SMSF Property Valuation

SMSF Property Valuation

Valuing a property at market value is one of the most time consuming and frustrating issues when preparing financial statements at 30 June or at specific trigger points such as starting a pension, acquiring or selling a property from or to a member or other related party or a member wanting to access their bring forward non concessional caps or carry forward concessional caps.

Refer to the ATO website for more information in relation to caps on contributions.

Concessional contributions cap | Australian Taxation Office (ato.gov.au)

Non-concessional contributions cap | Australian Taxation Office (ato.gov.au)

It does not have to be frustrating if the process is understood and planned for. A trustee can provide the valuation. However, how many trustees have the expertise to determine what the value should be and back it up with the evidence required to show the auditor and the ATO. It is prudent to get an expert involved. Let us take you through why an SMSF property is required to be valued, how it can be valued and when it should be valued.

Why is an SMSF Property Valuation Required?

The Superannuation legislation requires the assets of a Fund to be valued at market value as at 30 June EACH year.

Apart from the requirement to obtain an annual market valuation an SMSF holding property is required to determine and be able to verify (must have evidence), what the market valuation is at a specific time. Very easy when all the assets are in cash or shares but when a property is in the mix the process becomes more complex.

Refer to what the significant trigger points are at “When Should the Trustee Value an SMSF Property.”

Reviewing and revaluing the market value of property in the financial statements allows the auditor or the ATO to determine if the member is eligible to access other superannuation and tax concessions, based on their member super balance, such as:

  • Pension Establishment – The Transfer Balance Cap (TBC) determines how much a person can have in pension mode which is counted when a pension is established. The amount set aside at the start of a pension is counted towards the TBC, and it is vital the value of a property reflects the market value at that time. TBC (at 30 June 2023) is between $1.6m to $1.7m depending on when pensions were started. 
  • Bring forward non-concessional contributions (refer to ATO link above) is subject to various criteria including your age (people 75 and older are excluded), your Total Super Balance (TSB) (refer below) and further restrictions on types of non-concessional contributions that can be accepted by your SMSF. Discuss your eligibility with your SMSF Accountant or Licensed Financial Adviser before making any non-concessional contributions.TSB must be less than $1.68million (at 30 June 2023) before being considered for eligibility to bring forward $330,000 of non-concessional contributions in the 2024 financial year.
  • Carry forward concessional contributions (refer to ATO link above) which is based on the member’s TSB (refer below) and the member having eligible unused concessional contributions.TSB must be less than $500,000 (cap was based at 30 June 2023).
  • Calculating a pension payment (Account Based Pension), which is based on the member’s age and pension balance as at 30 June (balance at year end before the pension payment is made).
  • Related party transactions (refer to Tip below).

Total Super Balance (TSB) – generally includes all a member’s super balances in accumulation mode, pension mode, all super funds (not just the SMSF) and can include a proportionate part of the outstanding balance of a limited recourse borrowing arrangement (LRBA). The LRBA proportion is only relevant in relation to new loans after 1 July 2018 which are related party loans, or the member has met a full condition of release such as turning 65.

Tip – Obtain a market valuation of property when the transaction includes a new pension or acquiring or selling a property from or to a member or a relative of a member or other related party.

Refer to the ATO website in relation to related party.

Related parties and relatives | Australian Taxation Office (ato.gov.au)

Example – An SMSF holds cash and 8 residential properties. All the properties are leased to unrelated arms length tenants and have formal written lease arrangements in place. There are 2 members who are in pension mode. Agnes turned 75 on 25 June 2023 and Henry turned 80 on 1 May 2023. The property market is hot and the valuation as at 30 June 2023 increased significantly from the prior year Agnes’s balance as at 30 June 2023 increased from $1.2million to $1.9million and Henry’s increased from $1.6million to $2.3million. Due to their ages both members were required to increase their pension payments in the 2024 financial year.

The pensions increased from $60,000 for Agnes and $96,000 for Henry paid in the 2023 financial year to $114,000 and $161,000 respectively for the 2024 financial year. A significant increase due to the substantial increase in the market value of the properties as well as the change in the percentage factor (based on their ages).

Cashflow will be an issue as the rental increases do not cover the pension payments required for 2024 financial year. Neither member can contribute to the fund and therefore may need to sell one of the properties to resolve the cashflow problem or seek other strategies to resolve the cashflow issue.

 Who can Value my SMSF property?

Anybody.

However, the crux of the issue lies in the evidence to support the market valuation which must be based on objective and supportable data.

Guidelines for Market Valuation of SMSF Property

The Superannuation Legislation defines market value as follows:

“market value” , in relation to an asset, means the amount that 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:

(a)  that the buyer and the seller dealt with each other at arm’s length in relation to the sale;

(b)  that the sale occurred after proper marketing of the asset;

(c)  that the buyer and the seller acted knowledgeably and prudentially in relation to the

sale.

The ATO guidelines require the valuation to be based on objective and supportable data.

What is objective and supportable data?

The Trustee must be able to explain to a third party, who does not have any specific knowledge of the property, how the valuation was determined and provide evidence to support this. The most compelling, objective and supportable, data is recent sales of similar properties.

How can I Value my Property Held in my SMSF?

