SMSF compliance tips for 2020 financial year

There is no doubt that additional emphasis was being placed on the annual SMSF compliance before Covid-19 and you need to be prepared for more extensive requirements from fund auditors going forward for you to be able to complete the work we do to satisfy the ATO and best practice.

Not all the requirements listed are obligatory but do reflect best practice so discuss these prior to June 30 2020.

1. Early Release of SuperannuationIn the case where the lump sum payment made from an SMSF due to the receipt by the Trustee of a copy of a
   “Coronavirus – early release of super benefits”approval letter issued by the ATO, we will require below documents for audit:

• A copy of the letter received from ATO
• A copy of the signed application made to the super fund by members for lump sum withdrawal
• A copy of the signed minutes of the meeting of trustees approving the lump sum payment
• A copy of the signed confirmation letter sent to members by trustees.

2. Minimum Pension WithdrawalAny additional documents are not required to be prepared and provided for this.
   However, we will be reviewing and making sure that if a pensioner has already drawn more than their reduced minimum,
   it was not returned to super fund as there is no mechanism to return surplus pension payments.
   However, if the member was eligible for a contribution, it is possible to contribute additional pensions as contributions.
3. Rent Relief provided by SMSFIn the case where SMSF provides rent relief, as an auditor we need to make sure that the rent relief looks reasonable.
   We will be using the National Cabinet’s Mandatory Code of Conduct – Commercial Leasing Principles to verify
   the reasonableness for commercial properties.
   The code provides that:

• The amount of relief should be proportionate to the tenant’s loss in turnover.
• Rent relief can take the form of:

1. a rent waiver which must be at least 50% of the total rent relief and cannot recouped by the landlord over the lease term and/or
2. a rent deferral for the remaining rent relief with this amount amortised over the remaining lease term or at least 24 months (whichever is greater).

We will require the following documents for audit purpose for all type of properties

• A written request by tenant to SMSF for a rent relief listing the adverse economic effects of COVID-19.
• A minute of meeting of SMSF trustees for the relief to be provided and reasons or basis on which the relief to be provided.
• If the arrangement is not as per above mentioned code and if tenant is a related party, the commercial justification based on which the alternate arrangement was negotiated.
• A lease variation document to confirm the agreed updated lease terms.

4. Loan relief provided by SMSF to borrowerIn the case where SMSF provides loan relief to a borrower, as an auditor we need to make sure that the loan relief looks reasonable.
   We will be using the relief offered by commercial lenders to business as per https://www.ausbanking.org.au/covid-19/the-business-relief-package/.
   This provides that:

• If your business or not-for-profit has been adversely impacted by COVID-19 your bank will allow
  you to defer principal and interest repayments for all loans attached to the business for a period of six months.
  While the interest will be capitalised and paid off over the life of the loan.

We will require the following documents for audit purpose

• A written request by borrower to SMSF for a variation of the loan terms listing the adverse economic effects of COVID-19.
• A minute of meeting of SMSF trustees for the relief to be provided and reasons or basis based on which the relief to be provided.
• A loan variation document to confirm the agreed updated loan terms.

5. LRBA relief provided to SMSF by lenderIn the case where SMSF receives loan relief from a third party lender, we will require document related
   to loan relief offered by lender and new accepted loan terms agreed by SMSF and Lender.

In case where SMSF received loan relief from a related party lender, as an auditor we need to make sure that the loan relief looks reasonable.
We will be using the relief offered by commercial lenders to business as per https://www.ausbanking.org.au/covid-19/the-business-relief-package/.
This provides that:

• If your business or not-for-profit has been adversely impacted by COVID-19 your bank will allow you to defer principal and interest repayments for all loans attached to the business for a period of six months. While the interest will be capitalised and paid off over the life of the loan.

We will require the following documents for audit purpose:

• A written request by SMSF to lender for a variation of the loan terms listing the adverse economic effects of COVID-19.
• A loan variation document to confirm the agreed updated loan terms.

6. In-house asset exceeding 5% due to current market fallThe downturn in the share market may result in the fund’s in-house assets being more than 5% of the fund’s total assets.

We will require the following documents for audit purpose:

• A written plan by trustee setting out the amount of the excess and the steps trustee proposes to take to reduce the market ratio of in-house assets to 5% or below.
• This plan must be prepared before the end of the next following year of income. If an SMSF exceeds the 5% in-house asset threshold as at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021 to make sure that excess is removed by 30 June 2021.

Provided the in-house asset limit was not exceeded at “acquisition” time, this situation in itself will not cause a breach of SIS. If we are provided with above mentioned information, we as an auditor will not be taking any actions for FY 2020.

7. Financial Statement DisclosureFor SMSFs who have not yet completed financial statements for FY 2019 and if the value of the assets of an SMSF
   at the time of issue of financial statements is materially lower than the asset value reported in FY 2019 financial statement,
   please add Subsequent Events Notes to the financial statement regarding FY 2019.

If asset values continue to fall, a similar disclosure may be required in financial statements of FY 2020.

8. Effect on investment strategy due to current market fallThe downturn in the share market may result in the fund investing outside the asset allocation ranges outlined in the strategy.
   For audit purpose we will require either an updated investment strategy or a minute for review of investment strategy stating
   reasons for investments outside the ranges and reasons for not changing the investment strategy.
9. New Investment Strategy Guidelines issued by ATO

ATO has released a new investment strategy guideline this year. As an auditor we will review the investment strategy
to make sure that on top of the existing requirements of an investment strategy, investment strategy also covers
below mentioned guidelines of ATO.

• Investment strategy should be based on the relevant circumstances of the fund. Relevant circumstances may include (but are not limited to)
  personal circumstances of the members such as their age, employment status, and retirement needs,
  which influence your risk appetite. Your strategy should explain how your investments meet each member’s retirement objectives.
• When formulating your investment strategy, it is not a valid approach to merely specify investment ranges of 0 to 100%
  for each class of investment. You also need to articulate how you plan to invest your super or why you require broad
  ranges to achieve your investment goals to satisfy the investment strategy requirements.
• Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk.
  In this situation, your investment strategy should document that you considered the risks associated with a lack of diversification.
  It should include how you still think the investment will meet your fund’s investment objectives including your fund’s return objectives and cash flow requirements.

Please find below the ATO guideline link for guidance.

https://www.ato.gov.au/super/self-managed-super-funds/investing/your-investment-strategy/ 

If investment strategy provided is not as per the guidelines, we may need to qualify the audit report and lodge the contravention with the ATO. Also, in that case each trustee/director may face a penalty upwards of $4,200 from the ATO for a breach of the investment strategy requirements.

The other common issues that should be reviewed prior to June 30 include:

• Ensure ownership records are correct for all assets; it is common for banks to make errors on term deposits and bank accounts.
•   Ensure ownership records on all life insurance policies are correct; it is common for life insurance companies to fail to record the correct trustee on policy ownership documents.
• Review all unpaid entitlements owed to the SMSF by related unit trusts. Beware of the borrowing regulations.