Increased ATO and auditor focus on SMSF property valuations

With increased scrutiny on SMSF property valuations, trustees
must ensure valuations are based on objective, supportable data
and meet updated guidelines to avoid audit complications.

The ATO and SMSF auditors are cracking down on the valuation of SMSF assets. Specifically, valuing of properties has become a real focus and the frequency in which these assets need to be valued has increased significantly. In the past, an SMSF Trustee could generally provide a property valuation every three years but this is no longer the case.

At PKF Sydney and Newcastle our preferred SMSF audit provider is Evolv Super Audits and they have provided the below new guidelines for property valuations. It is important to note that these guidelines are not only for properties held directly by an SMSF but also for properties that are held in trusts and companies where an SMSF owns units/shares:

• Commercial property – Valuation needs to be within 18 months of the end of the financial year. ‘Within’ means both pre and post the valuation date so it is possible for a commercial valuation to support multiple financial years.

• Residential property – Valuation needs to be within six months of the end of the financial year.

• All valuations need to be based on objective and supportable data. This can include a range of sources to substantiate the market value but at a minimum the value should be based on at least two recent sales of similar properties.

For year-end valuation purposes the valuation does not need to be completed by a registered valuer. The valuation can be prepared by anyone as long as it is based on objective and supportable data.

Rental appraisals also need to be considered by SMSF Trustees. A rental appraisal is required when the tenant is a related party to ensure that rent is being received at market rates. Obtaining a rental appraisal at the same time as obtaining a property valuation can save Trustees time and money. A rental appraisal is not required when the tenant is an unrelated party, however, it’s best practice to have one on file. A rental appraisal should be reflected in any lease agreements that are in place. If they are not, then the lease should be adjusted to be in line with the appraisal at the next available date.

It is important to note that it’s not the auditor’s job to undertake a valuation. Rather, it is the trustee’s responsibility to provide their auditor with the documents that are requested to support the market valuation of SMSF assets, including real property. The auditor should seek evidence that shows how the asset was valued, including the method used and the data on which the valuation was based. Where the evidence is not sufficient and appropriate to enable the auditor to form an opinion the asset was valued at market value, the auditor must modify their audit report and consider whether an auditor contravention report (ACR) should be lodged.