When to revalue SMSF property?

A common question SMSF trustees who invest in direct property have is: When does our SMSF property investment need to be revalued?

In this article I will not only confirm when properties held by SMSF need to be valued, but also how they can be valued and who can value them.

Why SMSF property investments must be revalued?

There are four main reasons why SMSF trustees need to revalue any real estate investments held by their fund:

  1. Pensions – when a SMSF commences a pension, the value of the underlying investments that support that pension need to be determined to accurately calculate the minimum and maximum pension amounts.
  2. Performance – it is essential for SMSF members and trustees to be able to measure the performance of their investments – which needs to include any change in the valuation of real property.
  3. In-house Assets – SMSFs are limited to having 5% of their assets invested into ‘in-house’ assets.  For this ratio to be accurately measured, all investments of the fund must be valued at fair market value.
  4. Contribution Caps – the current Labor government has slated a reduction in the current $50,000 concessional (tax deductible) contribution cap to a measely $25,000 for persons over the age of 50 where their member balance exceeds $500,000.  To accurate determine whether the lower cap will apply, all assets of the SMSF need to be accurately valued at market value.

When MUST property in a SMSF be revalued?

The ATO in Superannuation Circular 2003/1 has stated “self managed superannuation funds should use market value reporting for their financial statements” – considering that each SMSF must prepare accounts each financial year, then it makes sense that market valuations for any property held by a SMSF should also be valued each and every 30 June right?

Not necessarily….

SMSFs are generally not considered to be reporting entities, and hence they are not forced to comply with the same strict reporting standards as larger superannuation funds.  If you look at the ATO Circular mentioned above, it uses the phrase “should use market value reporting” – NOT “must use market value reporting”

However, SMSFs trustees do not get off the hook that easily.  The independent auditor of the SMSF each year must ensure that the financial statements are presented are a fair and accurate representation of the assets of the fund.  The following is an extract from a 2011 SMSF audit report:

 

 

SMSF auditors (the competent ones at least) take the above very seriously – and I would too in their situation.   The auditor of the fund must be provided with evidence that the valuation of any property held by the SMSF is valued accurately enough for them to sign off on the above Auditor’s Opinion.

The general rule of thumb used by the majority of SMSF auditors is that property investments held by a SMSF must be valued at least every three years.

There are some situations where property held by a SMSF must be revalued on a more frequent basis:

  • When a pension is commenced, a valuation from within 12 months prior to the commencement of the pension must be used
  • When the auditor believes that the valuation used in the accounts is either too high or too low
  • Where the SMSF has in-house assets and the auditor needs to ensure that the 5% in-house asset ratio has not been exceeded

The most important (and most common) exception of the above three is when a pension is commenced.  Many SMSF members who have started a pension still contribute to their fund on an annual basis.  This means that a new pension is potentially started each year.  In this situation, Tax Determination TD 2000/29 will require the trustees to undertake a valuation each year, as the valuation must be within 12 months prior to the commencement of the pension.

Who can undertake the valuation?

When it comes to obtaining the actual valuation of a property, it does not always needs to be done by an independent valuer.  It is not so much who does the valuation – rather how the valuation is performed which is the key factor in determining whether the valuation can be relied upon by the auditor or not.

Valuations can be conducted by:

  • Independent valuers
  • Real estate agents
  • Other unqualified persons (including trustees of the fund)

From an auditors perspective, something from an independent party holds a lot more weight than something from a trustee of a SMSF.

The method of determining market value – the ‘how’ is significantly more important than who conducts the valuation.  The methodology must be objective, based on a reasonable process, take into account all relevant factors and be able to be explained to a third party.

For example, when determining the valuation of property, the following factors would be considered:

  • the value of similar properties
  • how much was paid for the property
  • valuations for council rates purposes
  • independent appraisals
  • rental yield

For SMSF trustees wishing to complete their own valuations, for residential properties they should obtain either a Street Sales History report or a Suburb Sales History report from RP Data.  These reports are significantly cheaper than a full independent valuation, and they can form the basis for the valuation of the SMSF property – especially when combined with information freely available from RealEstate.com.au and similar sites.

When it comes to commercial, industrial and other more unique properties that a SMSF can hold as part of its investment strategy, it becomes more complex.  The above historical RP Data reports may provide some helpful information, however more detailed analysis will normally be required to obtain a valuation that will be accurate enough to satisfy the auditor.

In these situations, an independent appraisal should be obtained every three years, and the methodology used in the valuation combined with up to date market information (freely available on the internet) to determine valuations in the intermediary years.

Summary:

SMSF trustees wishing to undertake their own property valuations need to be aware of the above requirements and their obligations to the auditor, the ATO and themselves as members of the fund.

Any questions or comments about this article?  Please feel free to comment below or contact me.

