Property valuations are often a contentious issue for SMSF auditors. The auditor has a responsibility to confirm the assets of the fund are at a market value. If trustees don't provide enough paperwork to support the valuation, it can cause delays in the SMSF auditing process, and possibly a contravention.
The ATO requires that any asset's valuation be based on objective supporting data. Generally, it's the quality of the valuation process rather than who conducted it that governs the acceptability of a valuation.
At Audit your Superfund, we will often receive a minute from the trustees stating the property value is the same as the previous year's accounts and that this reflects current market value.. Having trustees sign off a minute only, whilst simple and easy, will not be sufficient evidence to confirm the market values of a property for an SMSF audit. As a result, the audit will be placed on hold until further supporting documentation has been provided.
The ATO provides a guide to trustees when valuing assets of a SMSF here.
How to secure a valid property valuation for your SMSF audit
You must be able to demonstrate that the valuation has been determined using a 'fair and reasonable process'. Generally, a valuation is considered fair and reasonable where:
- It takes into account all relevant factors and considerations likely to affect the value of the asset.
- It has been undertaken in good faith.
- It uses a rational and reasoned process.
- It is capable of explanation to a third party.
For a property valuation in particular, an SMSF auditor would need to see a detailed description of the property, including details such as:
- Type of property
- Land area,
- Planning zones,
- Car parking,
- Specific features of the property.
A comparison of recent sales of similar properties in the area, and a comparison of rental returns of properties of a similar nature will help build up the case of a suitable valuation.
How to account for market variables in an SMSF audit
There are many factors that will affect a property valuation, such as economic conditions, vacancy rates, unique nature of the property etc. These factors should be recorded when providing supporting documents to the SMSF auditor.
Paperwork to include in your property valuation
In many cases council rate notices are not truly representative of the actual market value.
Sometimes we receive a council rates notice to confirm a property value. Whilst this is a good starting point, in many cases council rate notices are not truly representative of the actual market value. We would generally request further information to be satisfied this is the correct value of the property.
The best supporting documentation (and the most efficient method to confirm a property value) is by obtaining an independent valuation or appraisal from a real estate professional who specialises in the type of property held in the fund. Generally we would want to see such a valuation/appraisal updated every three years, unless the property has been substantially altered since the last valuation.
Get your SMSF up to speed with legislative change
We understand many trustees will take an active role when investing directly in property and may have good knowledge of property values. However, this is not enough in the current legislative climate.
Valuation of property assets will be critical with the new transfer pension balance limits, total superannuation calculations, and new non-concessional rules. Don't forget if you're making use of the transitional CGT relief provisions, valuations will be required to support the CGT calculations.
Don't risk your client's money and your business. Choose an independent SMSF auditor who works with SMSF professionals.