Top 5 Common SMSF Audit Mistakes & How to Avoid Them

A Self-Managed Superannuation Fund (SMSF) is a great way for Australians to take control of their retirement savings. With an SMSF, you can choose how to invest your superannuation money and build a portfolio that fits your needs and goals. However, managing an SMSF also comes with a lot of responsibility, especially when it comes to keeping everything in line with strict rules and regulations.

One of the key parts of managing an SMSF is the annual audit. An audit helps ensure that your fund is operating properly and meeting legal requirements. But it’s easy to make mistakes along the way, and some common errors can lead to penalties, extra costs, or even being removed as a trustee.

In this article, we’ll look at the 5 most common mistakes made during SMSF audits and share simple tips on how to avoid them. This way, you can keep your SMSF running smoothly and avoid unnecessary problems.

1. Poor Record Keeping

One of the most common SMSF mistakes is not keeping accurate records. Proper record-keeping is crucial, not only for a successful audit but also to make sure you comply with the rules set by the ATO (Australian Tax Office) and other authorities.

Why It’s Important

The ATO requires that SMSFs keep detailed records of all transactions, investments, income, expenses, and trustee meetings for at least five years. If your records aren’t up to date or are incomplete, it will be difficult to prove that your SMSF is complying with the rules. This can lead to fines or even force your fund to be declared non-compliant.

How to Avoid It

To avoid this mistake:

• Keep Clear Financial Records: Make sure every transaction, whether it’s contributions, investments, or expenses, is well-documented.
• Track Trustee Decisions: Record minutes of all meetings where decisions are made about the fund.
• Use Software: Consider using accounting or SMSF-specific software to organize your records. This can make things easier and help ensure you don’t miss anything.

Example:

If your SMSF buys a property, you’ll need to keep all documents related to the purchase, like the purchase agreement and settlement details, for audit purposes.

2. Breaking Investment Rules

SMSF trustees must follow strict investment rules. This includes ensuring that every investment is made with the goal of benefiting the fund’s members when they retire—not for personal gain. There are also specific restrictions on the types of investments your SMSF can make.

Why It’s Important

The ATO has clear rules about what SMSFs can and cannot invest in. For example, you can’t invest in personal items like artwork, cars, or collectibles, and there are rules about transactions between related parties. Failing to follow these investment rules could lead to penalties or the disqualification of trustees.

How to Avoid It

To avoid breaking the investment rules:

• Stick to the “Sole Purpose” Test: All investments must aim to provide retirement benefits, not personal benefits.
• Diversify Your Portfolio: Don’t put all your money into one investment. Keep your portfolio balanced and in line with your risk tolerance and the fund’s investment strategy.
• Avoid Related Party Transactions: Be careful about buying or selling investments to family members or others closely related to you. There are strict rules around these types of deals.

Example:

If your SMSF buys a property from a family member, make sure the transaction follows the ATO’s guidelines for related party deals. This can help you avoid issues during the audit.

3. Not Following Trustee and Member Rules

SMSF trustees have specific duties under the law. A common mistake is not following the correct process for appointing trustees, making sure trustees are eligible, or ensuring that members and trustees are following all the rules about their roles and responsibilities.

Why It’s Important

Your SMSF must have at least one trustee, and no more than four. Trustees must be either individuals or a company acting as a trustee. It’s important that these appointments are made properly, and the rules are followed to avoid non-compliance.

How to Avoid It

To keep things compliant:

• Set Up Trustees Correctly: If your SMSF is a corporate trustee, the company needs to be set up and registered according to the law.
• Know Your Duties as a Trustee: Trustees must act in the best interests of SMSF members and avoid any personal conflicts. Make sure all decisions are documented.
• Review Member and Trustee Appointments: Keep records of who the trustees and members are, and update them if anything changes.

Example:

If a trustee is no longer eligible, like if they are declared bankrupt, make sure they’re removed from the role as required by law.

4. Not Having an Updated Investment Strategy

Every SMSF needs to have a written investment strategy that guides how money is invested. A common mistake is failing to review or update this strategy regularly. Your strategy should reflect the current needs of the members and be in line with their retirement goals.

Why It’s Important

If your SMSF investments don’t match the investment strategy, it can lead to non-compliance. Plus, your strategy should evolve as your goals and circumstances change. Not reviewing your strategy regularly can result in outdated decisions that might not benefit your retirement plan.

How to Avoid It

To stay on track:

• Review Your Investment Strategy: Make sure your strategy is reviewed at least annually, or whenever there’s a significant change in your personal or financial situation.
• Make Sure Investments Match the Strategy: If you’re planning an investment, ensure it aligns with your strategy. Any changes or exceptions should be documented.
• Get Help if Needed: Consider talking to a financial planner or SMSF auditor to make sure your investment strategy is still appropriate.

Example:

If you’re getting closer to retirement, your risk tolerance might change. Update your investment strategy to reflect this, moving away from high-risk assets to safer, more stable options.

5. Missing Deadlines for Important Documents

A common mistake that SMSF trustees make is not submitting the required documents on time. Failing to submit documents like the annual tax return or financial statements to the ATO can lead to fines and penalties.

Why It’s Important

The ATO has strict deadlines for SMSF documents, such as the annual return, financial reports, and tax documents. Missing these deadlines can result in your fund being penalized and can also raise red flags during the audit, leading to additional scrutiny.

How to Avoid It

To avoid missing deadlines:

• Track Key Dates: Use a calendar or reminder system to ensure you never miss an important deadline for document submission.
• Submit Early: Aim to get your documents submitted well before the deadline to avoid last-minute issues.
• Get Help if Needed: If you’re unsure about the paperwork, consider working with an SMSF administrator or auditor who can handle the submission deadlines for you.

Example:

If your SMSF’s tax return is due on May 15th and you miss the deadline, you could face a penalty. Late submissions also trigger additional checks and raise concerns during the audit.

Conclusion

Managing an SMSF is a rewarding but complex responsibility. By avoiding common mistakes like poor record-keeping, breaking investment rules, not following trustee requirements, neglecting the investment strategy, and missing deadlines, you can ensure your fund stays compliant and runs smoothly.

If you’re feeling unsure or overwhelmed by the audit process, it’s a good idea to seek professional help. For more guidance and expert SMSF audit services, you can visit Access Super Audit.

Staying on top of these common issues will not only save you from fines and penalties but also help your SMSF meet its goals and secure your retirement savings. With careful planning and attention, your SMSF can stay in good shape and continue to work for your future.