main reason for this requirement is to make sure trustees are only using the fund to provide retirement benefits for members – known as the sole purpose test.

The audit has a practical role, too. It can catch errors, lost paperwork, incorrect valuations or breaches of super rules before they become bigger problems. Without this independent review, the ATO has no reliable means of verifying that the fund continues to be entitled to the tax concessions available to compliant super funds. “Trustees shall also appoint an approved auditor at least 45 days before the due date of the annual return.

An SMSF audit has two parts: a financial audit and a compliance audit.

An audit of an SMSF is comprised of two parts and both are equally important. The auditor is more than a numbers man. They also check if the fund has been managed in accordance with the law.

The financial audit confirms the accuracy of the fund’s financial statements. The compliance audit looks at whether the fund has complied with the rules in the SIS Act.

The financial audit checks whether the assets exist and are correctly valued at the appropriate market value. The compliance audit confirms that the fund is complying with important obligations including the sole purpose test.

The financial audit confirms that income, expenses, assets, and liabilities are correctly entered. The compliance audit looks for any prohibited activities such as loans to members or illegal early access to super.

Both parts have to be completed before the auditor can provide a clear, unqualified audit report.

The SMSF Audit Process

When the fund’s records are well organised, the audit process is generally straightforward. Even then it takes a few steps and it needs collaboration between trustees, accountants and auditors.

Preparation and appointment The trustees select an ASIC-registered SMSF auditor and agree on the scope of the audit.

• Documentation Collation: The trustees or their professional managing administration gather the necessary documents for review, including bank statements, investment documents, and legal paperwork.
• Financial Review: The auditor examines the fund’s financial statements to confirm that the fund’s income, expenses, assets and liabilities have been properly reported.
• Compliance Examination: The auditor checks to see if the fund has been managed in accordance with the SIS Act, including whether the investment strategy exists and has been followed.
• Reporting: The auditor prepares an Independent Auditor’s Report, which describes the outcome of the audit and highlights any issues that require attention.

If the auditor identifies a serious breach, they may also have to lodge an Auditor/Actuary Contravention Report directly with the ATO. That’s one reason why it’s so much better to address problems early than to let them fester over time.

Trustees’ Duties and Responsibilities in an Audit

Even if an accountant or administrator is brought in to help run the fund, the trustees are still responsible for making sure the SMSF complies. Having someone else do the paperwork does not shift that responsibility.

Trustees are required to provide the requested documents to the auditor within 14 days of receipt of a written request. These documents usually include bank statements, property appraisals, investment plans, trust deeds, and transaction proof documents. Trustees must also keep the fund’s assets separate from their own personal or business assets. This may sound obvious but it is a common problem area and one that auditors look at very closely.

Implications of Non-Compliance

If an SMSF does not meet its legal obligations, the consequences can be costly and stressful. The ATO has a range of enforcement options and the response usually depends on the seriousness of the breach.

• Education Directions: Trustees can be directed to take a course to better understand their legal duties.
• Administrative Penalties The ATO can impose fines directly on trustees and these penalties must be paid by the trustee personally and not by the fund.
• Notice of Non-Compliance: The fund may lose its compliant status, which could increase the tax bill on the fund’s income and assets considerably.
• Disqualification: A trustee can be disqualified from acting as a trustee, which could result in major changes to the fund or even its closure.

The biggest takeaway for most trustees is simple: Staying on top of the annual audit is one of the best ways to avoid these outcomes.

Conclusion: The Benefits of Having Your Retirement Savings Audited

An SMSF audit is not a tick-box exercise. It is an important annual review that protects your retirement savings, ensures the fund’s records are correct and confirms the trustees are meeting their legal obligations. By understanding the financial and compliance aspects of the audit, trustees can keep better records, correct problems early, and minimize the risk of penalties. Got an upcoming SMSF audit? Now is the time to get your documents in order and your fund ready.