Many self-managed superfunds include real estate properties. As a result, issues surrounding these properties often come up in our SMSF audits, especially since the ATO is targeting this area more closely than in the past.
Changes in ATO guidelines
In recent years, the ATO has released new guidelines for super funds that own properties. Property valuation is one of the most common areas for problems, particularly due to increases in Australian real estate prices over the last couple of years and general volatility in the marketplace.
In October 2020, the ATO updated its website to clarify the kind of objective evidence needed to support real property valuations for tax purposes. In addition to providing an overall description of the property (location, features, estimated rental value, etc.), the following items may offer useful supporting information for valuation purposes:
- An independent appraisal from a real estate agent (kerbside)
- A sales contract (if the purchase is recent and nothing has happened to impact the value since the purchase, such as a fire or flood, etc.)
- Documentation on recent sales of comparable properties in the neighborhood
- Net income yield of commercial properties (however, this information alone is not considered sufficient for determining value).
When demonstrating how a valuation has been calculated, you need to ‘compare apples with apples’ – you can’t compare a four-bedroom home to a two-bedroom home, and you can’t compare property prices in a particular suburb to a suburb too far away. Also, the ATO guidelines suggest that properties within an SMSF should be assessed against the market annually, and even more recently if major renovations (or damages) have taken place.
In short, the ATO is asking for reliable data, so when it comes to providing proof of valuation, a simple one-page document from a real estate agent won’t necessarily cut it. There needs to be more methodology behind the valuation – and as SMSF auditors, we look for sufficient evidence to support that value.
Is external valuation necessary for SMSFs?
An external valuation by a qualified, independent third party is not required, but it can obviously assist in determining an accurate value of a property within an SMSF.
However, SMSF trustees should consider getting an external valuation if the property represents a significant proportion of the fund’s value.
Why is information on property valuations so key for SMSF audits?
Understanding the ATO guidelines for properties within SMSFs is vital for trustees because accurate valuations impact the calculation of total super balances, transfer balance amounts (which can affect contribution and pension limits), and the overall financial health of an SMSF. Plus, failure to comply with valuation requirements can result in audit qualifications and contraventions being lodged to the ATO. As an accountant, knowing that your clients need to provide accurate details in advance can help avoid hassles and potential delays at tax time.
For more on SMSFs and property assessments, see the ATO website’s valuation guidelines for self-managed super funds.
Need help providing the correct documentation to meet ATO guidelines for SMSF audits? Contact the professionals at AuditYour Superfund today.