Future value of property needs disclosure

SMSF future value

SMSFs purchasing property earmarked for development should have it valued for its future worth to prevent breaching acquisitions valuation rules.

Trustees looking to add property into their SMSF portfolio earmarked for development should ensure they have an accurate valuation reflecting the future value of the asset, according to an SMSF technical specialist.

Heffron head of SMSF technical and education services Lyn Formica said once property had been approved for development it was too late to add it to an SMSF at its original value and an updated value should be provided to prevent the fund possibly acquiring the asset for less than market value.

“They might not have developed the property, but they’ve got approval to do so [meaning] the property is worth more and [the] SMSF [can’t reflect that] value before the approval was received,” Formica said during a recent webinar.

She gave the example of an SMSF purchasing a dairy farm which has the potential to be mined for blue metal gravel, which would provide mining royalties to the landowner, and for which a lease had been drafted with a third party miner.

Formica noted while the lease had not yet been executed and no royalties earned, the potential for an increase in the value of the property in the future meant it had to be revalued before it could be acquired by the SMSF.

“The risks come about because there is the potential that we might be acquiring this asset for less than market value.

“You need to be conscious that if your client is buying something slightly unusual [more care is needed] in being able to prove that they are acquiring this asset at the right value.

“This means making sure you get a property valuation from a qualified valuer, and not just any qualified valuer but someone who has some experience in land mining leases, royalty payments, and those sorts of things.

“If you do, then you should all be fine from a non-arm’s length income perspective and not have any income or expense issues because if you don’t, that’s going to throw you out forever in relation to that transaction.”

Heffron SMSF technical and education services director Leigh Mansell added in these situations SMSF trustees must make full disclosure when seeking a valuation.

“Somebody’s identified that there’s potential for mining, somebody presumably has done that feasibility study,” Mansell said.

“If we haven’t looked at subdividing or done anything else that wouldn’t really feed into the value but if we had done that, it should feed into the value and we should tell the valuer we’ve got that approval.”

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