Overview
As part of the SMSF audit process, assets, including property investments, must be valued at market every 30 June. This does not necessarily mean a sworn valuation by an independent property valuer every year; it does, however, mean last year’s valuation will not suffice for the current income tax year. The days of valuing property every 3 years are well and truly over, according to the Australian Taxation Office (ATO).
Today’s article is Part two in a series on valuing assets in an SMSF. We have produced these articles, as we field many questions from trustees and intermediaries on asset valuations.
Why has the ATO changed its stance on property valuations?
Whilst it may seem that way, the ATO has not changed their view on market valuations for SMSF property investments. Legislation and regulations have not changed and have always required assets to be brought to account each 30 June.
Regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994 has always required assets to be valued at market value in the financial report each financial year.
ATO guidelines
To assist trustees in meeting their responsibilities under Regulation 8.02B, the ATO has provided some asset valuation guidelines. When reviewing a trustee’s compliance with Regulation 8.02B, the ATO will assess how a property has been valued against their guidelines. Therefore, it is imperative SMSF intermediaries be familiar with these to be able to assist their clients (i.e. trustees) in complying with their obligations.
These guidelines include a section on valuing real property which is reproduced below. See the link for further information:
The ATO states valuations should be conducted on a fair and reasonable basis, considering all relevant factors in valuing the asset. Valuations must be undertaken in good faith, use a rational and reasoned process and be capable of explanation to a third party.
When valuing real property, relevant factors and considerations may include:
- The value of similar properties and recent comparable sales results
- The amount that was paid for the property in an arm’s length market – if the purchase was recent and no events have materially affected its value since the purchase
- An independent appraisal from a real estate agent (kerbside)
- Whether the property has undergone improvements since it was last valued
- Rates Notice (if consistent with other valuation evidence)
- For commercial properties, net income yields (not sufficient evidence on their own and only appropriate where tenants are unrelated).
It is important to note property values can change significantly from year to year, as tenants can vacate and the SMSF landlord struggle to find suitable replacements, or substantial repairs or expenditure may be required due to water damage or other unforeseen events.
The ATO goes further, clarifying more than one of the above sources may be required when confirming the valuation of property as at 30 June by the fund:
Unless the property has been recently purchased by the fund, you should consider a variety of sources to substantiate the market value of real property. Generally, it is not sufficient for valuations to be based on only one item of evidence in the above list.
A valuation undertaken by a property valuation service provider, including online services or a real estate agent, are acceptable. If this valuation is the sole source of evidence being relied upon to substantiate the real property valuation, the valuation should specify the supportable data. For example, in the case of a real estate agent appraisal or online report, the valuation should list the comparable sales it relied on.[1]
What does it mean for audit requirements?
The ATO also expects SMSF auditors to use those guidelines when assessing trustee compliance with regulation 8.02B. When the ATO reviews the files of SMSF auditors, they look for valuation evidence consistent with the guidelines. Therefore, the auditor approach applies the ATO’s guidelines when reviewing if a property has been valued at its market value.
All trustees should be aware that if the fund auditor is not provided with the evidence necessary to support the valuation of a property, the auditor will include a modification (e.g. a qualification) in both Parts A and B of the audit report. Due to the percentage of fund assets property usually forms in an SMSF, the auditor works on the assumption all property is material and will report to the ATO in an Auditor Contravention Report (ACR) stating they did not receive enough evidence to determine the trustees complied with the requirement of regulation 8.02B.
Auditors are now under increasing pressure from the ATO to be the gatekeepers of SMSF compliance. They are seen by both the ATO and the Australian Securities and Investments Commission (ASIC) as playing a key role in upholding the integrity and confidence of the SMSF sector. Auditors that fail this responsibility are being struck off the Register. In the second half of 2024 alone ASIC acted against 17 SMSF auditors.
The old approach of obtaining a valuation once every three years and providing no evidence to support the valuation in the intervening years is no longer appropriate.
Who can undertake a valuation?
