Managing Audit Risks For the year ended 30 June, 2018 Presented by Belinda Aisbett CA. BAcc. SSA SSAud Director Super Sphere Pty. Ltd. Slide No: 1 Introduction o Asset valuation risks o Cost base relief hangover risks o Contribution cap risks o Earning allocations o Asset segregation o ECPI calculations o NALI Slide No: 2 Introduction o TRIS & Part IVA considerations o Contribution splitting and member balance equalisation o LRBA o Legal considerations o 3-year audit cycle Slide No: 3 1
Asset Valuation Risks o Incorrect asset valuations to distort member balances o Chopping and changing between member choice and pooled investments to distort member balances o Incorrect asset valuations to distort CGT relief Slide No: 4 Example o Distortion of asset values as at 30 June, 2017 to manipulate member account balances o SMSF: o 30 June, 2016 property worth $17m o 30 June, 2017 property worth $6.4m o 30 June, 2017 4 pension members Slide No: 5 Example o Distortion of asset values as at 30 June, 2017 to manipulate CGT cost base relief o SMSF held shares as at 30 June, 2017 worth $1.60 o Shares were connected to an IPO being finalised post year end, where shares were expected to be worth $2.60 o Fund wanted to report investment at $2.60 to maximise CGT relief Slide No: 6 2
Example o Distortion of asset values as at 30 June, 2017 to manipulate CGT cost base relief o 14 properties held o $’000 of repairs and maintenance costs incurred o All capitalised to obtain greater cost base relief. Slide No: 7 Provision for Disposal Costs? o Appropriate? o Possible? o Audit risks? Slide No: 8 Asset Valuations o Regulation 8.02B of SIS requires all assets to be reported at market value at year end o Regulation is signed off on in the audit report, so this must be reviewed by the auditor o Sufficient appropriate audit evidence must be on file Slide No: 9 3
Hangover Risks o Cost base re-setting o You become aware an asset had the cost reset when the asset was not eligible o Deferred last year, but disposals calculated on uplifted cost to proceeds only o Discounting is incorrectly applied Slide No: 10 Member Account Manipulation o Earnings allocated disproportionately between members o Contributions being mis-allocated between members o Impact on earning allocations post manipulation of asset valuations or contributions Slide No: 11 Example o Two member fund o Mum and Dad now going through a nasty divorce o Past 3 years contributions from family business were split 50/50 between members o If not split Dad would have been excessive Slide No: 12 4
Example o Dad now claiming wife never worked for the family business, so the contributions should have been allocated 100% to him o Dad claiming auditor was not independent because auditor has a connection to the wife’s family Slide No: 13 Example o Dad wants member statements re-stated showing 100% of family business contributions being allocated to his member account o Property disposal allocation was distorted because member balances were wrong o Earning allocations to also be re-stated Slide No: 14 Audit Risks o Litigation risk – Dad is considering legal action against the auditor Slide No: 15 5
Contribution Cap Audit Risks o Essential that the audit file contains audit evidence as to who the contributions belong to, to ensure allocation to member accounts is correct o What about historical issues? o Representation letter considerations Slide No: 16 Earning Allocation o Must be done on a fair and reasonable basis o Must not advantage one member over another o Is signed off on in the audit report, so must be checked by the auditor Slide No: 17 Example o Two member fund o 75 year old mum o 40 year old son o 5 years ago, land was sold o Profit allocated 100% to son’s account only o Now realise son can’t access profits until age 65 Slide No: 18 6
Example o Mum now wants to re-state earning allocation & re-do financials for previous 5 years Slide No: 19 Audit Risks o Can this even be done? o What about minimum pension obligations if Mum’s account is restated? o Can ECPI be claimed by mum on her pension account? o Is this being done now purely to lower the son’s balance to allow more contributions? Slide No: 20 Asset Segregation post 1 July o Member investment choice is still permitted, however earnings on all assets are grouped for tax purposes o Allocation of earnings to member accounts and the associated tax needs to be reviewed by the auditor Slide No: 21 7
