Dealing with Auditor Convention Reports in Light of Changes


The recent changes to how the Australia Taxation Office (ATO) reviews ACRs means that a Self-Managed SuperFund (SMSF) does not automatically becomes non-compliant when an SMSF Auditor lodges an ACR.

The most recent figures show the ATO made only 92 Funds non-compliant during the 2014/15 financial year. With more than 556,000 SMSFs in existence and a 2.5% ACR lodgement rate, there is a 0.07% chance a Fund with a reportable breach will get taxed at the highest marginal rate.

Given these odds, it would appear that non-compliance is not in the best interests of the Superannuation system. SMSF Advisors should view non-compliance as a last resort punishment used by the ATO for hardcore, recalcitrant SMSF Trustees.


So how does the ATO risk-assess ACRs?


All ACRs are risk assessed by the ATO using risk models that analyse multiple indicators of non-compliance. This includes reviewing regulatory and Income Tax matters, drawing information from the SMSF Annual Return, ACRs and other data, such as Trustee and Members’ records.


The ATO takes an educational approach when working with Trustees who do the wrong thing, but will not hesitate to use their penalty powers when necessary. Typically, Trustees will be contacted by the ATO within 8 to 12 weeks of the ACR being lodged, based on the Fund’s Risk Assessment:


A low-risk ACR letter should not be interpreted by an SMSF advisor as that the reported contravention is not important and does not need to be rectified. Where the contravention remains unrectified in the next year or the Fund contravenes the same section again, the ATO will Risk Assess it at the next level.


Medium-risk Funds are not out of hot water either, as the ATO has stated that approximately 9% of all medium-risk Funds get moved up into the high-risk category. A sure-fire way of this happening is where a Trustee, or their SMSF advisor, refuses to co-operate when contacted by the ATO.


This is to be avoided at all costs because once a Fund gets to the high-risk stage, the ATO will put the SMSF under the microscope and look at every aspect of the Fund that goes way beyond the ACR.


What should SMSF Trustees do?


SMSF Trustees should not try to circumvent a breach by Audit shopping for a better outcome when they do not like the one from their SMSF Auditor. Some SMSF Trustees, or their SMSF Advisors (yes – this is happening all the time), are terminating the engagement prior to the Auditor issuing their Report.


It should be noted that SMSF Auditors still have an obligation to report breaches even if they are no longer the Fund’s Auditor. They will lodge an ACR and advise the ATO that the Audit was cancelled by the Trustee (or their SMSF Advisor) through Section G of the ACR. The ATO is aware of this and takes a very dim view about this type of behaviour.


It is in the SMSF Trustee’s best interests to fully co-operate with both the ATO and their SMSF Auditor. This has never been more important as administrative penalties now range from $900 to $10,800 per SIS Provision Breach per Trustee, which gets paid directly from the Trustee’s pocket.


The benefit of a Corporate Trustee under these circumstances cannot be underestimated, as four individual Trustees will be fined a whopping total of four x $10,800 = $43,200 for a breach of s67(1) SIS as opposed to $10,800 for one Corporate Trustee.


Unfortunately, the evidence is that the majority of new Funds in 2015 were set up with individual Trustees and not a Corporate Trustee. Even putting the penalty issue aside, the administrative nightmare of having to replace an individual Trustee in the event of death or family fallout should not be underestimated. This can only be put down to false economy on the part of Trustees.


How can we help?


If you are still unsure of how we assess and report breaches, please do not hesitate to give me a call and I will be happy to discuss any questions relating to SMSF with you.