The Australian Taxation Office (ATO) can initiate an SMSF audit for a number of reasons, including a miscalculation or non-compliance with the SIS Act or SIS Regulations. Generally, ATO audits are escalated from an initial review, however it is at the ATO’s discretion, so they may choose to undertake an audit without conducting an initial examination or review.

ATO audits require an in-depth investigation of the SMSF and reported breaches. The ATO may request a large amount of information from various parties including trustees, accountants, advisers and auditors.

The ATO is currently conducting an increased number of audits as the number of SMSFs are growing quickly as well as an increase in illegal early release. They have identified SMSFs with very large balances as potentially high risk along with SMSFs who have the following:

• A qualified audit report
• A late lodgement or multiple outstanding lodgements (check out the ATOs deferral for lodgements)
• High risk events such as related party transactions
• Illegal early release or improper withdrawals
• A substantial contributions being made
• Failure to pay an outstanding tax liability

Nevertheless, SMSF trustees are always at risk of random ATO audits. If breaches are identified, the ATO could issue the trustees with the following penalties:

• Education Directions
• Enforceable Undertakings
• Rectification Direction
• Administrative Penalty
• Disqualification of a Trustee
• Civil and Criminal Penalties
• Wind-up
• Freezing SMSF Assets

The cost of assisting the ATO with their audit can be very high due to the time required to prepare documentation as well as completing the audit questionnaire. This could also lead to amending the accounts and having the fund re-audited.

To protect themselves from this risk and the financial cost associated with ATO audits, the fund can purchase audit protection insurance to shield any unbudgeted expenses. This type of insurance works as a shield and covers the cost of professional fees generated from ATO audit, investigation and review.

Our team in Bendigo can assist advisers with solutions to protect clients’ funds and businesses from the costs of audits. The link here will take you to the website with further detail, however its best to speak with an insurance adviser so that they can discuss the product in more detail, our freecall number is 1800 086 666.

If you have any other questions about managing your client accounts, please speak with Mark Phillips or Alex Polorotoff on 1300 364 597 or via email at mark.phillips@interprac.com.au or alex.polorotoff@smsfengine.com.au.