Latest News

The Seamless crew want you to be up to date with all the latest SMSF goss, so check out the summary below to find out all the latest in the SMSF space.  

Qualified Audit Reports – WRAP Platforms 

What is a Qualified Audit Report? 

A qualified audit report indicates that the auditor was unable to fully verify certain financial information about the fund. This may occur even if trustees have met their compliance obligations. One common scenario involves SMSFs investing through service organisations, such as WRAP accounts or managed portfolio services. These services often use custodians to hold assets, making it challenging for auditors to obtain direct evidence of ownership. 

In such cases, auditors may issue a qualified opinion for Part A of the audit report, which relates to the financial audit. It’s essential to note that a Part A qualification doesn’t necessarily mean the SMSF is non-compliant. 

Why it Matters 

While a qualified opinion doesn’t automatically indicate wrongdoing, it can have implications for the fund’s compliance and reporting. Trustees should address any qualifications promptly to avoid potential issues with the Australian Taxation Office (ATO). 

What has changed 

In a recent publication, The ATO has provided further information on SMSFs that invest through service organisations like WRAP accounts or managed portfolio services, where assets are held by custodians on behalf of the SMSF.  

When SMSFs with these types of investments are audited, auditors may find it challenging to verify asset ownership due to insufficient evidence, even when provided with investment statements.  

In these events, auditors are encouraged to issue a qualified opinion under Part A of the Auditor’s Report , which pertains to the financial aspects of the audit. This qualification can occur despite trustees fulfilling their obligations.  

Audit Process Update 

Effective January 1, 2025, Seamless will implement a revised audit process for SMSFs with investments in WRAP accounts, aligning with the ATO’s guidance. The updated procedure is as follows: 

1. Data Feed Verification: Seamless will examine your SMSF software to confirm the presence of a data feed for the WRAP account. 

1. If a data feed exists: No further action is required. 

1. If no data feed is found: Proceed to step 2. 

1. Independent Audit Report Assessment: Seamless will check for the availability of an independent audit report for the WRAP platform. 

1. If an independent audit report is available: No further action is required. 

1. If no independent audit report is available: Proceed to step 3. 

1. Holder Identification Number (HIN) Evaluation: 

1. If a HIN is available: Seamless will conduct a sample test by obtaining investment holding statements, trading activity, and income statements from the relevant share registries. 

1. If a HIN is not available: An audit query will be issued to your firm. 

1. If a HIN cannot be provided: Part A of the audit report will be qualified. 

This approach ensures compliance with the ATO’s expectations for SMSF audits, particularly concerning investments in WRAP accounts.  

Death Benefit Vs Member Benefit 

In the realm of superannuation, distinguishing between a member benefit and a death benefit is crucial, as it significantly impacts the tax treatment of withdrawals. A recent Private Binding Ruling (PBR) by the ATO sheds light on this distinction, particularly when a withdrawal is requested before a member’s death but processed afterward. 

 Case Overview 

The PBR in question involved a superannuation fund member over 65 who, due to health issues, resided with their adult child. The member held an account-based pension and, anticipating the need for funds, requested a lump sum withdrawal. Unfortunately, the member passed away before the payment was processed. The central issue was whether this payment should be classified as a member benefit or a death benefit. 

ATO’s Determination 

The ATO concluded that since the payment was made after the member’s death, it should be treated as a death benefit. This classification holds significant tax implications, as death benefits paid to non-dependants can attract higher tax rates compared to member benefits. 

Implications for SMSF Trustees and Members 

This ruling highlights the importance of timing in superannuation withdrawals. To ensure that a payment is treated as a member benefit, the transaction must be completed while the member is alive. SMSF trustees and members should be aware of these nuances to make informed decisions, especially when planning for end-of-life financial matters. 

Key Takeaways 

• Timing is Critical: For a withdrawal to be considered a member benefit, it must be processed before the member’s death. 

• Tax Implications: Death benefits paid to non-dependants may incur higher taxes than member benefits. 

• Proactive Planning: Members should plan withdrawals carefully, considering potential health declines, to ensure desired tax outcomes. 

Understanding the distinction between member benefits and death benefits is essential for effective superannuation planning. This PBR serves as a valuable reminder of the tax implications tied to the timing of superannuation withdrawals. 

