SMSF Audit

Non-arm’s length income

ow non-arm’s length income is taxed at the highest marginal rate.

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Income tax purposes

For income tax purposes, self-managed super funds (SMSFs) and parties to any scheme should deal with each other on an arm’s-length basis to avoid any application of the non-arm’s length income (NALI) provisions.

There may also be regulatory consequencesExternal Link if SMSFs do not act at arm’s length.

Definition of non-arm’s length income

Broadly, income is NALI for a complying SMSF if:

  • an amount of ordinary or statutory income was derived as a result of a scheme in which the parties weren’t dealing with each other at arm’s length in relation to the scheme and one or more of the following applies:
    • that income is more than the SMSF might have been expected to derive if the parties had been dealing with each other at arm’s length in relation to the scheme
    • from 1 July 2018, in gaining or producing the income, the SMSF incurs a loss, outgoing or expenditure (including nil expense) that is less than what the SMSF might have been expected to incur if the parties were dealing on an arm’s-length basis in relation to the scheme. The types of expenses are:
      • specific expenses – are in relation to a particular asset or assets of the fund (for example, maintenance expenses for a rental property)
      • when an SMSF incurs a specific expense, all income in relation to the particular asset or assets will be NALI
      • general expenses – have a sufficient nexus to the entirety of the income of the fund. These expenses usually relate to the operation or obligations of the fund as a whole (for example, accountancy fees).
      • when an SMSF incurs a general expense, the NALI will be calculated as twice the difference between the amount of the actual expense and the expected market value of the expense.
  • dividends are paid to a SMSF by a private company (unless the dividend is consistent with arm’s length dealing – see TR 2006/7Opens in a new window)
  • income is derived by an SMSF as a beneficiary of a trust, other than because of holding a fixed entitlement to the income. For example income derived as a beneficiary of a discretionary trust
  • income is derived by an SMSF as a beneficiary of a trust through holding a fixed entitlement to the income of the trust if, as a result of a scheme in which the parties were not dealing at arm’s length in relation to the scheme and one or more the following applies:
    • income that is more than the SMSF might have been expected to derive if the parities had been dealing with each other at arm’s length in relation to the scheme
    • from 1 July 2018, in acquiring the entitlement or in gaining or producing the income, the SMSF incurs a loss, outgoing or expenditure (including a nil expense), that is less than what the SMSF might have been expected to be incurred if the parties were dealing on an arm’s length basis in relation to the scheme.

Non-arm’s length component

Any NALI forms part of the non-arm’s length component (NALC) of the SMSF’s taxable income which is taxed at the highest marginal tax rate. However, the SMSF’s total NALC can’t exceed the SMSF’s assessable income minus deductions, excluding assessable contributions and deductions against them.

For more information about how the NALC is calculated, refer to the return instructions for the relevant year.

See: Self-managed superannuation fund annual return instructionsExternal Link

For more information see:

Valuing fund assets for SMSFs

Each year you need to value your SMSFs assets and provide supporting evidence to your auditor.

One of the many responsibilities SMSF trustees have every income year is valuing your fund’s assets at market value.

The market value of an asset is the amount that a willing buyer and seller would agree to in an arms-length transaction. These valuations will be used when preparing your fund’s accounts, statements and SMSF annual return (SAR).

Your asset valuations will be reviewed by your approved SMSF auditor as part of the annual audit prior to lodgment of your SAR. Your auditor will check that assets have been valued correctly, assess and document whether the basis for the valuations is appropriate given the nature of the asset. They are not responsible for valuing fund assets.

Make sure you get your valuations done before going to your auditor.

It’s your responsibility to provide objective and supportable evidence to your auditor for the valuation of the fund’s assets, including all relevant documents requested to prevent delays in auditing the fund. Failure to do so could result in a potential late lodgment of your annual return or a contravention if mistakes have been made.

Start researching now to find what type of evidence your need to support the valuation as this can take time. For some asset types the law requires valuations to be undertaken by a qualified independent valuer. Find out more by visiting SMSF valuation guidelines.