The valuation can be undertaken by anyone provided it is based on objective and supportable data. The following would generally be considered adequate audit evidence:
- Formal valuation from a qualified and independent valuer
- Real estate agent valuation – with comparable sales included
- Online valuation – these will normally indicate whether the reliability is high, medium or low. The valuation needs to be of high reliability and include comparable sales
- Valuation from trustees – with evidence of market valuation such as recent comparable sales.
What is considered acceptable valuation evidence?
Examples of generally accepted valuation evidence:
- A valuation report from a professional valuer which includes a description of the property within 6 months of 30 June
- A trustee resolution assessing the market value based on a valuation report that is 2 years old combined with evidence of the percentage growth in the property market for the relevant suburb for the past 2 years or recent comparable sales (this information combined may be adequate to support the current value used)
- A trustee resolution assessing the market value of a one-bedroom apartment with evidence included of one or more recent sales in the same building for an identical apartment
- Online valuations for the relevant property as noted by websites such as domain.com.au or realestate.com.au provided the valuations have a high accuracy rating and list comparable sales.
What about rental income?
The auditor will also assess rental income received to determine if it is on commercial terms. The following would generally be considered adequate audit evidence:
- Lease agreement via a real estate agent or other written agreement covering the lease of the property during the year
- Rental statements from a real estate agent covering the lease of the property during the year
- Rental appraisal by an independent real estate agent or valuer (for related party tenants)
- Supporting evidence and an explanation from the trustees if there was no rental income received during the year.
It is important to remember the role of the auditor is to see if the trustees are complying with the legislative requirements to value the assets at market. The responsibility of the auditor is to:
- Check the valuation of the SMSF’s assets as part of the annual audit
- Ensure the valuation is based on objective and supportable evidence
- Assess whether the basis for the valuation is appropriate given the nature of the asset.
The audit function is not to value assets or tell trustees whether investments are suitable; the auditor merely determines if assets are valued at market.
Property leased to related parties
Where property is leased to a related party tenant, the auditor will generally pay close attention to determine if the rental income paid to the SMSF is commercial. The terms and conditions are expected to be the same terms as if the fund is dealing with an arm’s length third party.
It is a legislative requirement that the SMSF does not provide financial support to a related party. Factors confirming the terms of the arrangement are commercial include:
- There is an up-to-date and enforceable written agreement
- The terms of the lease are consistent with commercial terms
- The amount of rent and any increases in rent are on commercial terms
- The agreement includes appropriate clauses regarding the recovery of unpaid rent and the consequences of unpaid rent
- Any extensions or renegotiations of the lease are documented in writing.
The trustees are responsible for enforcing the terms of the lease agreement. If the agreement notes rent is payable monthly, rent should be received by the fund monthly. Rent paid in arrears is generally considered evidence the transaction is not on arm’s length terms.
How will Division 296 impact property valuations?
Division 296 is the government’s new tax on super balances above $3 million. Given Labor’s sweeping electoral victory, it is inevitable this tax will become law. Funds with lumpy assets such as property may be unduly impacted by this new tax, as it applies to both realised and unrealised gains. This means paper increases in value will be taxed, adding cashflow pressure on funds that hold significant property assets. Accurate and timely property valuations will be crucial in determining a member’s exposure to this tax. Valuations are also important if SMSFs look to transfer property assets out to related parties to avoid the extra super tax.
Conclusion
Accurate property valuations are important for SMSF trustees and members. Not only is valuing assets at market a compliance requirement, but it also determines member balances for a range of important factors, such as Total Super Balance (TSB), pension commencement valuations and member liability for the dreaded Division 296 taxation impact.
What does Neo Super provide?
We are an innovative end-to-end SMSF service provider specialising in:
- SMSF administration and compliance
- Documentation services, including fund establishment, borrowing arrangements and pension documentation
- White label documentation and services for Intermediaries such as accountants and financial planners
- SMSF technical support, education, and training.
Further Information
For other service requirements, please contact our office at neo@neo-super.com.au or 1300 083 428.
[1] https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/smsf-administration-and-reporting/guide-to-valuing-smsf-assets