ATO Penalty Unit Increases 

Effective November 7, 2024, the Commonwealth penalty unit in Australia has increased from $313 to $330, following recent legislative changes. This adjustment has significant implications for SMSF trustees, as penalties for regulatory breaches are calculated based on these units. 

Impact on SMSF Trustees 

This increase could result in substantial fines for SMSF trustees. For instance, a 60-unit penalty now amounts to $19,800, up from the previous $18,780. Given that penalties can range from 5 to 60 units, even minor infractions may lead to significant financial consequences. 

It is also important to remember that these administrative penalties are imposed on each individual trustee, whereas directors of a company are jointly and severally liable for these penalties. This could be a reason to review the list of SMSFs within your client base that have appointed individual trustees and potentially look at establishing a company trustee.  

Common Breaches and Associated Penalties 

SMSF trustees should be vigilant about common compliance issues, such as: 

• s 65(1): Lending to members or relatives   

• 60 penalty units OR $19,800 

• s 67(1): borrowings  

• 60 penalty units OR $19,800 

• s 84(1): failing to comply with in-house asset rules  

• 60 penalty units OR $19,800 

• s 103(1): failing to keep minutes  

• 10 penalty units OR $3,300 

• s 104(1): failing to keep records of changes of trustee  

• 10 penalty units OR $3,300 

Lease Agreements  

For SMSFs leasing out real property during the financial year, auditors are advised to obtain and review lease agreements or equivalent documentation to verify the following: 

1. Arm’s Length Terms 

1. The lease terms should reflect an arm’s length arrangement. 

1. Ensure compliance with Section 109 of the Superannuation Industry (Supervision) Act (SISA), which mandates that all dealings must be at fair market value. 

1. Prohibition of Financial Assistance 

1. Confirm that the lease complies with Section 65 of the SISA. 

1. The arrangement must not result in direct or indirect financial assistance to any member of the fund or their relatives. 

1. Residential Property Leases 

1. For residential real property, auditors must ensure the property has not been leased to a related party of the fund. 

1. This can be verified through lease agreements or equivalent documents. 

Audit Process Update 

As a result of a recent ATO, it was recommended from the ATO for lease agreements to be requested for all types of properties. This includes properties that are leased via a third party real estate agent.  

Effective 1 January 2025, where a lease agreement cannot be provided, the following will occur: 

1. A management letter will be issued noting a breach of s.109 of the SISA as we were unable to determine if the arrangement was being conducted at arm’s length, and 

1. Part A of the audit report will also be qualified  

Avoiding Breaches of Section 65 and Regulation 6.17 

Understanding Section 65 of the SISA 

Section 65 of the SISA explicitly prohibits SMSFs from providing direct or indirect financial assistance to members or their relatives. A common example of non-compliance occurs when an SMSF provides a loan to a member without sufficient documentation. To meet compliance requirements, any loan must include the following: 

• Loan terms: Clear and enforceable terms governing the agreement. 

• Repayment schedule: Details on how and when repayments will occur. 

• Applicable interest: A market-rate interest component to ensure the transaction is at arm’s length. 

Without this documentation, the transaction risks being classified as a breach, undermining the fund’s compliance status. 

The Importance of Regulation 6.17 of the SISR 

Regulation 6.17 of the SISR Regulation 6.17 of the SISR governs how and when payments can be made from an SMSF. It restricts fund payments to ensure they are made strictly in accordance with a member’s condition of release, such as retirement, reaching preservation age, or meeting specific criteria like financial hardship. This regulation ensures that superannuation funds are preserved for their intended purpose—providing retirement benefits. 

Audit Process Update 

As a result of a recent ATO audit, it was advised to our firm that for a loan to member or a relative of a member to be treated as a loan for the purposes of the ATO, a loan agreement must be established upon the commencement of the loan. Failure to have a loan agreement prepared by the trustees will result in the loan being considered a benefit payment. As such, if a condition of release has not been met, this would be considered an early release payment and therefore give rise to not only an auditor’s contravention being issued (regardless of the amount), but also taxation consequences in the members personal income tax return.  

Please ensure loan agreements are prepared and signed by all relevant parties and included in your audit file, in the event this type of event is relevant to your firm.  

Hopefully that is information that will ensure you have zero issues with your SMSF’s and as you know, the Seamless team are always here to answer any questions you may have so don’t hesitate to reach out if you want to discuss any of the above further.