Changes in SMSF Audit Report Overview

Changes in SMSF Audit Report Manoj Abichandani | SMSF Specialist (UNSW)

Our Speaker Today Manoj Abichandani B. Bus. (UTS), Tax Agent CTA, SMSF Specialist (UNSW) Manoj has worked in a Specialist SMSF CPA Firm for 26 years advising over 600 funds on various aspects of SMSF. Currently he works as a SMSF Technical Director for Deed Dot Com Dot Au Pty Ltd as a trainer and helps the solicitor in updating their SMSF Trust Deed. He has written Australia s first online SMSF Audit Software where over 600 + SMSF Auditors initiated over 86,000 SMSF audits in the past year.

Changes in SMSF Audit Report 1. Changes made to IAR 2. Back Flip By ATO 3. Impacts of COVID 19 Providing rental relief Loan repayment relief In-house asset relief Market valuations Early release of super on compassionate grounds due to COVID-19

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Changes have been made to the self-managed super fund IAR (NAT 11466) WEF reporting periods starting on or after 1July 2019 This form replaces the previous version of the IAR used for reporting periods on or after 1July 2016 Auditors are required to use the new form for reporting periods starting on or after 1July 2019 ATO will accept that the approved form requirements are met, and will not take any compliance action, if the previous version is used in the first year

Changes in IAR The changes bring the report in line with the equivalent form prepared by auditors of Australian Prudential and Regulation Authority (APRA) funds Recent updates include: Wording added to make it clearer how auditors can make a modification to the audit report where a qualified or adverse opinion is required. 1. The modification wording for a disclaimer of opinion is in a footnote to the report 2. Reordering of paragraphs in Part B, Compliance Engagement. The paragraph which refers to the sections of SISA & SISR that require compliance assurance (now called the listed provisions ) has been moved under the opinion clause 3.

Changes in IAR Clearly articulating the Auditor s Responsibilities so they are more consistent with the auditing standards and SISR requirements 4. Updating version of the APES110 Code of Ethics for Professional Accountants which now includes the independence standards - commenced on 1January 2020. 5. No change in SISA and SISR Sections listed provisions requiring compliance

Auditors Responsibilities Professional obligations of approved SMSF auditors prescribed by theSISA include: Complying with Competency standards for approved SMSF auditors issued by ASIC 1. Applicable auditing and assurance standards issued by the Auditing and Assurance Standards Board (AUASB) (ASA 300, 210, 580, 260, 500, 230 315) 2. CPD requirements prescribed in the SISR (128F(a) of the SISA and regulation 9A.04 of the SISR) 3. Adequate PI insurance (128F(b) of the SISA and regulation 9A.05 of the SISR) 4. Auditor independence requirements prescribed in the SISR APES 110 5. Professional associations 6. mandatory competency requirements hold a certificate of public practice.

How ATO / ASIC will take your Licence away Do not follow your responsibilities Do not audit properly What does ATO look for NAT 75229 08.2020 Amended on 1st September 2020 It is in the Handout

Back flip by ATO https://www.ato.gov.au/Super/Sup/COVID-19-relief--Changes-to-the-ACR-and- SMSF-IAR-instructions/ ) ATO Issued Independent Auditors Report Instructions Auditors No need to modify their opinion in Part B of the IAR with respect to certain contraventions arising from the impacts of COVID-19 Auditors wanted Opinion Clause on the Audit Report to exclude these type of contraventions Auditors Complained ATO had issued a new IAR with new wording ATO did not want to change the Audit Report as they had just issued a new Audit report Auditors will once again be required to modify their opinion in Part B of the IAR where they identify any material breach of the provisions and regulations listed within the IAR. Including contraventions arising from the impacts of COVID 19

Part A Financial Audit Engagement of SMSF IAR Provide your 1. Unqualified, 2. Qualified or 3. Adverse opinion on whether the financial report presents fairly in all material respects in accordance with the accounting policies described in the notes to the financial report. Or 4. Disclaimer of Opinion If you are unable to provide an opinion on the financial report in the footnotes to the report.

Part A Financial Audit Engagement of SMSF IAR Many SMSF Auditors have never read the Audit Report Please read it Australian Auditing Standards ( PLEASE READ ASA 300, 210, 580, 260, 500, 230 315) The audit report contains the statement that the audit has been conducted in accordance with Australian Auditing Standards. This refers to the auditing standards issued by the AUASB. APES 110 Attend webinar on 7th Oct A MUST ATTEND EVENT Complied with the relevant independence and ethical requirements in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) when undertaking the audit.

Part B Compliance Engagement of SMSF IAR No sections can be removed from the approved form however you can add additional sections and regulations - if needed Provide your Unqualified, Qualified or Adverse opinion If you conclude that a material contravention of any of the listed provisions has occurred 1. 2. 3. If you are unable to provide an opinion disclaimer of opinion in the footnotes to the report.. 4.

Part B Compliance Engagement of SMSF IAR Australian of Assurance Engagements Statement that the audit has been conducted in accordance with applicable Standards on Assurance Engagements. This refers to those standards issued by the AUASB. APES 110 You also need to ensure you have complied with the relevant independence and ethical requirements in APES110 Code of Ethics for Professional Accountants (including Independence Standards) when undertaking the audit

COVID 19 ISSUES You have to report them from 7th September 2020 After the ATO Back Flip

Auditors Contravention Report specific to 2019 20 and 2020 21 financial years due to impact of COVID 19 Certain types of relief which may or may not give rise to contraventions under the superannuation laws. Providing rental relief Loan repayment relief In-house asset relief Market valuations Early release of super on compassionate grounds due to COVID-19.

