Finding evidence to confirm an asset’s value and satisfy SMSF auditors can be challenging, especially for complex assets such as property and unlisted entities.
A lack of audit evidence for market valuations is one of the biggest reasons the ATO refers SMSF auditors to ASIC, meaning that valuations will continue to be a hot topic.
SIS Requirements
From a SIS compliance point of view, a market valuation is required when:
- fund financials are being prepared in line with r8.02B
- acquiring assets from related parties under s66
- investing on an arm’s length basis according to s109
- starting a pension under r6.17
While the ATO expects trustees to review the value of assets each year, it does not mean that an external valuation is required annually.
SMSF trustees must be able to demonstrate that the valuation has been arrived at using a “fair and reasonable process” by:
- Taking into account all the factors that affect the value
- Being undertaken in good faith
- Using a rational and reasoned process
- Being capable of explaining to a third party
And of course, the most straightforward way, but not necessarily the most cost-effective, is to obtain a valuation through an independent professional valuer.
The ATO says SMSF trustees should consider using a qualified independent valuer when the asset’s value represents a significant proportion of the fund’s value or the investment is complex. The reason is that the valuation is likely to be complicated.
Valuing Property
According to the ATO, if the latest property valuation has become materially inaccurate or a significant event has affected the value, it is time to get a new valuation.
A significant event could be an extensive capital improvement, renovations, a natural disaster, pandemic, or a change in market conditions like we are currently seeing with an increase in interest rates.
Of course, the cost of property purchased during the audit year is acceptable audit evidence only in that year. It may also be permitted the year after if no changes exist.
A property valuation by a qualified valuer is acceptable for all types of property, such as residential, commercial, rural, and vacant land.
Online valuations may be used for residential property only, with the data generated from an automated service as an estimated value. Under these circumstances, the sales history used in the valuation must include similar properties.
The auditor will also check that the valuation range is not too broad , making the value meaningless.
If an SMSF trustee prefers to provide evidence for all property types, they could use an online property service provider’s sales history of comparable properties.
Using a minimum of three (3) comparable sales is considered best practice by referencing them in a trustee minute that includes the property’s value. Simply stating that the trustees have looked on the internet is unacceptable. SMSF auditors will ensure that the trustee valuation aligns with the recent sales included in the minute.
The market capitalisation of net income will apply to all property types except vacant land, confirming the market yield used for that particular property.
Providing a workpaper detailing the calculations is acceptable for unrelated tenants. Where the tenant is a related party, additional evidence is required to confirm the rent is at market value.
Council rate values are insufficient audit evidence for all property types except vacant land. And along with the council rates, evidence will need to be provided from one of the other discussed types.
History of Comparable Sales
The ATO’s guidelines for including comparable sales in kerbside property valuations have significantly impacted SMSF audits and continue to receive a backlash of criticism
While this adds time and delays the audit, we should be aware that the auditing standards play a large part in this scenario.
SMSF auditors require documentation and evidence provided by the SMSF trustee to ensure that the methodology behind the valuation is understood correctly and that the asset is valued fairly: it is not an SMSF auditor’s job to value an asset
The standards that apply to valuations are ASA 500 Audit Evidence and ASA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, charging SMSF auditors to understand how the valuation is based on the data.
Traditionally, kerbside valuations provide only one part of this puzzle: how can a valuation be accepted where there is a lack of audit evidence – namely, the comparable sales referred to in those valuations?
Property is an excellent example because SMSF auditors have previously accepted kerbside valuations that refer to comparable sales to determine market value without the referenced material.
When the ATO released new property valuation requirements in October 2020, it was not to make our SMSF working lives difficult (even though it did). It ensured SMSF auditors met their professional obligations under the auditing standards through its role as the Regulator.
What If There’s No Comparable Sales?
What happens when there are no comparable sales included in the kerbside valuation?
SMSF auditors will ask for more information. And trustees may prefer to undertake research and provide at least three (3) examples of comparable sales to confirm the valuation.
Alternatively, the kerbside valuation and another form of evidence may be sufficient, such as a market yield calculation. However, additional scrutiny is required to determine whether the yield is acceptable, consider the property’s age, use, location, and whether there was a change in tenancy.
Once again, this methodology is acceptable where the property is leased to an unrelated party but may also be sufficient for a related party tenant where additional evidence confirms the rent is at market value.
While it is a clear-cut case of “it depends,” providing comparable sales evidence will be a better option for most SMSF trustees than a qualified audit report.
Conclusion
The requirement to include comparable sales in any valuation that refers to them is Auditing 101.
In real terms, SMSF auditors have long accepted the risk of not meeting the auditing standards, which could easily backfire in a court of law.
The SMSF industry generally accepts new paradigms systematically applied by the Professional Bodies, the Regulators and the Government.
Requesting a real estate agent to include comparable sales in their kerbside valuation – where possible – is probably one of the easier ones.
By Shelley Banton, Head of Education, ASF Audits
Given that some markets are quite volatile – crypto, shares, real estate – do the audited reports provided 11 months after balance day actually have any relevance to managing the fund? The AFR reports that real estate in Sydney and Melbourne is declining at a steady rate. I vaguely recall discussion of after balance day events when doing Auditing 101.
Most real estate agents are not valuers, so their opinion is irrelevant. The ATO has a long document on what is needed for a valuation to satisfy its auditors. I required the trustees to get a full valuation every 3 years, and confirmation of general market movement in the intervening years. Super is a great tax minimisation strategy, accept that it comes with costs for compliance.
And a so called full valuation on a property is also nothing more in reality than an opinion. Until a property is actually sold there is no definite value and it’s all just opinion.
So the valuers opinion or the real estate agents opinion don’t make much difference in reality. Sure the valuer backs up their opinion with some wider research and comparisons, so does the real estate agent they just don’t often document it but they do in a full sales appraisal.
Opinions are like Butts, we all have one.
But the whole point is, it’s an independent opinion; not just a figure made up by the Trustee. The entire audit process revolves around obtaining independent verification of an asset’s existence, ownership and value.
And, for all the complaining, it’s really not that hard to get one done.
Yep that being an independently engaged Real Estate agent or Valuer, the point being it’s just an opinion, nothing more 🙂
why the ato allow and accepts market value appraisals by real estate agents .
Valuations are important if funds are paying a pension or in some minor cases of in-house assets in a fund
The Govt has itself reduced pensions to half – so don’t understand why so much importance is given to valuations
The year when the fund is moving to pension phase is the year when external Valuer’s should be used
Hi Manoj, what about valuations for TSB purposes? Surely, given the importance of thresholds and values in ability to make certain contributions, valuations play a part in that space too especially now that we have the window of contribution opportunity expanded to just before age 75.
For unlisted equities , possibly net asset backing or earnings multiples may be O.K.
The corollary to this is that comparable sales can wildly fluctuate due to wide disparities between the dates of sale. Even if the properties are practically identical (eg: units in the same block with the same or near identical floor plan) subjective criteria (such as view, access and traffic noise) will always give rise to wide fluctuations (even if the comparable sale is close to the valuation date). Property is not like buying apples or oranges. The only real time that the prices are relatively close together is when the properties are brand new.
This requirement is a needless burden on real estate agents that will ultimately add to the cost of administration of a fund with property, instead of just targeting egregious valuations. Nice job, Well done ATO!
Well you should consider this when deciding whether to invest in property or other assets.
Really Marg?. The Trustees can invest in whatever they like!
If a real estate agent is not able to find comparable sales how is the super fund going to find it?