Figure: Common audit qualifications by category, self-managed superannuation funds
Every self-managed superannuation fund must be audited each year by an approved SMSF auditor who is independent of the fund and of the accountant who prepared its financials. The audit must be completed before the annual return is lodged. The same handful of issues account for most qualifications, and all of them are avoidable with a bit of attention during the year rather than after it.
1. Asset valuations without evidence
Fund assets must be reported at market value each year, and the auditor needs objective evidence supporting that value. Listed shares and managed funds are straightforward. Everything else is where the trouble starts.
Property is the usual problem. A figure carried forward from three years ago, or an owner's estimate, is not evidence. Auditors expect something objective: a recent sale of a comparable property, a real estate appraisal, a rates notice, or a formal valuation. A formal valuation is not required annually for most assets, but the evidence supporting the number must be current and documented.
Unlisted investments, collectables and loans to unrelated parties each need their own basis. Gather it during the year while it is easy to obtain.
2. Contribution caps breached across multiple funds
Contribution caps apply per person, not per fund. A member with an SMSF and a legacy retail fund from a previous employer can breach a cap without either fund seeing the whole picture.
Excess concessional contributions are added back to assessable income with an interest charge. Excess non-concessional contributions can be withdrawn along with associated earnings, or left in and taxed heavily. Neither is fatal, but both are administratively painful and entirely preventable.
Check total contributions across every fund before the year ends, particularly where an employer contribution and a personal deductible contribution are both in play. If the bring-forward rule has been triggered in an earlier year, the available cap this year may be nil.
“
Caps are tested per person. If a member has any fund other than the SMSF, nobody sees the full picture unless someone deliberately goes and looks.
”
3. Related-party transactions
The rules here are strict and the exceptions are narrow. A fund generally cannot acquire assets from a related party, cannot lend money or provide financial assistance to a member or relative, and cannot hold in-house assets above 5% of total fund value.
There are limited exceptions — listed securities acquired at market value, and business real property acquired at market value being the main ones — but they are exceptions, not a general permission.
The failure we see most often is informal: the fund pays an expense that is really personal, or a member uses a fund-owned asset. A holiday unit owned by the fund and occupied for a weekend is a sole purpose test breach, whatever rent was notionally charged. Assets must be held exclusively to provide retirement benefits, and use tells against that.
4. No documented investment strategy
Every fund must have an investment strategy in writing, reviewed regularly, that takes into account risk, return, diversification, liquidity, the fund's ability to discharge its liabilities, and whether to hold insurance for members.
A one-page document stating that the fund may invest 0–100% in each asset class does not satisfy this. The ATO has written to trustees specifically about strategies lacking genuine diversification consideration, particularly single-asset funds holding one property with a limited recourse borrowing arrangement.
The strategy must also match reality. If the document contemplates a balanced portfolio and the fund holds one commercial property, either the document or the portfolio needs to change. Review it annually, minute the review, and keep the minute.
5. Separation of assets and record-keeping
Fund assets must be held in the name of the fund or its trustee, clearly separate from personal assets. A property registered in an individual's name without a documented declaration of trust is an immediate qualification.
The same applies to bank accounts. The fund needs its own account. Contributions, rent, dividends and expenses running through a personal account, even briefly, create a separation problem and make the audit considerably harder.
Records must be kept for the required periods: accounting records for five years, and trustee minutes, elections and declarations for ten.
What good preparation looks like
Reconcile the fund monthly rather than annually. Gather valuation evidence as it becomes available rather than in September. Check contribution totals across all funds before 30 June. Review and minute the investment strategy once a year. And keep the fund's money entirely separate from everyone else's.
Funds that do these five things generally clear audit without a query. Funds that do not generally receive the same list of questions every year.
We provide accounting, tax and administration services for self-managed funds. We do not provide investment or financial product advice, and we are not licensed to.
Tax Visory Team
Chartered Accountants ANZ · Registered Tax Agents. Questions about this article? Book a free consultation.