|Summary: If you have a self-managed fund, chances are your accountant has recommended you take out audit insurance annually. At a cost of $300 to $400, you may be tempted to take it out. But do you really need it? We ask the experts.|
|Key take-out: For SMSFs with a simple assets structure, the chances of being audited are fairly slim. But even if you are, the costs of answering some simple questions are likely to be less than the cost of taking out audit insurance. Ultimately, it comes down to your risk profile with the ATO.|
|Key beneficiaries: General investors. Category: Superannuation and tax.|
Self-managed super funds may not need tax audit insurance when they have relatively simple affairs and experienced accountants looking after them, according to SMSF administrators and members associations.
Accountants are increasingly tasking their SMSF clients with the decision over whether to buy tax audit insurance amid mounting regulatory activity by the Australian Taxation Office (ATO) this year.
“I think the cost is excessive, and I think most SMSFs are dealing with an accountant or an administrator who is very experienced with what they are doing and don’t need it,” says Olivia Long, chief executive of SuperGuardian, a chartered accounting firm and specialist SMSF administrator.
However, Long says that trustees who prepare their accounts themselves or whose accountants look after less than 10 funds per annum are in a higher-risk category and should consider tax audit insurance. Their accountants (of which there are a significant number) might not have the time or ability to insure their technical knowledge is as up to date as it should be.
John Mcllroy, a director at the Small Independent Superannuation Funds Association (SISFA), and Simon Maitland, a director at the SMSF Members Association, agree with Long.
“If the SMSF is using a professional administrator with a good reputation, then I wouldn’t have thought that tax audit insurance was necessary, particularly when the fund is using one of the services that is using daily administration,” Mcllroy says.
In their defence, accountants say that because of increased legislation towards SMSFs, if the regulator does find your SMSF suspicious, there will be more frequent correspondence with your accountant – meaning more time involved and higher costs.
But Long and Maitland point out that even if a simply structured SMSF is tax audited, it likely won’t be that expensive – around a couple of hundred dollars – as most questions are simply answered. Much of the information should already be on file and readily available, since SMSFs must be audited every year regardless.
Meanwhile the annual fee of tax audit insurance usually costs several hundred dollars, though it depends on the negotiations between accountants and the insurance firms. One Eureka Report subscriber, who already pays over $500 annually to have his books audited, quoted $305 for the insurance fee from Audit Shield Insurance.
That’s around another 5.5% on top of operating expenses a year for an average SMSF with more than $900,000 in assets.
The ATO plans on reviewing 16,000 SMSFs this financial year to check on whether they are complying with tax and regulatory obligations, according its compliance program. Given there are now more than 500,000 SMSFs, that’s about one in 30 that could be tax audited.
But the ATO doesn’t target SMSFs randomly. An ATO spokeswoman told Eureka Report that the regulator and tax collector selects cases for audits using the data it holds, such as from annual returns and from the contraventions reported by independent SMSF auditors.
For the SMSFs then flagged, the ATO uses a “risk differentiated approach” where the level of the fund’s risk determines what action it might take, ranging from writing to the SMSF to advise them of the ATO’s concerns to commencing a full review or audit.
“If you haven’t had a compliance issue before, you’ve probably got a much lower chance [less than 3%] of being tax audited,” Mcllroy says.
However, Long and Mcllroy say there are ways to get the ATO’s unwelcome attention. One of the things the regulator looks at is the cost of audit. Trustees that appear to be paying a cheap price may not have had their accounts adequately reviewed and are prone to being targeted for an audit.
Other areas to watch out for include claiming deductions that are too high compared to the size of the super fund, and investing in unusual assets such as artwork, particularly given the ATO’s new regulations toward investing in collectibles.
If you are concerned about your SMSF in any of these areas, they say tax audit insurance may be worthwhile.
Eureka Report’s Bruce Brammall says choosing to have audit tax insurance is all about assessing the risk, given your circumstances as well as the complexity of your SMSF.
“If you’re pushing the envelope with your accountant from a tax perspective, then paying the insurance might well be worth it,” he says. “But if you’ve got nothing to worry about – you don’t believe there’s anything of concern in your accounts – then perhaps you don’t need it.”