Treasury has proposed that SMSFs would be subject to a factor-based approach wherein the maximum amount of income taxable at the highest marginal rate would be set at five times the level of the general expenditure breach.

Speaking to SMSF Adviser, BDO partner, superannuation, Shirley Schaefer said the amendments proposed by Treasury do nothing to alleviate red tape and “certainly nothing to alleviate the responsibilities that will be put onto auditors.”

Ms Schaefer explained the ATO has made it clear that it thinks auditors should be looking at non-arm’s length expenditure issues in the audits they perform.

“The problem is that we just don’t have the background knowledge.”

“We don’t know the trustees. We don’t know what they do for a job and on that basis, we don’t know whether they should have been paying any expenses or not.”

With auditors required to undertake additional investigation and verification, Ms Schaefer said fees for audits will also go up.

“Due to the tax consequences, I think some auditors will take the path of saying ‘well I don’t know what I don’t know so I’m going to disclaim my audit opinion,” she stated.

“That’s not necessarily the right path to go down but it’s only going to take one legal case for someone to have a go at an auditor because they didn’t tell them that an expense should have been on arm’s length basis. None of us want to be in the position of being held liable for loss.”

DBA Lawyers director Daniel Butler previously warned that unless there is an appropriate legislative fix for the non-arm’s length income provisions, the work and responsibility for SMSF auditors would significantly increase after 1 July.

“Auditors will have to start asking their clients what they are doing after hours, what tools they have in their shed, and whether they have a well-stocked home office,” said Mr Butler speaking at the National Superannuation Conference last year.

“If there’s use of computer equipment but its minor and infrequent use, auditors will also need to make decisions around that and so on. They will have to query their clients a lot and do a lot more investigation on whether non-arm’s length income is present.”

Some SMSF auditors are already starting to ask these types of questions, he said.

Mr Butler said that non-arm’s length income will be very difficult for auditors to detect where it involves minor types of expenses.

“Auditors will have a lot more work and a lot more responsibility and they’re the ones that could be sued if the accounts are not presenting the position fairly.”

“It’s really quite a lot of detail that they’ll have to go through, which is not really fitting for their role.”