Key thresholds subject to age requirements:

1. Contributions update

It is essential that SMSF auditors stay on top of the recent changes to the superannuation contribution rules.

What taxable contributions can be made for the year ended 30 June 2022?

The Concessional Contribution (CC) cap is $27,500 per member for the 2021/22 year. The 2020/21 CC cap was $25,000. Any excess over the CC cap is taxed at the individual’s marginal tax rate.

CC’s are contributions that somebody is claiming a tax deduction for (employer / individual).

CC’s include:

• Superannuation Guarantee Contributions (SGC)
• Employer voluntary / extra contributions (eg. salary sacrifice)
• Member taxable contributions (claimed as a deduction in personal ITR)

What tax free contributions can be made for 2021/22?

Non-Concessional Contributions (NCC’s) are contributions that an individual is not claiming a tax deduction for.

The Non-Concessional contribution (NCC) cap is $110,000 for the 2021/22 year. The 2020/21 NCC cap was $100,000.

For 2021/22 member’s aged under 67 have an option to contribute up to $330,000 over a 3 year period (depending on their Total Superannuation Balance (TSB)).

 The rule works as follows for 2021/22 onwards:

The NCC rules worked as follows for 2020/21 year (and prior years) for member’s aged under 65 having an option to contribute up to $300,000 over a 3 year period (depending on their Total Superannuation Balance (TSB)).

It is essential that making a NCC be carefully be reviewed by Trustees in terms of the cap rules prior to a contribution being made.

What are the aged base contribution acceptance rules from 1 July 2021?

From 1 July 2021 to receive a contribution a member must meet the “work test” being:

• If under age 67 there is no work test requirement (and this commenced from 1 July 2020). (For 2019/20 and prior years there was no work test requirement if a member was under age 65.)
• If aged 67 to 74 must meet the work test (and this commenced from 1 July 2020). (For 2019/20 and prior it was age 65 to 74).
• If 75 or older can only receive mandated employer contributions (or downsizer contributions).

It is also noted that from 1 July 2019 if a member is not gainfully employed and aged 67 to 74 they are allowed to make employer & member contributions if:

• they were gainfully employed on at least a part-time basis in the previous year, and
• had a total super balance (TSB) less than $300,000 at end of previous financial year, and
• they did not use the work test exemption in a previous financial year.

What is the Work test?

If an individual is currently aged under age 67 there is no work test required to be able to make a contribution. (It was changed from 65 to 67 from 1 July 2020)
If an individual is aged from 67 to 74 then they must meet the work test to be able to make or receive a contribution. The work test is working 40 hours for remuneration over a 30 day period at least once during the year.

What are the “Carry forward provisions” re taxable contributions?

An individual can carry forward CC’s if their Total Superannuation Balance (TSB) is less than $500,000 at the end of the previous year. The unused contributions can be carried forward for 5 years starting from 1 July 2018 and the first year that this provision can be used was the 2019/20 year (that is from 1 July 2019).

What are the splitting of contribution rules?

An individual is able to split their Concessional Contributions (CC) that are made on their behalf to a spouse (subject to meeting the requirements).

The main reasons that an individual would want to split contributions is due to:

1. Assist with the limit of only being allowed to have $1,700,000 to start an account based pension with.
2. Assist with ability to make Non-Concessional Contributions (NCC) given the cap limit also of $1,700,000.
3. Assist with the ability to use the carry forward CC’s provisions given the member balance cap of $500,000.
4. Age differences between spouses and the ability to access benefits at an earlier date.
5. Centrelink advantages by minimizing a member’s account.
6. Allowing a member to have sufficient superannuation to be able to pay life insurance.

Is there still a spouse rebate for superannuation contributions?

A spouse rebate for superannuation contributions can be claimed up to a maximum of $540 (subject to meeting the requirements). For the year ended 30 June 2022 (and 30 June 2021) if your spouse earns less than $37,000 per year and you contribute $3,000 into superannuation for them you can claim a tax rebate of $540. (Note: $0 rebate if spouse’s income is $40,000 or greater).

What are the May 2021 Budget proposed changes to superannuation?

The May 2021 Budget proposed changes to superannuation are as follows and all have a proposed start date of 1 July 2022 if legislation is passed:

1. Removal of $450 monthly income threshold to receive employer contributions.
2. Removal of work test for those aged 67 – 74.
3. Downsizer contributions age eligibility to be lowered from age 65 to age 60.
4. Market linked income streams (Term Allocated Pensions) & defined benefit pensions – 2 year period to convert to more flexible options (eg. account based pensions or conversion to accumulation and the ability to pay out lump sum benefits).

