Valuing assets within a Self Managed Superannuation Fund
7 December 2022
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The valuation of assets, and in particular property assets, within Self Managed Superannuation Funds has caused a lot of confusion over the last couple of years. While the accounting standards require assets held at Fair Value to be valued with sufficient regularity to ensure the carrying amount of the asset does not materially differ from fair value, the SIS Regulations have an overriding compliance requirement. That is, Regulation 8.02B requires all assets of an SMSF to be valued at Market Value in the Financial Statements each year. Further guidance issued by the ATO provides that the valuation should be based on objective and supportable data.
This does not necessarily mean that an independent expert is required to perform a valuation of your investment property each year. It is the valuation process, rather than who conducted the valuation, that will determine the appropriateness of the valuation. However, Trustees should consider using a qualified, independent valuer if:
the value of a fund asset represents a significant proportion of the fund's value
the nature of the asset indicates that the valuation is likely to be complex or difficult, for example, commercial property.
Regardless of who performs the valuation, there are general valuation principles that need to be considered. Trustees need to be able to demonstrate that the valuation has been arrived at using a fair and reasonable process and the valuation takes into account all relevant factors likely to affect the asset value.
There are generally two types of property held by an SMSF, residential and commercial. But regardless of type, an assessment of market value must be made annually. Trustees may consider a variety of approaches when assessing the market value of a property, the most common of which is the use of an independent valuer. Trustees may value property themselves considering the:
Kerbside valuation by a real estate agent;
Contract of sale for recent purchases;
Recent comparable sales;
Rates notice;
Net income yield of commercial properties; and
Generally, a single item of evidence listed above will not be sufficient on its own unless the property has been recently purchased by the fund. We suggest a variety of sources of evidence to support compliance with regulation 8.02B.
For example, a rates notice on its own is unlikely to be sufficient for valuation purposes as it will generally be the unimproved land value and should only be used if consistent with other evidence. Net income yield for commercial properties will not be sufficient on its own and not considered appropriate where tenants are a related party. Real estate agent appraisals stating what the property is likely to sell for based on sales in the area, without listing details of those sales, would generally not on its own be sufficient and appropriate evidence. The evidence should also support a market value for the property as close as possible to 30 June, especially when the market is potentially volatile. Trustees should also consider whether the property has undergone improvements since it was last valued.
Where the trustees obtain an external valuation, they do not need to have a formal valuation performed each year. The valuation should however include objective and supportable data, such as the comparable sales or other data the external valuer relied on to substantiate the valuation. While in this instance a formal valuation is not required each year, gone are the days when an independent valuation has been obtained so it can be relied on for 3 years. Trustees will still need to consider whether the valuation is appropriate on an annual basis by reviewing:
Evidence of changes in market conditions;
Rental market movements;
Any improvements to the property;
Changes to the character of the asset;
Land value movements.
So in summary, It is important to ensure property assets are valued at market value, on an annual basis, when preparing the financial statements of the fund at year end. The valuation should be based on objective and supportable data and Trustees should provide that information to their auditor in support of the valuation assumptions and methodology.
For further information on what is required to accurately value your SMSF assets get in touch with our team. The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Unison SMSF Audit ABN 31 315 285 606.
By Mark Andrejic
Partner