The following are various acceptable valuation methods:

Desktop or Kerbside valuation is a market valuation, typically provided by an independent real estate agent or a qualified valuer, which does not include a formal visit to the sight but is based on the valuer’s resources and knowledge of the area. Gone are the days when a statement from your friendly agent, as the only supporting evidence, merely saying the valuation of the property is $x. The auditor will still accept a valuation from your agent where, if this is the only source of the market valuation, it includes additional details to show how it was valued. Where the agent includes details of recent sales of similar properties to support the valuation, the auditor will accept it. Best practice is to include at least three comparable properties.

The ATO and auditor will accept a kerbside valuation without the comparable sales BUT further evidence must also be provided such as website valuations, trustee valuation and recorded discussions with independent property agents with details of the date of the discussion, who the agent is and what the agent said.

Qualified independent Valuer’s Report is a written valuation which includes a visit to the site and is prepared by a person who is a registered valuer with formal qualifications in valuation methodologies. It is several pages long, can be 20 or more pages with detailed information about the property with more than one methodology to support the valuation and then using reasoned arguments to select the most appropriate method.

Typically preferred when the property is a significant proportion of the Fund’s assets, when acquiring or selling property from or to a member or a related party of the fund, establishing pensions or when the property valuation is complex or there is no comparable data, especially in relation to large commercial properties.

Trustee Valuation the Trustee can prepare a valuation and should include the following:

  • Property address and folio number or other property identifier.
  • Description of the property, if residential, to include number of bathrooms, bedrooms, size, location, age, type of structure and any other special features. Commercial property is more complex and depends on the specifics of the building.
  • The market value and date of the valuation
  • How the property was valued including reliance on agent’s kerbside valuation, recent sales, discussions with experts (detail when and who the experts are), valuations from websites such as Domain and realestate.com. older formal valuations and recent sales of comparable properties (include details about the property attributes).

Contract of Sale or Purchase of Property

The contract in relation to property which is purchased or sold from or to an unknown, unrelated third party is sufficient evidence. However, if the property is purchased or sold to a member, relative of a member or other related party then a qualified independent valuer’s report should be obtained. Other valuation methods can be used but a qualified valuer’s report is typically relied on by the auditor without further investigation and is considered stronger evidence in case of a legal dispute.                                                                    

Other Valuations which are acceptable include Corelogic data which is a website report showing details about residential property with comparable sales. The report also provides a confidence factor. A high confidence factor is generally accepted as sole evidence but if the confidence factor is medium or low then other methods of valuation are also required.

If the property is leased to a third unrelated party, other or additional evidence can include net income yields for commercial properties and rates notice.

When obtaining a market valuation an indicator of the rental income is also useful. If renting to a member or a related party the rent valuation is also critical to include comparable rental details of similar properties.

Cost is often a driver as to the methodology chosen to value a property. A formal valuation is the most expensive but is the most acceptable valuation method for audit purposes. Of course, other methods, as explained are acceptable but may be queried if the supporting data is not sufficient.

How Often do I Need to Obtain a New Valuation?

It depends.

In relation to the financial statements an auditor will generally accept a valuation which has objective and supportable data for 3 years but subject to the warning below. Of course, the timing may vary depending on the auditor. The auditor will also want a statement or other evidence to show why there has been no significant change to the last acceptable valuation.

In relation to other significant trigger points, as per below, the valuation should be near the date of the event and certainly should not be more than 12 months old.

Warning – Regardless of the source of the valuation if the evidence used to support the valuation has significantly changed then a new valuation is required. A few examples are as follow:

  • A significant renovation
  • Flood, fire, Tsunami or other significant weather or environmental or political event
  • Subdivision of the property
  • Hot or depressed property market

 How do I Value an SMSF Property held Indirectly?

The same valuation rules apply.

Property held by a private unit trust which is not held directly by the SMSF is required to be valued at least annually. In valuing the units, whether it is a related unit (closely held) or an unrelated unit trust, all the significant underlying assets and liabilities are required to be valued so that the market value of units held directly by the SMSF can be calculated.

The financial statements of a private unit trust are not required to be valued at market value. The unit trust, trustee, may be very reluctant to obtain a market value when it is not required.

If the property is held via a related unit trust (closely held) you should have control over the decision to obtain a market valuation. It can be problematic for property held in an unrelated unit trust as you may only have a minor voice and the trustee may not want to pay or allow an inspection of the property by an external valuer. The SMSF trustee may obtain a desktop valuation if it is residential property which means the valuation can be done independently of the trustee of the unit trust.

When should the Trustee value an SMSF Property?

An SMSF property must be valued at market value as at 30 June each year.

Other significant trigger points include:

  • When a member starts a pension
  • Paying a superannuation lump sum to a member
  • Divorce proceedings
  • Bring forward contributions
  • Carry forward contributions
  • Acquiring property from a member or other related party
  • Selling property to a member or other related party
  • In-specie member contribution of property (non-cash contribution)
  • In-specie rollover (non-cash transfer to another SMSF)

Key Takeaways

  • Evidence is key to support the valuation
  • The valuation must be explainable to a third party
  • Recent comparable property sales are very important
  • Factor in the cost of valuations in time and money

Do you need help with understand in Property Valuations for your SMSF?

Give us a call on 1300 392 544 or get in touch online 

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If you’re interested in learning more about Property Valuations for your SMSF, Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you need help with understand Property Valuations for your SMSF?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about Property Valuations for your SMSF, please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)