By Millinda Cobban, Associate Director, SMSFcentral

SMSF Audit Requirements: What Happens If Your Fund Fails

Every self managed super fund (SMSF) in Australia must be audited by an approved SMSF auditor each financial year. This is a legal requirement under section 35C of the Superannuation Industry (Supervision) Act 1993 (SIS Act), and it applies regardless of the fund’s size, activity level, or whether it is in accumulation or pension phase. The audit has two parts — a financial audit of the fund’s statements and a compliance audit against the SIS Act — with results reported directly to the ATO as part of the fund’s annual return.

The Two Parts of an SMSF Audit

Part A: Financial audit

The financial audit examines whether the fund’s financial statements present a true and fair view of the fund’s financial position. The auditor reviews bank statements, investment records, asset valuations, contribution receipts, pension payments, and any other transactions during the year.

The auditor is looking for completeness and accuracy. Are all assets recorded? Are valuations at market value as required by ATO Superannuation Ruling 2008/1? Do the financial statements reconcile with the bank and investment records?

Part B: Compliance audit

The compliance audit tests whether the fund has operated in accordance with the SIS Act, SIS Regulations, and the fund’s own trust deed during the year. The auditor checks specific compliance areas including:

• Sole purpose test (s62). Were all fund activities conducted solely for retirement benefits?
• Investment strategy (s52B(2)(f)). Does the fund have a documented, current investment strategy that considers risk, diversification, liquidity, and insurance needs?
• In-house assets (s82-85). Are loans to members or related party investments within the 5% in-house asset limit?
• Arm’s length dealing (s109). Were transactions with related parties conducted at market value?
• Separation of assets (s52B(2)(d)). Are fund assets held separately from members’ personal assets?
• Contribution caps and acceptance rules. Were contributions accepted in accordance with the rules?
• Benefit payment conditions (Schedule 1). Were any lump sums or pensions paid only to members who had met a condition of release?
• Borrowing restrictions (s67). If the fund borrowed, was it under a compliant limited recourse borrowing arrangement?

Who Can Audit an SMSF

Only an approved SMSF auditor registered with ASIC can conduct the audit. The auditor must be independent of the fund. This means the auditor cannot be a trustee, a member, an employer-sponsor, or a relative of any of those people. The auditor also cannot be the fund’s accountant or tax agent, although they can work for the same firm in certain circumstances provided independence is maintained.

The ATO maintains a register of approved SMSF auditors. If your auditor’s registration is cancelled or suspended, any audit they conduct is invalid.

Auditor Contravention Reports (ACRs)

When an auditor identifies a contravention of the SIS Act during the compliance audit, they must decide whether to report it to the ATO. This report is called an Auditor Contravention Report, or ACR.

Auditors are required to lodge an ACR when the contravention is material, when it has not been rectified, or when the trustee does not intend to rectify it. The auditor may also lodge an ACR for less serious matters if they believe the ATO should be aware.

An ACR is not a penalty in itself. It is a notification to the ATO. What happens next depends on the nature and severity of the contravention.

What Happens After an ACR Is Lodged

The ATO reviews every ACR received. Their response is proportionate to the seriousness of the contravention. The possible outcomes range from no further action to the most severe consequence of making the fund non-complying.

Education direction

For first-time or minor contraventions, the ATO may issue an education direction under s160. This requires one or more trustees to complete a course approved by the ATO. The course must be completed within the timeframe specified, usually within a few months.

Rectification direction

The ATO can direct the trustee to rectify the contravention within a specified period under s159. For example, if the fund holds an in-house asset above the 5% limit, the ATO may direct the trustee to dispose of the excess within 12 months.

Administrative penalties

Under Part 21 of the SIS Act, the ATO can impose administrative penalties on trustees. Each trustee can be penalised individually. Penalty amounts range from $2,220 to $18,780 per contravention (2025-26 amounts), depending on the section breached.

Non-complying fund status

In the worst case, the ATO can make the fund non-complying. This is the nuclear option. A non-complying fund loses its concessional 15% tax rate and instead pays tax at the top marginal rate (currently 45%) on the fund’s entire taxable income, plus a tax on the market value of the fund’s assets at the highest marginal rate less 15%. The financial impact is devastating.

Common Audit Failures

In practice, certain contraventions appear repeatedly. The most common issues identified in SMSF audits include:

• No documented investment strategy, or a strategy that has not been reviewed. This is the most frequently reported contravention.
• Loans to members or related parties. An SMSF cannot lend money to a member or their relatives. This includes informal arrangements where the fund pays a member’s personal expenses.
• Assets not at arm’s length. Renting a fund-owned property to a related party below market rent, or purchasing an asset from a member above market value.
• Incorrect benefit payments. Paying a lump sum to a member who has not met a condition of release.
• Late or missing valuations. Assets not valued at market value as at 30 June.
• Inadequate separation of assets. Fund money in a personal bank account, or personal expenses paid from the fund’s account.

How to Prepare for Your SMSF Audit

Good preparation makes the audit process faster, cheaper, and less likely to result in qualifications or contravention reports.

1. Organise bank and investment statements. Provide complete statements for every account and holding for the full financial year.
2. Document all valuations. Ensure every asset has a supportable market valuation as at 30 June. For property and unlisted investments, obtain independent valuations.
3. Review your investment strategy. Confirm it reflects the fund’s current asset allocation, has been reviewed within the past 12 months, and is signed by all trustees.
4. Check minutes and resolutions. Pension commencements, investment decisions, and changes to the fund should be documented in trustee minutes.
5. Confirm member contributions are within caps. Verify that concessional and non-concessional contributions are within the annual caps for each member.
6. Ensure benefit payments are correct. If any benefits were paid during the year, confirm the member met a condition of release and that the payment type (lump sum or pension) matches the fund’s records.

Timeframes

The audit must be completed before the fund’s annual return is lodged. For self-lodging funds, the annual return is due by 28 February following the end of the financial year. Funds using a registered tax agent typically have an extended deadline, often in mid-May or later depending on the agent’s lodgement program.

Appointing your auditor early in the year, ideally before 30 June, gives them time to plan and ensures there are no delays at lodgement time.

Frequently Asked Questions

Can I use the same auditor every year?

Yes. There is no mandatory rotation requirement for SMSF auditors. The auditor must remain independent. If circumstances change and independence is compromised, you must appoint a new auditor.

What if my fund had no activity during the year?

The fund still requires an audit. Even a dormant fund with no contributions, no withdrawals, and no investment changes must be audited annually.

How much does an SMSF audit cost?

SMSF audit fees typically range from $400 to $900 depending on the fund’s complexity. Funds with property, borrowings, or related-party transactions generally cost more to audit.

What happens if I do not get my fund audited?

Failure to appoint an auditor is itself a contravention of the SIS Act. The ATO can impose administrative penalties and, in persistent cases, may disqualify the trustees.

Can I rectify a contravention before the auditor reports it?

Yes. If a contravention is identified during the audit and the trustee rectifies it before the audit is finalised, the auditor may decide not to lodge an ACR. Prompt action makes a significant difference.

Get Your Audit Right

SMSFcentral coordinates the annual audit as part of our audit and review service. We prepare your fund’s financials, liaise with the auditor, and ensure your records are complete before the audit begins. If you need help preparing for your next SMSF audit, call 02 8412 0086 or email [email protected].

This is general information only, not personal financial advice. SMSFcentral does not hold an Australian Financial Services Licence.