The proper valuations of SMSF held properties continues to raise questions among trustees as they remain unclear as to what they can actually do.
Under Regulation 8.02B, SMSF trustees are required to value fund assets at their market value. A common question arises as to whether an SMSF trustee can value property themselves, particularly given the Superannuation Industry (Supervision) (SIS) rules do not specify how the valuation must be performed or who is responsible for it.
The answer, of course, is that it depends.
There is no requirement for an SMSF trustee to obtain an independent qualified market valuation when it comes to property valuations within the fund. That is only triggered when an SMSF disposes of a collectable or personal use asset to a related party in accordance with SIS Regulation 13.18AA.
Audit requirements
SMSF auditors are not mandated to request an independent qualified market valuation under the auditing standards. They must, however, understand the methodology adopted by the SMSF trustee to confirm that an asset is fairly stated in the fund’s financial statements.
Under Auditing Standard ASA 500, auditors are required to obtain sufficient appropriate audit evidence to evidence how SMSF trustees determined the asset’s value.
The ATO guidelines reinforce this by insisting SMSF trustees provide objective and supportable data to document how they arrived at the value and present it to the fund’s auditor during the annual audit. It ensures transparency and allows the auditor to verify the basis of the valuation.
Where the evidence provided is inconclusive and does not support the property being valued at market value, SMSF auditors have no discretion but to report the matter to the ATO in an Auditor Contravention Report (ACR), noting they cannot confirm compliance with SIS Regulation 8.02B.
ATO valuation guidance
Current guidance from the ATO clearly outlines the acceptable forms of evidence for valuing real property, listing items such as recent comparable sales, an appraisal from an independent real estate agent, and net income yields for commercial property (only appropriate where tenants are unrelated).
Additionally, the ATO has stated a variety of sources should be considered to substantiate the market value of real property, and that valuations should not be based solely on one item of evidence from its list.
The regulator has also doubled down by concluding if the most appropriate valuation method has not been used for any of the assets:
- the trustees’ valuation will not be accepted and
- the ATO will apply the most appropriate valuation method to determine the value
The issue is determining what evidence is acceptable and under which circumstances.
Risk considerations for valuing property
The level of risk associated with specific SMSF events will influence the amount of evidence required.
For example, an appropriate amount of evidence for an SMSF in accumulation mode holding real property with no other significant events, such as in-house assets, may include comparable sales data to determine market value.
Contrastingly, an SMSF acquiring business real property from a related party will require more comprehensive evidence to provide objective and supportable data to the auditor, as the risks and compliance stakes are significantly higher.
The reason is that a breach of SIS Act section 66, resulting from acquiring property from a related party at either less than or more than market value, can only be rectified by disposing of the property.
To this end, comparable sales and net income yields, which use historical events and values that may be up to several years old, would not provide sufficient appropriate audit evidence to justify the market value of business real property transferred into an SMSF from a related party.
Definition of market value
The definition of market value under section 10(1) of the SIS Act fully supports this position. It is the amount a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:
- the buyer and the seller dealt with each other at arm’s length in relation to the sale
- the sale occurred after proper marketing of the asset by the buyer and
- the seller acted knowledgeably and prudentially in relation to the sale.
It means the valuation has been undertaken in good faith, using a rational and logical process, and is capable of explanation to a third party without hesitation.
The applicable acid test is whether a person would consider selling their residential property to an unrelated party using comparable sales and historical values as the basis for the sales price.
While it may be a starting place to obtain an idea of the market value, it would not necessarily represent the final sale price without undertaking further research.
Practical considerations
It can be frustrating for SMSF trustees and auditors when the SIS Regulations and auditing standards are silent on the machinations of undertaking market valuations.
Given the frequent referral of SMSF auditors to the Australian Securities and Investments Commission for insufficient audit evidence, some practitioners may prefer to adopt a risk-based approach to market valuations depending on the nature of the transaction.
As a result, they may choose to request an independent, qualified valuation to ensure clarity and compliance with the governing legislation when acquiring business real property from a related party.
Additionally, the ATO is adamant a qualified valuer must hold formal valuation qualifications or have specific industry knowledge within their professional community. Even more critical, however, is that the valuer must be independent.
Conflict of interest
Independence means a qualified valuer is not a member of the fund or a related party, such as a relative, to ensure impartiality so as not to be influenced or appear to be influenced by others.
While the valuer may hold professional qualifications or have extensive experience in real estate it does not pass the smell test for independence.
It is the same rationale as to why SMSF auditors cannot audit their own or a relative’s fund.
The situation is a conflict of interest involving self-interest and familiarity threats. In such cases there are no safeguards available to reduce or eliminate the threats to an acceptable level.
Conclusion
While SMSF trustees are not required to obtain independent property valuations for market value they must be able to demonstrate and support the market value of fund assets with objective evidence.
The level of evidence required depends on the risk and nature of the transaction.
High-risk transactions that may require an independent, qualified valuation cannot be undertaken by an SMSF trustee or a related party, as they are not independent.
Other valuation techniques must be assessed by the auditor exercising their professional judgement to confirm the adequacy of the evidence presented, while always considering the requirements of the SIS Act, the auditing standards and applicable ATO guidance.
Shelley Banton is director at Super Clarity.