Asset Segregation post 1 July o Funds are not permitted to use the segregation method for pension members with balances greater than $1.6m Slide No: 22 Actuarial Certificates o Disregarded small fund assets o If at 30 June of the prior year a member has more than $1.6m in super (across all funds and all account types), the fund must use the unsegregated method to claim ECPI and must obtain an actuarial certificate Slide No: 23 Asset Segregation post 1 July o Circumstances now where a fund with 100% pension accounts will still need to obtain an actuarial certificate Slide No: 24 8
Actuarial Certificates o Needed if a member’s pension account exceeds the transfer balance cap, for example: o SMSF $1,600,000 on 1 July, 2017 o Earnings $96,000 o Pension drawn $64,000 o Balance $1,632,000 at 30 June, 2018 The SMSF still needs an actuarial certificate Slide No: 25 Multiple Funds – ATO Issue o Minimal risk to the auditor o Auditor will need to be aware of other super balances held by each member o This should be an annual question for every fund audit Slide No: 26 TBAR and the Auditor o Should the auditor even review? o How will the auditor obtain comfort that TBAR information is up to date? o Should the auditor try to keep track of the member transfer balance cap? Slide No: 27 9
Non-Arm’s Length Income o Major risk to the auditor if not identified o Financial statement balances will be materially mis-stated o Where identified ensure communicated to the trustee directly (not just via the referring accountant), even if balance is immaterial in year 1 Slide No: 28 Part IVA Risks o TRIS pensions commenced to obtain cost base relief only to be commuted on 1 July, 2017 o Consider reasons for commutation, otherwise there may be Part IVA risks Slide No: 29 Contribution Splitting o Expect an increase in splitting in 2018 onwards as funds try to equalise their balances between spouses Slide No: 30 10
Additional Audit Risks o Members have manipulated the proportion to be split to gain a greater allocation to one spouse Slide No: 31 LRBA Risks o Documentation still not stacking up o Some problem LRBA’s include o Custodian has the debt, and the fund agrees to be responsible o Bank loan does not say limited in recourse, but given there are no guarantees accountant thinks this is implied o Guarantees in place are not limited in recourse Slide No: 32 LRBA and Total Super Balance o Total super balance will include the outstanding loan amount of an LRBA that starts after 1 July, 2018 where the member has: o Satisfied a nil cashing restriction; or o It is a related party LRBA Slide No: 33 11
Reserves o Be aware this is an area of focus for the ATO, refer SMSFRB 2018/1 o Sole purpose test o Part IVA o Contribution reserves still ok Slide No: 34 Legal Considerations o Lessons from Cam & Bear o Ensure financial report disclosures are appropriate o Don’t simply rely on representations for matters you could test directly o Be careful on whose representations you place reliance o Don’t exclude the trustee from important conversations or communications Slide No: 35 Managing Legal Risks o Key is to remember the use of professional scepticism o If in doubt… o Emphasis of matter o Qualification of Part A opinion o Communicate with the trustee directly o Consider wording of specific issue representation letters Slide No: 36 12
Legal Considerations o Lessons from Cam & Bear o Time for a PI insurance review? Slide No: 37 3 Year Audit Proposal o SMSF with a history of good record keeping and compliance can move to a year 3 year cycle o Suggested that a 3 year cycle will reduce red tape and save on costs for the SMSF Slide No: 38 Proposed Triggers o Commencement of a pension o Death of a member o Roll out of member, or admittance of new member o Receipt of NALI* o LRBA Slide No: 39 13
Proposed Triggers o Acquisition of an asset from a related party o Investment, loan or leases with a related party o In-specie lump sum payments* Slide No: 40 Further Trigger Suggestions o Cryptocurrency investments o Payment split between divorcing couple o Contribution splitting o Derivatives investments Slide No: 41 Proposed Operation o 3 year cycle is proposed to be self assessing o Trustees do not have to opt in if they are eligible o If a trigger event, audits need to be done, so if an event in year 2, audits for year 1 and year 2 need to be done before year 2 SAR is lodged Slide No: 42 14
Opinion…. o Most people I speak to think it is a bad idea o Few who think it will be good o Couple “free years” to run rampant o Simple fund, it should save on costs o Few who think SMSF’s shouldn’t be audited at all! Slide No: 43 Opinion…. o Impact on the sector o Impact on the integrity of the system Slide No: 44 What’s Next? o Await Treasury response to submissions o Discuss with clients & gauge their position or thoughts o Prepare for 2020 Slide No: 45 15
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