What you need to know about auditing your SMSF

Running a self-managed superannuation fund (SMSF) comes with many responsibilities and one of them is ensuring the fund is subject to an annual audit.

As with most matters involving SMSFs, there are quite a few boxes to be ticked. Here's a rundown on what's involved.

What is an SMSF audit and how does it work?

An SMSF audit is a mandatory annual requirement to ensure the validity and accuracy of a fund's financial statements and its compliance with superannuation legislation and regulations.

It is required under SMSF laws as regulated by the Australian Taxation Office (ATO). At the same time, audits can only be carried out by independent SMSF auditors who must be registered by the Australian Securities and Investments Commission (ASIC).

An SMSF can't lodge its annual tax return without an audit being completed first.

Requirements of trustees

SMSF trustees must appoint an approved, independent SMSF auditor within a minimum 45 days before a fund's annual tax return is due to be lodged with the ATO.

Trustees are required to provide an auditor with any requested documentation within 14 days and submit the fund's audited annual tax return to the ATO when the audit is completed.

It's important to note, an auditor or auditing company cannot provide both accounting and auditing services to the same client.

Requirements of auditors

Auditors must carry out two components of an SMSF audit: verifying a fund's financial statements and its compliance with the Superannuation Industry (Supervision) - or SIS - Act.

Auditors are required to provide an independent auditor's report (IAR) to trustees within 28 days of receiving all their documentation.

They must also record any reportable irregularities in a report and submit it to the ATO.

How often is an SMSF audit required?

SMSF audits are required every year. This should happen even when there are no contributions or payments made in a given financial year.

As well, filing an SMSF's annual return will require information from an audit report. This means it's imperative to have an audit completed before a fund's return can be lodged.

How much does an SMSF audit cost?

The median fee for an SMSF audit is around $550 but they can typically range from $500 to $1,000 depending on their complexity and fees charged by individual auditors.

What is required when an SMSF undergoes an audit?

You'll need to prepare several documents for your SMSF fund to be audited. Here are some of the documentary requirements and information you may need to provide:

Financial reports

• balance sheet

• income statements

• bank statements

• member statements

• rental statements

• investment documents such as shares, dividends, contract notes, property documents, and rental statements

Relevant Documentation

If it is the first time an auditor will be conducting checks for the fund, you will likely need to supply copies of the following:

• signed Trust Deed

• signed ATO Trustee Declarations

• signed Investment strategy

• signed Meeting Minutes

• member applications

• actuarial certificate

If SMSF trustees fail to keep accurate documentation and records, the auditor must report it to the ATO.

What are some of the more common SMSF audit breaches?

Auditors are legally obliged to report any irregularities and breaches to the ATO. Here are some of the more common ones:

• insufficient documentation of activities and transactions

• failing to separate SMSF assets from personal assets

• incorrect valuation of assets

• loans or financial assistance to members or related parties

• income not immediately deposited into the SMSF's bank account/s

• incorrectly claimed SMSF expenses that relate to personal use

• not having a current SMSF investment strategy

Acting on SMSF audits

Once the audit is complete, the SMSF should receive the auditor's report. If it flags any potential issues, the auditor should work with the SMSF to address them.

Trustees should act quickly to respond and may need to bring in outside SMSF professionals to rectify any major issues. It's wise to document the steps that are taken.

There are some breaches that may still require reporting to the ATO even if they have already been resolved.

The ATO encourages voluntary disclosure which it will take into account when assessing whether any penalties or other actions are warranted.

What if you fail to have an SMSF audit?

Failing to complete an audit will also lead to failure to lodge a tax return. This will see the ATO enforce a non-compliance penalty. There is a long list of such penalties that can result in monetary fines that must be paid from a trustee's personal funds, not from the SMSF.

Serious or repeated non-compliance can lead to freezing of the SMSF's assets, disqualification of its trustees, or the forcible winding up of the fund. The most serious cases may also result in civil or criminal court proceedings.

Auditing is an essential part of administering an SMSF. It should go without saying that observing superannuation laws is essential for the long-term health of the SMSF and the retirement prospects of its members.

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