Apply for Director ID (DIN)

Signature requirements for financial statements

New guide to help you manage your SMSF

Why recent Title Search is required ?

When SMSF Auditor conducts audit it is often asked why recent title search is required when Rate Notices, Water bills have name of the owner on it ?

Following are the reasons:

  1. Title search is accepted form of audit evidence to confirm ownership by the fund under Australian Auditing Standards. 
  2. We have seen similar entities names of related parties appearing on Title Search those have nothing to do with SMSF.
  3. Title search reveal any charge, caveat, interest registered on it. Which Rate notice or utility invoice can not provide.
  4. Utility invoice can be held under anyone receiving those services ie. Tenant.  Which is the reason Utility invoices can not be taken as audit evidence of ownership of assets.
  5. When LRBA loan is paid in full, mortgage needs to be discharged and title needs to be transferred to the fund ie. Corporate Trustee or trustees’ names as trustee for the fund. Only Title search can provide this information.
  6. When professional body, peer review and, ATO conducts our audits, they expect recent title search around the time audit was conducted in our audit file.

Report SMSF contraventions even if an audit engagement is terminated

If an approved self-managed super fund (SMSF) auditor forms the view that a contravention of the Superannuation Industry (Supervision) Act 1993 (SISA) and/or the accompanying regulations has occurred, may be occurring or may occur, during the course of conducting an audit, section 129 of the SISA requires the auditor to: notify the fund trustees in writing report the contravention to us via an Auditor/actuary contravention report (ACR), provided the reporting criteria is met. Auditors are reminded these reporting obligations exist from the time the auditor is appointed by the SMSF trustees to undertake the annual audit of the fund’s operations, and do not cease simply because an audit engagement is terminated early. This applies whether the engagement is terminated by the trustees or the auditor. Provided the opinion is formed during the course of, or in connection with, the SMSF approved auditor performing their audit functions, section 129 of the SISA will apply. This means if an auditor is appointed to audit an SMSF, and they identify a contravention in the course of undertaking that audit, but their engagement is terminated before they finalise the audit (and give the trustees a report on the fund’s operations), the reporting obligation still exists.

SPR 2020/D1 determination under paragraph 71(1) (f) for the consultation.

ATO has issued SPR 2020/D1 determination under paragraph 71(1) (f) for the consultation.

I have been in discussions with the ATO for some time now and very glad to see this determination now open for comments

This determination is the Superannuation Industry (Supervision) In-house Asset Determination – Intermediary Limited Recourse Borrowing Arrangement Determination 2020.

This sets guidelines around non-standard SMSF property loans where lender has not provided limited resource.

In recent past when major lenders withdrew from SMSF property lending market, I have seen some structure those have not fit well for in-house asset exception provided under 67A.

Lodging ACR for these structures have been very challenging where client obtained professional financial advice and lawyers were involved.

This determination has provided clarity and more seeds for the thought. Which will certainly open doors for the SMSF to obtain compliant loan, provided they have lender to meet conditions set out.

Whether “normal residential loans with lower interest rates” which some claim, meet the terms, will require more clarification. 

Some already set up loans will not be complaint given item 9 of determination reads “the documentation referred to in paragraph (8) is disclosed to the lender in connection to the borrowing referred to in paragraph (5).

I have seen trustees providing declaration to the lender that “this loan is not for the superannuation fund”.

Due date to provide comments to the ATO is 13 March 2020.

https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=2&num=1&docid=SLD%2FSPR20201%2F00001&dc=false&stype=find&tm=phrase-basic-SPR%202020%2F1

https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=2&num=1&docid=SLD%2FSPR20201%2F00001&dc=false&stype=find&tm=phrase-basic-SPR%202020%2F1

Appoint an SMSF auditor

You must appoint an approved SMSF auditor to audit your fund each year, not later than 45 days before you need to lodge your SMSF annual return. The auditor examines your fund’s financial statements and assesses your fund’s compliance with super law.

