The ATO has recently announced they are changing how you will need to disclose the market value of your assets, meaning SMSF trustees will need to provide more than one item of evidence.
Property is a popular asset choice for many SMSF Trustees. When preparing annual financial statements, SMSF trustees are required to make an annual assessment of the market value of all assets, including property investments.
How will the ATO determine the market value of your assets?
The ATO provides the following list of relevant factors and considerations that might be considered when valuing property:
- the value of similar properties and recent comparable sales results;
- the amount that was paid for the property in an arm’s length market (if the purchase was recent and no events have materially affected its value since the purchase);
- independent appraisals from a real estate agent (kerbside);
- whether the property has undergone improvements since it was last valued;
- the rates notice (if consistent with other valuation evidence); and
- for commercial properties, net income yields (not sufficient evidence on their own and only appropriate where tenants are unrelated).
Are kerbside valuations sufficient?
In the past, it was commonly accepted that trustees only needed to obtain an external valuation every three years. This was usually done by obtaining a one-page kerbside valuation letter signed by a real estate agent.
What is important for SMSF Trustees to now understand is that the ATO have explicitly stated in their valuation guidelines that ‘Trustees should consider a variety of sources to substantiate the market value of real property. Generally, it is not sufficient for valuations to be based on only one item of evidence’.
Kerbside valuations (by themselves) are therefore considered only one item of evidence. To meet the ATO’s new guidelines, a kerbside valuation should now be accompanied by supporting evidence of comparable sales results or other evidence as noted above.
For trustees obtaining a kerbside valuation, they should request the agent include the comparable sales evidence to support the valuation to comply with the ATO’s requirements.
Do I need a formal valuation?
In relation to property assets, generally the answer is no. The super laws only require a valuation by a qualified independent valuer in relation to collectable and personal use assets (not property).
However, trustees may wish to consider using a qualified independent valuer, especially where the value of the property represents a significant proportion of the SMSF’s value, where there are related party purchases or sales, or where there is limited other evidence available to support a valuation.
What about commercial properties?
In practice, it is often difficult to obtain comparable sale information for commercial properties. Therefore, SMSF Trustees need to consider other forms of supporting evidence.
A formal valuation is an option but may not be the preferred option on an annual basis due to cost reasons. The ATO suggests industry and location specific property net income yields could support a valuation but note that these would not be appropriate where tenants are related.
Do valuation requirements apply to properties held via a trust?
Yes, like all SMSF assets, units in a unit trust need to be reflected at market value each year for reporting purposes. The unit value is typically calculated based on the asset valuation of the trust, therefore the property held via the trust needs to reflect market value and the same valuation guidelines still apply.
For related party trusts, organizing a property valuation is relatively easy, but can prove more difficult where the SMSF owns only a small percentage of the trust units (e.g. unrelated trust).
Regardless of this, SMSF trustees still have an obligation to assess the property value and must provide evidence to support the annual assessment which might require them organising an independent valuation of the property or obtaining other external information to support their assessment of the property valuation.
Are you unsure of what evidence you require to support your SMSF property valuation?
At Davidsons, we understand it can be difficult for Trustees to understand if they have sufficient evidence to support the valuations of their SMSF properties.
If you need assistance in understanding your compliance obligations or determining if you have sufficient, appropriate evidence for your annual audit, please contact our Senior SMSF Auditor Tania Sears on (03) 5244 6817 or our SMSF Manager Simon Abbott on (03) 5244 6867.
Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives, or goals.