It is a regulatory requirement for all SMSFs that assets be valued at their market value when preparing the fund’s annual accounts and financial statements. Additionally, SMSF auditors are required to gather sufficient and appropriate evidence to support the value of a fund’s investments.
ATO guidance
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.
The ATO recommends using an independent valuer when assets represent a significant proportion of the fund or when the asset is complex or unique. An auditor’s primary obligation under the auditing standards is to ensure robust evidence for assets.
Annual Revaluation
SIS Regulation 8.02B requires an annual revaluation, and auditing standards require suitable supporting evidence to be provided. Should comprehensive valuation support be provided for the prior year, the trustees may consider using that valuation as a starting base and applying a suitable logical approach to revalue the asset for the most current audit. It is essential that the valuation is comprehensive in detail and is current for the prior audit (i.e., in the 2023 calendar year). Therefore, a trustee revaluation may be suitable, but this approach is subject to the auditor’s professional judgment to conclude it is sufficient and appropriate audit evidence.
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.
We suggest getting your valuation support now for the June 2024 audits. This will save you time by decreasing the number of audit queries, which will assist us in promptly completing your audit. Furthermore, if suitable audit evidence is provided, you will avoid having to rework the financial statements and reduce the risk of audit qualifications.
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.