Watch:

Your SMSF auditor must be:

  • registered with ASICExternal Link – if they are, they will have an SMSF auditor number, which you need to provide on your annual return
  • independent – they should not audit a fund in which they hold any financial interest, or where they have a close personal or business relationship with members or trustees.

An audit is required even if no contributions or payments are made in the financial year.

Before an SMSF auditor can start an audit, you or your professional adviser need to give them information about your accounts and transactions for the previous financial year. Any additional information requested by your SMSF auditor, in writing must be provided within 14 days.

Your auditor should advise you of any breaches of the rules. You, as trustee, should rectify any contravention as soon as possible.

Your auditor is also required to report certain contraventions to us. Even if you terminated an auditor engagement or the auditor does not finish the audit, if they have identified a reportable contravention, their obligation to report to us remains.

 

For more information click here for the Australian Taxation Office web portal 

 

Self-managed superannuation fund annual return and instructions 2017

You can download the Self-managed superannuation fund annual return 2017(NAT 71226).

This instruction guide is not available in print or as a downloadable PDF document.

These instructions will help you complete the Self-managed superannuation fund annual return 2017. However, they are not a guide to income tax or superannuation law. Seek help from us or a recognised tax adviser if these instructions do not fully cover your circumstances.

About the SMSF annual return

Who needs to complete an SMSF annual return

Your super fund must lodge a Self-managed superannuation fund annual return 2017 if it was:

Only self-managed superannuation funds (SMSFs) can use the Self-managed superannuation fund annual return 2017. Super funds that are not SMSFs at the end of 2016–17 must use the Fund income tax return 2017 and, where required, a separate Super member contributions statement.

Your SMSF must lodge an SMSF annual return even if it does not have a tax liability.

How to use these SMSF annual return instructions

Work through these SMSF annual return instructions from the start (Section A) to the finish (Section K).

  • You must answer all mandatory questions
  • You must answer all questions which apply to your SMSF.

Leave the answer box blank for all other questions. If you leave the answer box blank, you will have specified a zero amount or that the question is not applicable to you.

Read the instructions for each question to find out:

  • whether you need to complete the question
  • the information you must provide.

If a question does not apply to your SMSF, move on to the next question.

Sections of the SMSF annual return

The SMSF annual return is more than an income tax return. It has 11 sections, each described below.

You must complete at least six sections (ACD, (F and/or G), H and K). Complete the other sections only if they apply to your SMSF.

A: Fund information: Complete this section for the SMSF; provide general and identifying information about the SMSF and its auditor.

B: Income: Complete this section if the SMSF has assessable income to report.

C: Deductions and non-deductible expenses: Complete this section for the SMSF; report all the SMSF’s expenses, both deductible and non-deductible.

D: Income tax calculation statement: Complete this section for the SMSF to calculate the amount due or refundable to the SMSF.

E: Losses: Complete this section if the SMSF has tax or capital losses to carry forward to later income years.

Sections F and G: Member information and supplementary member information:Complete either Section F or Section G (or both) for the SMSF. Report contributions and account balances for each of the SMSF’s members:

  • in Section F, for those who had an account on 30 June 2017
  • in Section G, for those who left the SMSF during 2016–17.

H: Assets and liabilities: Complete this section for the SMSF. Report all of the SMSF’s assets and liabilities at 30 June 2017.

I: Taxation of financial arrangements Complete this section if the taxation of financial arrangements provisions apply to the SMSF.

J: Other information Complete this section if the SMSF has made or is making a family trust election or an interposed entity election.

K: Declarations: Complete this section for the SMSF. Declare that you have met your obligations in relation to the SMSF annual return.

For more information click  below:

https://www.ato.gov.au/Forms/Self-managed-superannuation-fund-annual-return-instructions-2017/

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SMSF AUDIT
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SPAA Specialist Auditor

SPAA Specialist Auditor

Shiv Parihar is a SMSFA accredited SMSF Specialist Auditor™. He provides SMSF auditing services independently, conflict free and in accordance with professional audit standards.

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