2. New audit report from 1 July 2021

The Australian Taxation Office (ATO) has issued a new SMSF audit report to be used from 1 July 2021 (NAT 11466-07.2021). SMSF auditors must ensure that they are using the correct audit report wording. Further auditors now have to tailor their SMSF audit report depending on whether they prepared the financial statements for the Fund or not.

The new audit report has 2 new paragraphs that refer to their obligations under APES 110 Code of Ethics for Professional Accountants (including Independence Standards). The new paragraphs confirm that the auditor’s firm or network firm:

i) are not providing any non-assurance services to an audit client that are prohibited under the Code, and

ii) that where they are preparing financial statements for a SMSF after 1 July 2021 that a management responsibility has not been assumed for the fund and the services provided are routine or mechanical and safeguards have been applied.

It is noted that the ATO advised that the previous audit report (NAT 11466-07.2019) could still be used only up until 31 July 2021.

The ATO advised:

“To enable auditors time to transition to using the new IAR, we will not take any compliance action where auditors continue to use the previous version of the IAR (NAT 11466-07.2019) during the month of July 2021. This version of the IAR will be removed from our website at the end of July.”
To highlight the changes in the audit report below is an extract of the previous version of the audit report compared to that to be used from 1 July 2021 in relation to changes that have been made.

Audit report extract pre 1/7/2021:

Part A:
“I am independent of the self-managed superannuation fund in accordance with the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) as required by the Superannuation Industry (Supervision) Regulations 1994 (SISR). I have also fulfilled my other ethical responsibilities in accordance with the Code.”

Part B:
“I have complied with the independence and other ethical requirements relating to assurance engagements, and applied Auditing Standards ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements in undertaking this assurance engagement.”

The new audit report from 1 July 2021 has changes to Part A and Part B.

What are the changes from 1 July 2021 to the audit report?

Re the new Part A changes:
The auditor now states my firm / firm network:

• Did not assume management responsibility for the Fund.
• Did not prepare the financial statements for the Fund, or
• Did prepare the financial statements for the SMSF but it was only a routine or mechanical service and appropriate safeguards were applied.
• If other non-assurance services provided they are not prohibited and safeguards have been applied.

Re the new Part B changes:

The auditor now states my firm / firm network:

• Did not assume management responsibility for the Fund.
• If other non-assurance services have been provided they are not prohibited and safeguards have been applied.

New audit report extract from 1 July 2021 re Part A:

“I am independent of the SMSF in accordance with the auditor independence requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to this audit and as required by the Superannuation Industry (Supervision) Regulations 1994 (SISR). I have also fulfilled my other ethical responsibilities in accordance with the Code.

In particular, neither myself, my firm or my network firm assumed a management responsibility for the fund. My firm or network firm [select the appropriate option] (did not prepare the financial statements for the fund / did prepare the financial statements for the SMSF but it was only a routine or mechanical service and appropriate safeguards were applied). Where my firm or network firm provided any other non-assurance services to the fund, we are satisfied that those services were not prohibited under the Code and any independence threats arising have been eliminated or reduced to an acceptable level by the application of safeguards.”

New audit report extract from 1 July 2021 re Part B:

“I have complied with the independence and other ethical requirements relating to assurance engagements, and applied Auditing Standard ASQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Reports and Other Financial Information, and Other Assurance Engagements / ASQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information, or Other Assurance or Related Services Engagements in undertaking this assurance engagement.

In particular, neither myself, my firm or my network firm assumed a management responsibility for the fund. Where my firm or network firm provided any other non-assurance services to the fund, we are satisfied that those services were not prohibited under the Code and any independence threats arising have been eliminated or reduced to an acceptable level by the application of safeguards.

Delete the option that is not applicable. ASQC1 can be applied until ASQM1 becomes operative on 15 December 2022.”

3. Audit Independence

The audit independence changes commence for SMSF auditors from 1 July 2021. SMSF auditors must understand the rules and ensure they are not breaching the independence requirements.
The independence changes primarily mean that from 1 July 2021 an auditor or audit firm normally cannot audit a SMSF if they or their firm prepare the financial statements or are involved in the management of the Fund.

