One of the promises of the Turnbull-turned-Morrison government is that it will cut red tape for Australian taxpayers. It was an election promise in 2015, and unsurprisingly, is surfacing again as a catch-cry ahead of the 2019 federal election.
SMSF investors are now being promised the cost of maintaining their funds will be cut, as a proposal to move from a compulsory annual audit to a minimum of once every three years is being evaluated.
The optics look good. The ATO has long said the SMSF sector is overwhelmingly compliant, so excessive policing doesn’t appear necessary. The portfolio composition of many SMSFs is also relatively simple - shares, cash and property - and the associated transactions are vanilla. Moving to a three-year audit cycle for a stack of funds which turn up with a clean bill of health each year seems reasonable then, on the surface.
Peel back the layers of the proposal even slightly, and it looks like one big administrative nightmare.
For one, there’s a good chance moving to a three-year cycle could be more expensive for SMSF investors than the current annual requirement.
Minor compliance red flags are often picked up during the annual audit process, which can compound over time into something worthy of a breach notice. Big four accounting firm KPMG, together with the support of respected, long-standing SMSF auditors, said a significant contributor to the efficiency and cost-effectiveness of running an SMSF is its compulsory annual clean up.
“Where significant audit issues arise and require consultation with trustees, the potential time lag could, in our view, make those consultations more difficult and increase the cost of reaching an appropriate resolution or conclusion,” KPMG said in its submission to government.
“This may occur where their record-keeping is deficient during that period, or where a significant audit matter is raised two years later than would otherwise have been the case,” KPMG said.
The eligibility process is also messy, and hinges on SMSF investors being completely across the deeply complex regulatory and legislative environment their fund exists in.
For example, there are a range of transactions which will still trigger a compulsory annual audit. These include commencing a superannuation income stream, the death of a member, the addition or removal of a member, starting or maintaining a limited recourse borrowing arrangement, and acquiring a loan from a related party.
Further, Treasury’s consultation paper also proposes eligibility for a three-yearly audit will be based on self-assessment by SMSF trustees. If those trustees get it wrong, they could face “further action” from the ATO, Treasury said.
So, we have before us a measure that increases risks of non-compliance, won’t apply to the entire SMSF population, and is complex to administer. Granted, the government is currently sifting through responses from its consultation period, and may produce an alternative that holds water. In the meantime, investors should be on the lookout for promises and policies which might seem conducive to wealth building, but could ultimately be detrimental to their financial future.