SMSFs warned on increasing compliance risks affecting property valuations
SMSFs are increasingly being exposed to risks stemming from grey areas around compliance breaches, particularly for residential and commercial property market valuations, which can lead to further audit issues, says one specialist audit firm.
Moving into the new financial year, SMSFs can often find themselves facing compliance breaches that are not as clear-cut, especially around valuations for residential and commercial property.
While many potential breaches of SMSF compliance requirements are straightforward, some transactions are more of a grey area, making it potentially harder to recognise as a breach.
Daria Galstyan, audit associate director at Evolv, explains that requirements around r8.02B of the Superannuation Industry (Supervision) Regulations 1994 and s 66 of the Superannuation Industry (Supervision) Act 1993 may pose a number of issues.
“For market valuation of properties, sufficient and appropriate audit evidence needs to be provided to support the market value struck at the end of a financial year (r 8.02B),” Ms Galstyan told SMSF Adviser.
“This required evidence may become problematic when there are transfers of properties in and out of the fund between related parties. Most trustees utilise a direct sales or market comparison approach to support the market valuation of property.
“For commercial properties, the issue is the lack of readily available market data, with some properties also being special purpose in nature. It can be quite difficult for the trustees to actually determine market value without seeking assistance from a commercial real estate specialist or a registered valuer.”
Ms Galstyan noted that the ATO has recently issued an update to their guidance on approach to valuations. The update by the ATO clarified that within their review of a fund’s affairs, the trustees may be requested to provide evidence to support the valuation method used.
“The ATO within their review would consider whether the valuation method chosen was the most appropriate method for the asset, the objective and supportable data gathered, and whether there were differing values, and methods employed by the fund for other purposes,” she said.
“The ATO has not stated a preference as to whether, or not, the valuation should be sourced from a real estate agent, a registered valuer, or from the trustees themselves. However, especially for commercial and special-purpose properties, it is often easier for the trustees to enlist a specialist real estate agent to obtain a valuation due to the lack of readily available data within the marketplace.”
Impacts on transactions and audit processes
Another related market value issue arises when transferring properties (commercial) into and out of the fund (either residential or commercial), as these transactions need to be supported for arm’s length purposes at the date of transfer, according to Ms Galstyan. This means the agreed value should be based on market data current at the date of transfer, while at times they see trustees using supporting data from a number of periods prior to the transaction occurring.
“Supportable data evidence should be within six months of the transaction occurring. Whether our clients are advisers, accountants or individual trustees, we encourage them to reach out if they are unsure about any planned transaction and how this fits within the compliance framework,” Ms Galstyan said.
“We are then able to talk through the application of the compliance framework to the proposed transaction, and any potential issues arising. We’re always here to provide an auditor’s view.”
With these grey areas affecting compliance processes, this can also impact the audit side for the SMSF. Ms Galstyan noted that for audits conducted from 1 July 2021 onwards, firms will be looking with more scrutiny at the trustees’ consideration of market value of property, the information employed to support values at 30 June, and whether it is in line with ATO guidance.
“The trustees are responsible for documentation of market valuation of property. When evidencing market value for properties, we suggest that the trustees clearly document the reasoning for the valuation method used, the valuation evidence obtained, and their considerations in determining the market value struck together with the stated market value,” Ms Galstyan explained.
“A trustee minute addressing these matters, together with attached supporting documentary evidence, will assist in clearly supporting how the trustees have considered Regulation 8.02B SISR compliance. Information in this format, in addition, provides support should an ATO review occur.
“When employing an administrator to support the documentation process, the responsibility for ensuring such documentation is in place remains with the trustee.”