Property valuations under increased scrutiny by SMSF auditors

“[However], when the accounts of the fund are being prepared, when a trustee pays a lump sum or a member commences a pension, then a reasonably accurate value should be obtained,” Mr Colley explained in an online article.

Valuations are also required under the Superannuation Industry (Supervision) Act (SIS Act) when a commercial property is acquired from a related party in order to establish that a transaction has been made on an arm’s-length basis.

“The ATO says that when preparing SMSF financial reports, an external valuation of real estate is not required each and every year. However, a recent valuation is prudent if the previous value is considered to be materially inaccurate or the value may have changed due to changes in market conditions, a natural disaster or capital improvements,” Mr Colley said.

“The current economic situation with COVID-19 is certainly one of those situations that may impact the value of the property.”

In contrast to the ATO guidelines, auditors have consistently been seeking a greater degree of confidence that the value of the property included in the fund’s accounts satisfies the accounting standards, he said.

“This may mean a more recent valuation than one that satisfies the ATO requirements,” he cautioned.

Mr Colley noted that the valuation of a property for SMSF purposes does not require a formal assessment of the property which can be expensive.

“The valuation may be undertaken by anyone as long as it is based on objective and supportable data. A valuation undertaken by a property valuation service provider, including online services or a real estate agent, is considered to be acceptable,” he said.

“An exception would be for property that is a significant proportion of the fund’s value or where the real estate has special features and the valuation is likely to be complex. In these cases, a qualified independent valuer should be considered.”

When valuing real estate, Mr Colley said the assessment may take into consideration the value of similar properties in the area, the amount that was paid for the property in an arm’s-length market, independent appraisals and whether the property has undergone improvements since it was last valued.

In terms of commercial properties, the assessment should consider the net income yields, especially in the current situation where rent reductions could impact the value of the property, he stated.

Mr Colley said that SMSF auditors will also be checking that the related-party tenant satisfies the terms of the lease and has made all appropriate rent and outgoings payments, including any concessions such as rent waivers or relief due to COVID-19. 

Auditors will want to ensure that any rent adjustments are up to date and consistent with market rents, he said.

In some cases, Mr Colley said the related-party tenant may not have indexed the rent as required by the lease agreement, or the fund may not have sought payment of the rent where it is in arrears.

“A number of court and tribunal cases have indicated that the trustee of a fund is required to act in accordance with the lease agreement, irrespective of whether the tenant is a related party or at arm’s length,” he said.