By far the greatest number of enquiries I am currently receiving about SMSF audits for the year ending 30 June 2017 are in relation to the valuation of assets. This is not surprising as for the 30 June 2017 financial year only, valuations may be used in uplifting the cost base as part of the transitional CGT relief and determining any excess over the Transfer Balance Cap, in addition to their usual function of being required for the preparation of the annual financial statements. Therefore, for those SMSFs affected by the new rules, the valuation as at 30 June 2017 is more important than ever before.
When considering valuations, it is important we start with the legislative requirement found in Regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994 (SISR) which requires:
“…when preparing accounts and statements required by subsection 35B(1) of the Act, an asset must be valued at its market value.”
The Statement of Financial Position is one of the statements listed in subsection 35B(1) of the Superannuation Industry (Supervision) Act 1993 (SISA) which means each year, assets must be recorded at market value in this Statement. It is important to note nothing has changed legislatively from previous years and the ATO has recently stated they felt no need to provide further guidance in addition to their Valuation guidelines for self-managed superannuation funds (QC 26343). However, I know the ATO has recently closely reviewed these Guidelines and I observe it has been modified by the ATO as recently as 21 April 2017.
One modification to the Guidelines is the incorporation of the requirements when determining market values of assets that are eligible for transitional CGT relief. The Guidelines list the valuation requirement for this purpose as being that the assets’ market values need to be determined on the date their cost bases are reset and that the valuation should be based on objective and supportable data.
So, it appears the requirement that the valuation be based on objective and supportable data for inclusion in the financial statements also applies for transitional CGT relief purposes.
For completeness, we note another, often overlooked, component of the Guidelines is the existence of the link to Market valuation for tax purposes (QC 21245). Should you be realising a capital gains tax event by applying the transitional CGT relief, I would strongly advocate familiarising yourself with that document also.
Approach of ATO and approved SMSF auditors
In the Guidelines, the ATO states they MAY review a valuation as part of their compliance processes. An SMSF auditor however, MUST review a valuation as part of his/her processes because the trustee(s) compliance with regulation 8.02B of the SISR must be checked in every audit.
Further, the Guidelines state that should the ATO wish to review a valuation as part of their compliance processes they will expect to see documentation of the valuation method used. It therefore makes sense, that for SMSF auditors to form an opinion on the trustee(s) compliance with the regulations, evidence of the valuation method used must be provided to the SMSF auditor each year.
What evidence is required for real property?
As an SMSF auditor’s opinion is based on their individual professional judgement and risk tolerance here is where things become tricky. Different SMSF auditors will have different requirements.
The ATO’s Guidelines include the following information in relation to the valuation of real property:
For preparing SMSF financial reports, an external valuation of real property is not required each year. A recent valuation however would be prudent if you expect that the valuation is now materially inaccurate or an event occurred that may have affected the value of the property since it was last valued. This may be due to a change in market conditions or a natural disaster.
When valuing real property assets for SMSF financial reports, 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 real estate agent would be acceptable.
Below I have listed what I believe to be the important points in the ATO’s Guidelines and then included our approach to those issues:
An external valuation of real property is not required each year.
Whilst not mandatory, it is our recommendation that an external valuation be organised every 3 years. We do not require this to be a paid valuation but if the property is unique or unusual a paid valuation may be the only way to obtain an accurate market value. Should the SMSF be affected by the super changes, we believe an external valuation is prudent for the year ended 30 June 2017.
A recent valuation however would be prudent if you expect that the valuation is now materially inaccurate or an event occurred that may have affected the value of the property since it was last valued
The trustees may consider that nothing material has occurred since the last external valuation and therefore the property should remain at the value included in last year’s Statement of Financial Position. This approach is reasonable, however the SMSF auditor needs evidence of this consideration to fulfil his/her audit duties. Therefore, a decision to leave a property value unchanged from one year to the next must be documented by the trustees and provided to the SMSF auditor.
When valuing real property assets for SMSF financial reports, the valuation may be undertaken by anyone as long as it is based on objective and supportable data.
Based on the above we accept a trustee’s determination of the appropriate value for inclusion in the financial statements if evidence of the valuation method used is provided each year and the valuation method considers objective and supportable data.
A valuation undertaken by a property valuation service provider, including online services or real estate agent would be acceptable.
In the past when trustees wanted to seek an external valuation, they would traditionally either organise a kerb-side valuation from a real estate agent or pay for a property valuation. However, in the last two years we have seen a rise of online valuation providers and it is interesting the ATO states a valuation from this source would be acceptable.
We still believe that online valuations are not yet at a point where they can be accepted no questions asked. There is an example where an estimated valuation provided by Onthehouse.com.au was 466% above the actual price for which the property sold. This example was part of a November 2015 study which compared the sale of 214 properties around Australia. The conclusion of that study was that “while a cursory check (of the online property valuations) can’t hurt, we suggest you do not rely on them.”
Therefore, our position at this time is:
- Those SMSFs affected by the super changes as at 30 June 2017 should obtain, at least, a kerb-side valuation.
- Every 3 years, trustees of an SMSF should obtain, at least, a kerb-side valuation.
- For the 2 years between external (e.g. kerb-side valuations), trustees can use online valuation services as part of their market value assessments.
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