m15 auditing: the retiring client's story · the client story –related unit ... • copy of...

Shirley Schaefer FCA

Director

BDO (SA) Pty Ltd

M15 Auditing: The retiring client's story

Audit

Noun An examination of records or financial accounts to check their accuracy

Verb to examine, verify or correct the financial accounts of

An SMSF audit is the independent verification of financial reports and the SMSF’s

compliance with prescribed SIS legislative requirements

ATO & Audit Independence

Current key issues & themes in ATO auditor reviews

• Cannot do audit of those you give tax advice to

• Independence in respect of providing financial advice and audit/compliance in

one firm

• “swapping” audit fees between firms

• Auditing own or relative’s funds

• Audit & Accounting by the same firm - Chinese walls

Agenda – Auditing Issues

Potential Audit issues:

• Contribution breaches

• Related Unit Trusts

• Breaching maximum pension payments

• Exempt current pension income (ECPI)

We will consider:

• Legislation/legislative changes

• Audit Evidence

• Auditor Contravention Reports

• ACR Rectification

• Application to Case study

Contributions

Legislative Changes

• Currently no changes

• 2016 Federal Government Budget

• Potential changes to non-concessional contributions & acceptance rules

• Lifetime cap instead of annual NCC limits

Contributions

Audit Evidence

• Evidence to support type of contribution

• Employer – salary records (pay slips)

• Personal – notice of intent to claim tax deduction

• Non-concessional – cash deposits or asset transfers

• CGT contributions – ATO election notice

Contributions

Audit Evidence

• Evidence to support value of contribution

• Bank deposits

• Market value of asset transfers

• Price of listed shares around date of transfer

• Valuation of business real property

Contributions

Audit Evidence

• Evidence to support work test

• Salary records/payslips

• Member/employer representation

• Diary/timesheet details

• Personal income tax records

• Representation by accountant

Contributions

Auditor Contravention Reports

• 7.04(1) - Acceptance of contributions outside age based rules

• 7.04(2) – Acceptance of contributions with no TFN

• 7.04(3) – Acceptance of NCCs outside of fund capped amounts

• 7.04(4) – Not refunded within 30 days

Contributions

ACR - Rectification

• Refund amount in breach (even if > 30 days)

• If > 30 days the breach is reportable

• Breach of statutory time limit

The Client Story - contributions

Julie

• Is 64 years of age in 2016 financial year

• Fund can accept any contributions


Sandy

• Can he contribute?


Sandy

• Is 68 years of age in 2016 financial year & retired

• Fund cannot accept contributions unless Sandy becomes ‘gainfully employed’

• Distribution from the Family Trust is not enough to be working – this is passive

income


Sandy

• Will need evidence of Sandy’s participation in Julie’s business

• Is he paid a salary?

• Is he working in the business & salary sacrificing into super?

Related Unit Trusts

Legislation

• In house asset (IHA) restrictions – no more than 5% of fund assets

• Exemptions

• Business Real Property (owned by the SMSF)

• Ungeared trusts(Reg 13.22)

• Pre 99 exemptions

• 1999 – 2009 Transitional Rules

Related Unit Trusts

Ungeared Trusts

• Trust owns real property (or business real property if leased to a related party)

• Has no other assets/liabilities or operations

• Trust does not borrow

• The asset of the trust is not pledged as security

Related Unit Trusts

Audit Evidence

• Financial Statements of Related Trust

• Property/title searches (check for security)

• Trust Bank Statements

• Evidence that distributions paid out

Related Unit Trusts

Audit Evidence - Valuation

• How have the units been valued?

• Underlying assets

• Income stream

• It is not just the value of the property (although likely to be largely influenced by

this)

• Evidence that the trustees have undertaken a valuation each year

Related Unit Trusts


• Contraventions can arise when:

• Bank account becomes overdrawn

• Property is used as security

• Trust distribution is not paid out within 12 months

• The trust has other assets/liabilities

Related Unit Trusts

ACR - Rectification

• No rectification is possible

• Related trust is an IHA

• Must unwind the structure

The Client Story – related unit trusts

Whatmore Property Trust

• SMSF owns 100% of units

• Trust established in 2005

• Property is business real property



• SMSF owns 100% of units

• Trust established in 2005

• Property is business real property

• Does the Whatmore Property Trust meet an exemption to the IHA rules?