Impacts of COVID 19 Rent relief - Contraventions Contraventions of the SISA may arise Section109 if the rental relief has not been offered on arm s length terms Section62 if the SMSF trustee is offering rental relief that is not on arm s length terms to assist a related party Must Lodge a Contravention Section84 rental deferrals offered to a related party can amount to a loan by the SMSF and if that loan exceeds 5% of the value of the fund assets, then an in-house asset contravention may arise (see paragraphs 10 and 11 of SMSFR 2009/4) Section 65 rental relief offered to a member or relative of the member either directly or indirectly can amount to providing financial assistance (see SMSFR 2008/1).

Impacts of COVID 19 Rent relief No Contraventions of Section 62 or 109 Rental relief satisfies the three requirements below Commercial terms Relief to related party is similar to Non-related party Use professional judgement in forming an opinion Mandatory Code of Conduct Commercial properties (self assess, relief is in proportion of loss of income, amend lease ends September 2020 etc) 1. Due to the financial impacts of COVID-19 Tenant must be impacted due to COVID - 19 2. Appropriately documented (Application process, lease amendment, minutes for approval 3.

Impacts of COVID 19 Rental relief provided by a Division 13.3A entity Interest in a related party which is exempt from being an in-house asset due to the operation of Division 13.3A of the SISR Deferral of rent can amount to a loan in the interposed entity Related Trust or Company (interposed entity) leases property to a tenant and offers certain relief such as a rental deferral Relief may trigger the events in regulation13.22D, thereby causing the fund s investment in the interposed entity to become an in-house asset

Impacts of COVID 19 Rent relief Conclusion Must Lodge a Contravention: Section 84 - rental deferrals offered to a related party can amount to a loan by the SMSF and if that loan exceeds 5% of the value of the fund assets 1. Section65 rental relief offered to a member or relative of the member either directly or indirectly can amount to providing financial assistance 2. Relief Offered 3. Non Commercial Basis No impact of COVID 19 Not Properly Documented

Impacts of COVID 19 Loan Repayment Relief Situations SMSF has offered loan repayment relief in relation to a loan it has made to a related or unrelated party 1. Related party providing SMSF LRBA relief 2. Section109 contravention may arise if the relief has not been offered on arm s length terms. The non-arm s length income (NALI) rules might also apply.

Impacts of COVID 19 Loan Repayment Relief No Contravention If the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loan Australian Banking Association (ABA) states that commercial lenders are providing loan repayment relief on the following basis: interest and principal repayments on the loan can be suspended for up to six months interest will continue to accrue on the loan during the deferral period accrued interest is to be capitalised and form part of the amount to be repaid over the term of the loan the borrower must have been financially impacted by COVID-19 the borrower must not terminate a lease or evict a tenant for rent arrears during the loan deferral period.

Impacts of COVID 19 Loan Repayment Relief No Contravention Rental relief satisfies the three requirements below Relief is on Commercial Basis 1. Replicates commercial banks Dealings are at Arms Length Impact of COVID 19 2. Proof such as Job keeper Properly Documented 3. Loan Agreement changed Interest continues to accrue and Capitalised Auditors Must: Use professional judgement, if Loan relief provided on an arms-length basis Should follow the reporting criteria for lodging an ACR and if reportable

Impacts of COVID 19 In-House Asset Relief Value of the fund s in-house assets exceeds 5% of the fund s total assets as at 30June the downturn in the market Funds who exceeded their in-house asset threshold as at 30June 2019 must prepare a plan to dispose of the excess, ATO will not to undertake compliance activity if the rectification plan was unable to be executed because the market has not recovered by 30June 2021 or it was unnecessary to implement the plan as the market had recovered Conclusion You have to report it but no action will be taken

Impacts of COVID 19 Market Valuations SISR 8.02B Financial statements not at market value and the contravention meets the reporting criteria, an ACR should be lodged as per normal requirements Problems in Asset Valuation Obtaining objective evidence to support the valuation of assets as per the requirement in the SMSF valuation guidelines. Conclusion Provide reasons in the ACR as to why the trustee was unable to obtain the appropriate evidence and if ATO are satisfied this was due to the impacts of COVID-19, the contravention will not result in any penalties

Impacts of COVID 19 Early release of Super on Compassionate Grounds SMSF members were able to access up to $10,000 of their superannuation before 1July 2020 and up to a further $10,000 from 1July 2020 What Auditor needs to check Payment standards in regulationSISR 6.17 member has not illegally early accessed their benefits checking that the trustee has a determination from the Commissioner confirming the member is eligible for early release of super Any provisions in the trust deed constraining such payments Do not have to check that the member has met the eligibility requirements listed under regulationSISR 6.19B

Impacts of COVID 19 Early release of Super on Compassionate Grounds What you should look out for Date of release Sub regulation6.17D(3) of the SISR states that the trustee must pay the member the amount approved for release as soon as practicable after receiving the determination. one single lump sum not exceeding the amount specified in the determination Use professional judgment as to whether you think the payment has been made as soon as practicable based on the fund s circumstances.

Impacts of COVID 19 Other Issues Reduction in minimum Pensions Super Balances going Negative Loans more than Asset Value Investment Strategies changes in Asset Allocations SMSF Residency Issues being stuck overseas Signature Requirements

Questions Time Manoj Abichandani B. Bus. (UTS), CTA, SMSF Specialist (UNSW) He has worked in a Specialist SMSF CPA Firm for 26 years advising over 600 funds on various aspects of SMSF. Currently he works as a SMSF Technical Director for Deed Dot Com Dot Au Pty Ltd as a trainer and helps the solicitor in updating their SMSF Trust Deed. He has written Australia s first online SMSF Audit Software and where over 600 + SMSF Auditors initiated over SMSF 62,000 audits in the past year.