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Australia's self-managed superannuation fund industry is in crisis

Publication: 
Nigel Morris-Co...
chiefofficersnet

Australia's Self-Managed Superannuation Fund schemes are great on paper. But in the real world, they are a constant source of problems.

The Australian Tax Office, or ATO, regulates the so-called "super funds". The ATO says "The difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees. This means the members of the SMSF run it for their benefit and are responsible for complying with the super and tax laws." Each individual fund must appoint an auditor who must, in turn, be regulated by The Australian Securities and Investments Commission, or ASIC.

A super fund attracts tax benefits if it meets certain conditions. One of those conditions is that the fund "needs to be maintained for the sole purpose of providing retirement benefits to your members or to their dependants if a member dies before retirement." That's imprecise: what it means is that if a member dies, the benefits go to that member's dependants." There is a very material difference between such a fund and, say, an investment trust. The ATO says "When investing in collectables such as art or wine, you need to make sure that SMSF members don’t have use of, or access to, the assets of the SMSF. Your fund fails the sole purpose test if it provides a pre-retirement benefit to someone – for example, personal use of a fund asset... Contravening the sole purpose test is very serious. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties."

That, obviously, means that investment property, such as houses, cannot be put into the fund if a member is to live in it. Those responsible for managing the fund must "manage your fund’s investments in the best interests of fund members and in accordance with the law. And you need to separate your fund's investments from the personal and business affairs of fund members, including your own." Also, unlike a trust, fund members cannot "settle" property on the fund. "All investments by your SMSF must be made on a commercial ‘arm’s length’ basis. The purchase and sale price of fund assets should always reflect true market value and the income from fund assets should always reflect a true market rate of return." So the fund can rent a property to a member but only on full commercial terms. It can't lend money to members and, in general, it can't buy property from members except in a handful of exceptional cases) and the fund cannot borrow money at all, even if it's secured on assets. The whole set of rules, in simple if sometimes unclear English is at https://www.ato.gov.au/Super/S....

The part that is exercising ASIC is in relation to auditors. The ATO says "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." Only ASIC can grant that approval. The problem appears to be that it has been doing so rather too freely in the past and now, every few months, ASIC is finding that its approvals process has been insufficiently rigorous.

In a statement issued today, ASIC says "ASIC has acted to disqualify, suspend or add conditions to the registration of a number of auditors of self-managed superannuation funds (SMSFs)."

The statement goes on with a clear indication that the approvals process was flawed "The actions arose following ASIC concerns about audit quality, independence issues, failures to meet the fit and proper person criteria or other matters."

This month's batch of actions against auditors of self-managed superannuation funds:

Strat Karnas of Victoria – disqualified as an SMSF auditor for:
failing as a trustee of his own SMSF to have the fund audited;
falsely representing in annual returns for his own SMSF that the fund had been audited when it had not; and
misusing his auditor number to lodge annual returns for his own SMSF.

Keith Knight of the Australian Capital Territory – disqualified as an SMSF auditor for:
failing as a trustee of his own SMSF to have the fund audited;
falsely representing in annual returns for his own SMSF that the fund had been audited when it had not;
misusing his auditor number to lodge annual returns for his own SMSF;
failing to obtain sufficient appropriate audit evidence in SMSF audits on property valuations and title of assets, which were not held in the name of the corporate trustee; and
failing to use the prescribed audit report format.

Mr Trevor Ward of New South Wales – registration as an SMSF auditor cancelled for failing to:
comply with continuing professional development (CPD) requirements;
hold an appropriate level of professional indemnity insurance; and
lodge annual statements for two years.

Ranjit Dadwal of Victoria – suspended as an SMSF auditor for two years from 30 October 2018 for not being a fit and proper person in that he had received criminal convictions for three offences.

Joseph Carbone of South Australia – suspended as an SMSF auditor for two years from 8 November 2018 for failing to:
report that an SMSF audited by him had not recorded a property at market value;
comply with independence requirements by auditing an SMSF where his staff prepared the accounts and financial statements; and
maintain appropriate records of compliance with CPD requirements.
ASIC also imposed conditions on Mr Carbone’s registration to:
sit and pass the SMSF auditor competency exam;
complete a course of study in relation to SMSF audit;
have three of his SMSF audits conducted after the suspension period reviewed by an independent SMSF auditor for compliance with auditing standards; and
inform his professional association about his suspension and these conditions.

Antonia Christine Quinn of Western Australia – conditions imposed for failing to obtain sufficient appropriate audit evidence in the audit of an SMSF on whether a lease was on an arm’s length basis, and for failing to comply with CPD requirements. The conditions require Ms Quinn to:
sit and pass ASIC’s SMSF auditor competency exam;
complete a course of study in SMSF audit;
have two of her SMSF audits reviewed by an independent SMSF auditor for compliance with auditing standards;
review and revise her SMSF audit tools and templates;
adhere to formal CPD requirements specified in the conditions; and
provide ASIC with proof that she has complied with CPD requirements annually for three years.

Chooi Beh of Victoria – conditions imposed for failing to obtain sufficient appropriate audit evidence in the audit of an SMSF about the value of unlisted shares and whether monies advanced to the fund were borrowings. The conditions require Mr Beh to:
sit and pass ASIC’s SMSF auditor competency exam;
complete a course of study in SMSF audit; and
inform his professional associations about these conditions.

Information about the above named auditors (other than Mr Dadwal) was referred to ASIC by the Australian Taxation Office (ATO) under section 128P of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

From 1 July 2013, the SIS Act required all auditors of SMSFs to be registered with ASIC. "This was to ensure that all SMSF auditors meet the base standards of competency and expertise," says ASIC.

That's gone well, then.

The crisis in the SMSF industry has been mounting for some time. It is clear that ASIC has failed to protect both the ATO and funds holders by authorising, or continuing to authorise, those who should not be providing such services. The fact that ASIC is so dependent on information from the ATO is a further flaw in the system. The apparent failings in educational standards indicates a failure by ASIC to properly check educational records and Continuing Professional Development requirements. The audit is an approval, an authorisation, not simply a registration and ASIC has fallen below the standard required for effective supervision and regulation.

ASIC claims an excuse "ASIC and the ATO work closely together as co-regulators of SMSF auditors. The ATO monitors SMSF auditor['s] conduct and may refer matters to ASIC for possible action such as disqualification or suspension of their registration. ASIC may also impose conditions on an SMSF auditor." Not really co-regulators, then: one is arguably a supervisor, at least in part, but only one authorises and/or disciplines auditors. As excuses go, it's pretty poor.

ASIC has plenty of trouble over its light touch attitudes across the whole financial sector, ranging from banks to independent financial advisers. It's time it looked to the basics and issued only appropriate authorisations instead of fire-fighting when things go wrong.

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