Whatmore Property Trust – audit verification

• Obtain financial statements of trust

• Valuation of trust (in SMSF accounts)

• Check SIS compliance (Reg 13.22)

• Have trust distributions been paid to the SMSF?



• Related issue – Arms length

• Rent increased on 2 of 3 units in the property trust

• Rent not increased for Katrina’s business

• Why hasn’t the rent been increased?



• Related issue – Arms length

• Is this a contravention?



• Related issue – Arms length – possible contraventions

• S.109 – non arms length transactions

• S.65 – provision of financial assistance to members & relatives

Pension Payments

Legislative Changes

• No changes to current rules

• 2016 Federal Government Budget

• Changes proposed to reduce tax concessions

• No changes to pension payments or SIS requirements

Pension Payments

Minimum Pension Requirements

• Must make a minimum pension payment

• Must make at least 1 payment per annum

• Minimum pension must be paid in cash

• Pension must be paid proportionately from taxable & non-taxable components

Pension Payments

Age Min Pension Factor

55 – 64 years 4%

65 – 74 years 5%

75 – 79 years 6%

80 – 84 years 7%

85 – 89 years 9%

90 – 94 years 11%

95+ years 14%

Pension Payments

Audit Evidence

• Pension commencement documentation

• Cash payments out

• Elections or requests for commutation & lump sum payments

• Cash or asset transfers for lump sum benefits

Pension Payments


• Reg 6.17 – payments without meeting a condition of release

• Reg 1.06(9A) - under/over payment of pensions

• Not an ACR report

Pension Payments

ACR - rectification

• Reg 6.17 – payments without meeting a condition of release

• Return monies to the SMSF

• Reg 1.06(9A) - under/over payment of pensions

• Catch up pension payments

• May be eligible for tax concessions/ATO discretion

The Client Story – pension payments

Sandy

• Condition of release > 65 years

• Minimum pension requirement $47,500

Julie

• Condition of release TRIS

• Minimum pension requirement $46,000 (commenced 1/1/16)

• Maximum pension requirement $230,000


Sandy

• Underpayment of pension would be a contravention

• Underpayment of pension could lead to tax consequences

• ATO discretion available if underpayment is < $3,960

• Catch up payment made as soon as is practicable


Julie

• Underpayment of pension would be a contravention

• Underpayment of pension could lead to tax consequences

• ATO discretion available if underpayment is < $7,667

• Catch up payment made as soon as is practicable


Julie

• Overpayment of pension could be breach of

• Reg 6.17 – withdrawal without meeting a condition of release

• S.65 - Provision of financial assistance

• S.82-85 – loan to member & IHA

ECPI

Legislation

• Unsegregated pension fund requires an actuarial certificate

• A pension for tax purposes is a ‘series of payments’

• Contravention of SIS

• Denial of ECPI deduction

ECPI

Legislation

• Segregated pension fund

• ECPI = income from segregated assets

• Apportionment of expenses

• No capital gains & no capital losses

ECPI

Audit Evidence

• Copy of ECPI/Tax calculations

• Basis for apportionment of expenses

• Copy of Actuarial Certificate (dated prior to ITR lodgement)

ECPI


• ECPI is a tax issue NOT a SIS issue

ECPI

Financial Statement Audit

• If pensions under/overpaid = ECPI may be denied

• Provision for income tax or tax refund may be under/overstated

• If material will result in a qualification of Part A

The Client Story - ECPI

Calculation of ECPI

• Expect > 75% of investment income as ECPI

• No ECPI against concessional contributions

• Expenses apportioned on a reasonable basis


Non Arms Length Income (NALI)

• Katrina’s rent was not increased on 1 July 2015

• Is Katrina charged rent on an arms length basis?


Non Arms Length Income (NALI)

• Katrina’s rent was not increased on 1 July 2015

• Is Katrina charged rent on an arms length basis?

• If rent from Katrina is NOT arms length may be assessed as NALI

• No ECPI deduction against NALI


Future Audit Issues

• 2016 Federal Budget Announcements

• $1.6m pension transfer cap will affect Julie

• How will the units in Whatmore Property Trust be valued?

• Incentive to devalue this asset to reduce the impact of the cap

Questions?

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