Independent Auditor’s Report for SMSFs – Changes for 2010/11

The approved form for the independent auditor’s report for SMSFs is not the most interesting read.

However, there are two changes for the approved form for 2010/11 which should catch your attention.

The first change relates to pensions.  The second change relates to the allocation of investment returns for member accounts.

 

The first change - pensions

For the 2010/11 financial year auditors will be required to express an opinion on whether trustees have complied with SIS Regulation 1.06(9A).  This regulation specifies some (but not all) of the general rules which apply to account pensions – that is account-based and transition to retirement pensions.

To properly discharge their function, auditors will have to consider whether funds paying account-based or transition to retirement pensions have adequately documented the terms of the pension and whether pension payments have satisfied the minimum pension limit for the financial year.

It may be appropriate for trustees to review whether the pensions have been adequately documented and whether the minimum payment requirements have been satisfied.

The second change – investment strategy for reserves

For the 2010/11 financial year auditors will also be required to state whether trustees have complied with SIS Regulation 5.03.  This regulation applies to super funds which maintain reserves.  The regulation requires trustees to determine the allocation of fund earnings to be applied to member balances having regard to the investment earnings, fund costs and the level of reserves.  Any allocation of fund earnings must be fair and reasonable as between the members and their balances.

Auditors will now have to consider and express an opinion on whether the allocation of fund earnings is fair and reasonable between the members and their various benefits.  This may require auditors to consider whether allocating all or substantially all of the fund earnings to reserves is fair and reasonable as between the members.

Trustees may have to consider and be prepared to justify allocation strategies where all or substantially all of the earnings of the fund are allocated to the reserves.

Possibly such allocation strategies could be supported on the basis that a disproportionate allocation to a reserve is required to build up the reserve, and that any short term disadvantage to the members is offset by having a reserve of sufficient amount in order to perform its intended function.  Alternatively, the short term disadvantage to members will be minimal given the long investment horizon of the members.

Auditors and trustees may be forced to consider some interesting issues when fund earnings are disproportionately allocated to reserves as against member balances.

Conclusion

These changes to the 2010/11 approved form suggest that the ATO is taking a more detailed look at whether pensions are properly documented and satisfying the minimum pension requirements, and also as to the earnings allocation strategy adopted by the trustees which maintain reserves.


Curious Omissions

There are some curious omissions in the 2010/11 approved form.  While the form refers to SIS Reg 1.06(9A), it does not refer to SIS Reg 1.06(1) which specifies that a pension’s capital amount cannot be added to by a contribution or rollover once the pension has commenced.  This provision also imposes payment of the pro-rata minimum pension limit before the pension can be commuted.  Further, the approved form does not refer to the definition of “transition to retirement income stream” in SIS Reg 6.01(2) which imposes the 10% payment ceiling for transition to retirement pensions.

Why require the auditor to express an opinion only on some but not all the key features of pensions?