What Happens if my SMSF Audit Report is Qualified?
An auditor reports directly to the trustees of an SMSF. The auditor must provide a written SMSF audit report to the trustees within 28 days of receiving all of the necessary information to prepare the report. The audit report is not lodged with the ATO but retained on file by the trustees of the fund.
The audit report has two parts. Part A being the financial audit and Part B being the compliance audit.
So what Happens if my SMSF Auditor Qualifies Part A (Financial Audit)?
A Part A qualification is generally considered to be a minor issue so there is no need to get too upset if this happens.
An SMSF must tick a box in its annual tax return identifying that a Part A qualification has occurred, but details are not included.
Do not ignore a Part A qualification but work with the auditor and the fund’s SMSF Specialist to rectify it. For instance, where there is insufficient evidence to support the market value of a property, the trustee should obtain an independent valuation from a qualified valuer (best evidence) or possibly a real estate agent who should also provide evidence of the market value of similar properties to support their valuation. This should be done prior to the next audit to avoid escalating the breach.
So what Happens if my SMSF Auditor Qualifies Part B (Compliance Audit)?
A Part B qualification is generally considered more serious and if it is very serious must also be reported directly to the ATO in an auditor’s contravention report (ACR).
Similar to a Part A qualification it must be identified in the fund’s annual tax return as being breached and in addition identify if it has been resolved.
Harsh penalties can be imposed on failing to comply with the super laws.
Harsher penalties include the fund being made non-complying and losing its tax concessions and in the first year of being made non-complying the fund’s assets can be taxed up to 45%. Each trustee can be fined, be disqualified or even imprisoned.
Being imprisoned is extreme and losing a fund’s complying status is rare. However, monetary penalties, educational directions and rectification directions are more common.
A SMSF lends $50,000 to a member. This breaches the in-house asset rules as it exceeds 5% of the fund’s in-house assets (INHA) at the time it was borrowed and in addition the fund breached the prohibition of lending to a member. (For more information about how an SMSF can lend money legally checkout our page on Lending from your SMSF) A penalty unit is $330 from 7 November 2024. The penalty is 60 penalty units for breaching the INHA rule and a further 60 penalty units for breaching the lending rule. Thus, a possible monetary penalty of $39,600 can be imposed on each individual trustee or on a corporate trustee (note this is not imposed on each director).
The ATO encourages SMSFs to comply with the Super Laws and seek to work with the trustee to rectify breaches identified by the auditor. A trustee’s behaviour matters and where a trustee is co-operative and immediately takes action to resolve the breach and puts in place processes to ensure it does not continue or happen again the ATO will look favourably on the trustee when deciding on an appropriate penalty.
The penalty imposed will depend on a number of things including the seriousness of the breach, the trustee behaviour, resolution of the breach and the breach being made due to lack of trustee knowledge. For more information about the penalties for potential breaches checkout the ATO website for more details.
Can a breach be both a Part A and a Part B breach?
Yes – An example of this is an asset being in the incorrect title.