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  • http://profiles.google.com/mark5372 Richard Harris

    I disagree for two main reasons. 1.  In order to value assets at market value you must account for Deferred tax otherwise your Members information statement is inaccurate i.e. it does not take into account the tax on the increased market value.  There is now a considerable increase in complication (and cost) for no valid reason with one exception namely the retirement phase.  Most Mom and Pops superfunds have a property or two (if that) and know precisely off the top of their heads what it’s worth.  i.e. until retirement phase market value and deferred tax is nothing more than a fee generating accounting exercise.
    2. Your comment on auditors is misleading.  The auditor signs off on the basis of the Accounting Policies, not on the basis of what he feels is the correct approach.  I quote “…in accordance with the accounting policies described in the notes…”  So for example if policy note 1 states that investments are valued at cost and deferred tax is not provided for the auditor the auditor is erring if he does not sign off on the financials.  SMSFs are not reporting enitities and are not required to comply with GAAP.  On a final note there is nothing wrong with stating the market value in your notes but back to point one.  How many members don’t know what it’s worth?  All members of a smsf are family members so it’s ludicrous to suggest that all this additional accounting gobbleddegook enhances their understanding of whats going on or makes one iota of a difference to their fund.

    • http://twitter.com/SF_Partners Superfund Partners

      Thanks for your comments Richard

      A few comments in response:

      – If accounting for the assets at market value, with or without deferred tax is complicated and costly, then whoever is preparing the accounts maybe doesn’t know how to ‘drive’ their software, or they are using inappropriate software that forces them to manually process the revaluations and deferred tax – in this scenario it would increase costs due to the additional time spent. 

      – I know that none of my clients pay any additional fees for having all their SMSF assets valued at market value (at least every 3 years for property, annually for most other assets, and daily for listed assets via price feeds)

      – Accounting for deferred tax in a SMSF can be misleading as often assets are sold during pension phase = no taxable capital gain.  Then when the deferred tax asset / liability is written back against the member accounts when they commence a pension is sqews the accounts in that year and always looks…… just weird

      – Yes, agree with your second comment,  the audit opinion has to be taken in the context of the accounting policies in the notes. 

      – If the accountant doesn’t value assets at market value, then in some occassions, audit fees will increase as the auditor would need to do additional calculations – for example to work out the totals assets of the fund to test the 5% in-house asset rule.

      – What is the whole point of accounts?  One of the fundamental purposes of accounting is to provide accurate information to enable informed decision making.  Most SMSF have a variety of assets – how can the trustees get a good picture of where their fund is at if they cannot clearly and easily ascertain the overall value of the investments?

      – There are other reasons why the regulators and law makers want SMSF trustees to value their assets at market value, such as compliance monitoring and also for policy information.

      – Most of my SMSF trustee clients feel that they get value from reviewing their SMSF accounts – either at the end of the financial year, or during their year as part of an investment review with their adviser (if they have one) – but this is becuase of the guidance and advice that comes with the accounts.

      – The entire issue of valuation of assets will be put to bed in the next few years as the Cooper Review into superannuation has recommended that all SMSFs report investments at market value, and that standardised valuaton methodologies are put in place.  The Government agrees with this recommendation and will consult with relevant stakeholders on its implementation.

      In general I do not think the valuation of SMSF assets is contraversial or complex, but some SMSFs will sometimes need to incurr additional costs to officially value unique assets – such as property (especially commercial) and also artwork and collectibles (from July 2016).

      • http://www.evolvemysuper.com.au Kris_Evolved

         Oops – last post was actually me – I was still logged into the Superfund Partners Twitter account!

  • http://www.evolvemysuper.com.au Kris_Evolved

    the ATO has released a new fact sheet entitled “Valuation
    guidelines for self-managed superannuation funds”. The fact sheet follows
    the introduction of Regulation 8.02B which requires SMSFs to use market value
    for preparing the financial statements and accounts for the 2013 income year
    and onwards. The fact sheet outlines that a valuation of assets is required to
    confirm the SMSF has complied with the following:

     

    – acquiring assets between SMSFs and related
    parties;- investments being made and maintained on an
    arm’s-length basis;- disposal of certain collectables and personal-use
    assets to a related party;- in-house asset rules; and- valuation of pension assets.

     

    The fact sheet also provides details of when a
    qualified independent valuer is required, and when the ATO will accept a
    valuation as being “fair and reasonable”.

     

    In the fact sheet, the ATO states that assets such as
    real property do not have to be valued every year for the purpose of preparing
    the financial statements, determining the value of pension assets or in-house
    assets. However, an annual valuation may be required if a significant event
    affects the value of the asset (e.g., natural disaster, market volatility or
    changes to the character of the asset).

     

    The ATO also considers that the valuation can be
    undertaken by anyone, provided it is based on objective and supportable data.
    In this regard, a valuation undertaken by a property valuation service provider
    including online services or a real estate agent would be acceptable. However,
    a qualified independent valuer should be considered if the asset represents a
    significant proportion of the fund’s value or the valuation is likely to be
    complex.

     

    The fact sheet is on the ATO website:

    http://www.ato.gov.au/superfunds/content.aspx?menuid=49150&doc=/content/00328213.htm&page=1&H1