Property valuations are basically appraisals of property widely used to form an audit opinion about the investment. Regulation 8.02B of SISR requires valuation of all fund assets when preparing financial statements and accounts for SMSF funds each year. Usually property valuation is calculated at ‘market value,’ however other factors including the property type, its surrounding, services the location offers – basically everything within the property is and should be considered by the SMSF auditor.
What are SMSF Auditors responsible for?
While SMSF auditors need to assess property valuations, their role is not to value assets or to determine market value. Approved SMSF auditors are responsible for:
- Checking correct valuation of fund assets;
- Obtaining and sighting objective and supportable documents to verify market value as determined by the trustees;
- Assessing and documenting whether the nature of the asset and basis for the valuation matches;
- Where there is insufficient evidence, they need to consider modifying the SMSF independent auditor’s report and lodging an auditor contravention report.
Auditors should also refer to Reg 8.02B for a more in-depth understanding. Dealing with properties can be a bit more complex than many assets such as listed shares and cash.
What is the SMSF trustee’s responsibility in the valuation?
In line with the auditors’ responsibilities, it is the SMSF trustee’s responsibility to provide objective and supportable evidence in relation to the valuation of a fund asset. As required under S35C(2), trustees need to provide all relevant documents within 14 days of a specific request by the auditor. The ATO allows auditors to lodge a contravention report if this is not done.
What supporting data should be considered when valuing SMSF properties?
The ATO has recently published updated guidelines for verifying the market value of fund assets.
“For the 2012–13 and later income years, trustees of self-managed super funds (SMSFs) must value all fund assets at market value when preparing the financial statements and accounts for their fund each year. This is to comply with regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994 (SISR).
Prior to this time, trustees were only required to value assets at market value if the fund was paying a pension or held in-house assets. Industry practice was to value other fund assets every three years.”
Approved SMSF auditors are responsible for verifying the market value of fund assets as determined by the trustees. They also need to obtain evidence to support that determined market value. Where there is insufficient evidence, they must consider modifying the SMSF independent auditor’s report (IAR), and lodge an auditor/actuary contravention report (ACR) where the reporting criteria is met.
The ATO has determined that SMSF trustees may consider using a qualified independent valuer or external valuer, especially where
- the value of the property is material or represents a significant proportion of the fund’s value,
- there are purchases or sales as related party transactions, or
- there is limited or no other evidence available to support a valuation.
For recently purchased property, the most common valuation documents would be a signed purchase contract and a settlement statement.
Trustees should consider having variety of source documents to substantiate the property’s market value, including:
- Independent appraisals from a real estate agent (kerbside);
- A contract of sale (at cost) if the purchase is recent and no events have occurred to the property that could materially impact its value since the purchase;
- Recent comparable sales or valuation of similar property;
- The rates notice (if consistent with other valuation evidence);
- The net income yield of commercial properties (not sufficient evidence on their own and only appropriate where tenants are unrelated).
While SMSF auditors can rely on one of the above types of evidence alone, they generally request at least two of them to satisfy an audit.
Do valuation requirements apply to properties held via a trust?
Yes. Since the unit value of a trust within a SMSF needs to be reflected at a market value each year for reporting purposes, it’s only natural that the property held by the trust reflects the current market valuation and follows the same valuation guidelines.
While this is the case, its not an absolute black and white procedure and auditors are still encouraged to assess with a professional judgment. For example, you may not require a market valuation if the unit trust is unrelated and the fund has no investment of significant influence.
As an independent auditing firm, National Audits Group understands that the valuation of property and other assets associated with SMSFs can be a make-or-break decision. National Audits Group provides accountants, advisors and trustees with the confidence that their SMSF audits are being managed professionally with regard to all auditing requirements.
For further information, contact us directly at 1300 734 707.
Laisa Bartolo | SMSF Auditor | National Audits Group
- Regulation 8.02B and evidence required to support real property valuations (ATO, 15 Oct 2020)