Anthony Fund was set up in May 2015 along with a custodian trust. An off the plan purchase of a residential apartment was executed in the name of the custodian trust. The custodian trust provided to the vendor a bank security guarantee, presumably backed up, somehow, by the single member of the SMSF. The accountant, for the FY2015 through to FY2018, also acted as auditor of the fund and signed off. The financial statements for those years had $150K asset as “beneficial interest held in land and building on trust” with a corresponding liability called “contingent liability deposit bond guarantee” for $150K. There was no evidence of a LRBA being on record, or any loan agreement in existence.

I audited the FY2019 as the accountant resigned from the ASIC auditors registration and continued on his role as the accountant. The financial statements for FY2019 had the building settled with a LRBA through a financial institution. A number of legal opinions were obtained in regard to the structure of the SMSF, and the borrowing arrangements and were all considered compliant under the SIS legislation. It appears that the security guarantee of $150K was withdrawn and the contract proceeded to settlement during the course of FY2019. The financial statement for FY2019 took up the land and building and the corresponding LRBA.

In hind sight, I neglected to investigate the compliance issue of whether the provision of a guarantee, by a fund member, constitute a breach of SIS legislation. The borrowing provision requires the existence of a LRBA, among other things, and must be for a single acquirable asset. Is the off-the-plan contract considered to be an acquirable asset for the purpose of the exemption under the borrowing provision? If so, the financial statements for those intervening years would have been incorrectly drawn up. In my opinion, the mere existence of an off-the-plan contract would not satisfy the SIS rules. The better way to have achieved the contract deposit would have been the contribution by the member instead and the fund used as deposit. The custodian trust could be set up when the borrowing was required at settlement. Of course, there are legal complications having to change the identity of the purchaser from the SMSF to the custodian trust.

I have signed off FY2019 audit without qualifying or at least mentioning this issue in the management letter. Now that I am more aware of the background, should I amend my audit report and management letter to reflect the contravention, though subsequently rectified, that is, if my analysis above is correct.

Can I have your opinion please.