It is noted that the ATO did a webinar on “SMSF Auditors and Auditor Independence after 1 July 2021”. The webinar was on 28 July 2021. The ATO recording and slides are at:

https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/in-detail/smsf-webinars/past-webinar-recordings/smsf-auditors-and-auditor-independence-after-1-july-2021

APES 110 – Code of Ethics for Professional Accountants (including Independence Standards)

APES 110 – Code of Ethics for Professional Accountants (including Independence Standards) was issued November 2018 with an effective date of 1 January 2020. The ATO applied an education approach to 30 June 2021.

Important sections of APES 110 that are relevant to the audit of SMSF’s include:

1. R600.7 – “Firm or network firm shall not assume a management responsibility for an audit client”

           Management responsibilities involve controlling, leading and directing a Fund.

      2. R600.7 A3 – activities that would be considered a management responsibility:

• • Authorising transactions.
  • Controlling or managing bank accounts or investments.
  • Deciding which recommendations of the Firm or Network Firm or other third parties to implement.
  • Taking responsibility for the preparation and fair presentation of the Financial Statements.

     3.  R601.1 – “Providing accounting and bookkeeping services to an Audit Client might create a self-review threat”.

     4. R 601.3 A2 – Management (trustees) are responsible for the preparation of the financial statements including:

• • Determining accounting policies.
  • Preparing journal entries.
  • Determining account classifications re the transactions.

5. R601.4 A1- “Accounting and bookkeeping services that are routine or mechanical in nature require little or no professional judgement”, examples include:

• • Recording recurring transactions where trustees have determined account classification.
  • “Posting transactions coded by the client to the general ledger”.
  • “Posting client-approved entries to the trial balance”.
  • “Preparing Financial Statements based on information in the client-approved trial balance and preparing related notes based on client-approved records”.

      6. R601.5 – “A Firm or a Network Firm shall not provide to an Audit Client” (SMSF) “accounting and bookkeeping services including preparing Financial Statements.. unless:

             (a) The services are of a routine or mechanical nature, and

             (b) The Firm addresses any threats that are created by providing such services that are not at an Acceptable Level”.

      7. 601.5 A1 “Examples of actions that might be safeguards to address a self-review threat created when providing accounting and bookkeeping services of a routine and mechanical nature to                an Audit Client include:

• • Using professionals who are not Audit Team members to perform the service.
  • Having an appropriate reviewer who was not involved in providing the service review the audit work or service performed”.

      8. 604.4 A1 – “Providing tax return preparation services does not usually create a threat”.

It is noted that an Exposure Draft was issued in May 2021 for amendments to APES 110. The amendments will apply from 1 January 2023 if approved.

The proposed amendments are re the greater than 20% referred fees independence threat:

R410.14.1: “When the total fees in respect of multiple Audit Clients referred from one source represent more than 20% of the total fees of the Engagement Partner, an Office of the Firm or the Firm expressing the audit opinions, the Firm shall evaluate the significance of the threat and apply safeguards when necessary to eliminate the threat or reduce it to an Acceptable Level.”

Independence Guide (APESB & CA & CPA & IPA)

The Independence Guide was issued in May 2020. Chapter 8 is in relation to SMSF’s.

The guide has a number of examples that assist us as auditors in understanding our responsibilities in complying with APES 110. Those examples include:

Example 1 – SMSF auditor prepares the financial statements.

There is a self – review threat. An auditor can only prepare the financial statements if the services are routine or mechanical and the auditor addresses any threats (601.4 A1 and R 601.5).

If accounts are prepared from a client prepared trial balance it is likely to be routine or mechanical. In such a situation safeguards to apply are:

• Using professionals not involved in the audit to prepare the financial statements, or
• Have an appropriate reviewer review the work performed (who was not involved in the preparation of the financial statements).

Example 2 – A Partner of a firm prepares the financial statements which are routine or mechanical. Trustees are financially literate and take responsibility for the preparation of the financial statements. Another Partner is assessing if to take the audit.

Threats to independence:

• Self – interest
• Self – review
• Intimidation

If SMSF investments are relatively straight forward and trustees are capable of taking management responsibility the preparation of the financial statements is more likely to be routine or mechanical. Larger firms may find it easier to address threats (if segregation of responsibilities). If cannot reduce threats to independence need to decline the audit.

Example 9 – Auditor A has 50 SMSF clients & Auditor B has 60 SMSF clients. They do a reciprocal arrangement and swap audits.

The Auditors cannot eliminate the threats to independence so the auditor must decline the engagement.

Example 11 – Auditor considering a SMSF audit when a Partner provides financial planning services to the SMSF.

