Documentation, Property

Poor asset valuations not considering all factors

SMSF asset valuations

The source of SMSF asset valuations need to be carefully considered with some providers overlooking key factors which may be later examined by the ATO.

SMSFs should not rely on the validity of online or real estate agent provided asset valuations, particularly where related-party transactions have taken place, as some fail to take into account factors that could affect the valuation.

The comments were made at a seminar in Sydney today by DBA Lawyers’ Shaun Backhaus, who noted that while external valuations usually took place every three years for real property held by an SMSF, any valuation had to be based on objective and supportable data.

Backhaus said a valuation from an online appraisal service or a real estate agent was acceptable, but cautioned SMSFs about the brevity of information many of them provided in their valuation.

“When you get the real estate agent appraisal, it is typically going to be a two or three-line letter saying ‘based on my appraisal, the value is this’,” he said.

“I would bet half the time there is an email or text message going to your client, or you, asking how much do you want to make this.”

He said the ATO would review the appraisal with “perfect 20-20 hindsight” and “if all you have is that two-line valuation, I think you are in trouble”.

He said his view of appraisals was based on worst-case scenarios where a property had been rezoned and its value had increased, and the appraisal did not consider that likelihood or other conditions such as an acquisition from a related party to the fund.

“If you have a related party and all you have got is that market appraisal and the asset value has shot up later, they [the ATO] could be saying no based on things in the media, the value should be more because of potential rezoning, or whatever it was which the real estate agent did not take into account,” he said.

SMSF clients were unlikely to want to pay to get a valuation, which may run into thousands of dollars, but if there were any related-party dealings, they should do so, he said.

“I am thinking of the worst-case scenarios and we should be trying to make sure our files stack up in those situations when things do go wrong,” he said.

Earlier this year, the ATO stated it would accept a trustee’s valuation of an asset if it was based on objective data, but stressed the trustee would be held responsible for the provision of that information.

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