Threats to independence:

• Self – interest
• Self – review

In most cases threats cannot be eliminated so auditor must decline the engagement.
Example 12 – Auditor has been auditing a SMSF for more than 10 years.

Threats to independence:

• Self – interest
• Familiarity.

After 10 years an internal or external independent review of the audit should be undertaken.

ATO Guidance

The ATO issued guidance re SMSF audit independence in March 2021.
It updated the guidance in April 2021 in relation to reciprocal auditing arrangements and referral source issues. It also did a further update on 15 July 2021 in relation to the “appropriate reviewer” concept.

The guidance states that if there is an independence threat:

• Eliminate the circumstances.
• Apply safeguards.
• Decline or end the audit.

The auditor will need to evaluate whether:

1. threats are at an acceptable level, and
2. address those threats by taking appropriate action.

The ATO expects auditors to document that they have complied with independence requirements and that they have not assumed any management responsibilities.
The ATO advises that if a firm also prepares financial statements the auditor needs to document that the trustee took on the responsibility for preparation of financial statements (and they had the skills / knowledge / experience to do so). For example if the trustee gives the auditor the trial balance to do financial statements this supports that the trustee has taken on management responsibility. A trustee representation letter or trustee declaration will not be enough to support that the trustees have taken on management responsibility for financial statements.

Reciprocal audit arrangements:

The ATO advises that reciprocal audit arrangements are a major risk to independence. Reciprocal audit arrangements are where 2 auditors agree to audit each other’s Fund. The Auditor should decline such audits.
The ATO states re the 20% rule:
“The Code does not specify a number of referral sources, or set percentage of fees from one or more referral sources or clients, required to reduce independence threats to an acceptable level. Nor does it explain what constitutes a ‘large proportion’ of a firm’s total fees. However, for well-established firms that generate most of their income from providing SMSF auditing services, as a guide, if the fees generated from one referral source are less than 20% of the firm’s total fees, we would not consider this in itself to create independence threats. Other factors may still be relevant in evaluating the level of any threats to independence.”
“If the fees generated from one referral source are greater than 20% of the firm’s total fees, depending on the circumstances, the independence threats may be significant enough to warrant the firm implementing appropriate safeguards to reduce those threats to an acceptable level.”
The ATO also advised re Audit pooling arrangements and network firms where a group of firms swap audits. They advised that such arrangements may give rise to independence threats and it may create a network of firms.

4. Non arm’s length income (NALI)

Non arm’s length income (NALI) is as per section 295.550 of the Income Tax Assessment Act 1997. If income is deemed to be NALI it is taxed at the top marginal rate of 45% rather than 15% (or 0% if the Fund is in retirement phase pension mode).

On 28 July 2021 Law Companion Ruling (LCR) 2021/2 was issued “Non arm’s length income – expenditure incurred under a non-arm’s length arrangement.” It clarifies how the NALI amendments operate where there are parties that do not deal with each other on an arm’s length basis and the Fund incurs non arm’s length expenditure (NALE) or it does not incur expenditure. The ruling states that if a Fund incurs non arm’s length expenditure (NALE) or it does not incur expenditure then income is also NALI.

The Ruling provides a number of examples and they include:

Example 1. NALE paid for a commercial property in relation to a Fund acquisition from a related party. That is the purchase price was less than market value.

Result: NALE does apply. Rental income is NALI and also any future capital gain is also NALI.

Example 2. A Partner of an accounting firm does not charge her SMSF for accounting services provided by her firm for the 2020/21 year.

Result: All income is NALI. If charge on an arm’s length basis for the 2021/22 year then income is no longer NALI.

Example 4 – A Fund has a Limited Recourse Borrowing Arrangement (LRBA) on a non-arm’s length basis in relation to a non-commercial low interest rate loan.

Result: NALE does apply. Rental income is NALI and also any future capital gain is also NALI.

Example 6 – A Tax agent prepares financial statements for their Fund but does not lodge the Annual Return under her agent number. It is argued that she performs service as a trustee of the SMSF and does not charge her Fund a fee.

Result: NALE does not apply.

Example 8 – An Accountant at an accounting firm gets a discount for accounts preparation of their personal SMSF at the same rate as all staff.
Result: NALE does not apply.

Example 9 – A plumber renovates a bathroom in a property that their SMSF owns and does not charge a fee.

Result: NALE does apply. Rental income is NALI and also any future capital gain is also NALI.

Example 10 – An Electrician provides a service to his SMSF property at commercial rate. It is argued that the work was done in an individual capacity and not as a trustee.

Result: NALE does not apply.