Guide to SMSF Property Valuations - What you need to know

SMSF Property Valuations have now become big business. I remember when the first online valuation provider came online and started to market their shiny new business. They had a website, a business model, direct email marketing to people like me and many others in the SMSF Professionals space. They caught onto the demand of SMSF Auditors, SMSF Specialist Accountants and SMSF professionals looking to the market to provide an easy, affordable, compliant and solid information about something that some people thought is really simple – telling the owner how much their property in their SMSF is worth.

Well, in this case, the owner just so happens to be the trustee or trustees of the SMSF, and an SMSF is just another legal vehicle (one of many) to acquire an asset.

I for one, was actually really excited to see the first email come through on my inbox from this shiny new company providing the solution to potentially every SMSF trustees’ problem – at least those with SMSF property or those looking to buy in the future but don’t even know they have a problem yet.

Actually, according to material and resources officially published by the ATO, and current information even as I write this, anyone can value an SMSF’s property. What they don’t tell SMSF professionals (even including many auditors) right throughout the whole SMSF Annual return lodgement process – is that these are easy to mess up.

I have seen countless examples of trustees signing declarations not worth the e-document they are written on. I know this firstly because ive had officials from the ATO directly tell me so. I have subsequently seen articles come up here and there, in discussion groups, in official and unofficial communications from our regulator, those in the SMSF professional space, and a few other channels. Trustee Declarations where the smsf trustee thinks to themselves ‘I feel I know my property better than anyone, so therefore I should know. Im the authority on my property. If I just put it on a document and digitally sign it or manually sign it (for even greater authenticity or legitimacy) then the valuation is the valuation and that’s that.’

Let me tell you – that alone just is not audit evidence. There, I said it. Trustees typically either do not know what their property is actually worth, or, have a bias either up or down, or, have an emotional tie to it - all of which is associated with subjectivity. To make matters worse, trustees do not know or understand how to present the information to ensure compliance with the legislation or regulation. They leave out material, they include the wrong material, their criteria is too loose, or data that has no relevance is introduced and the list goes on. In most cases it’s just too basic. What happens then is that awkwardness where the trustee argues with their SMSF professional, who then argues with their SMSF Auditor. All of this, when it could all be avoided.

Since circa 2017, (according to many other SMSF audit professionals, and sometimes the ATO with their unclear publications historically over this - even earlier than this), SMSF’s have been required to conduct annual valuations of their property.

I repeat, annual valuations. You would not believe how many times I get questions like SMSF property valuations every 3 years? Why are you asking for a valuation again this year I did it last year. It’s usually those that have either been out of the game, or otherwise missed the messaging coming from the SMSF regulator. In as little as Seven months after a valuation was obtained it ceases to be recent, and we are essentially looking at requiring new evidence to be able to determine accurate values for the new financial year.

In addition, these valuations have, for as long as I can remember, needed to include objective data – which is another way of saying a basis by which the valuation is based on and that basis has to be acceptable to us, the ATO, and therefore the SMSF Auditor auditing your SMSF! Objective data essentially means recent comparable sales. Comparable sales means look at your property that you own in your SMSF in your capacity as trustee – what does it have? Is it residential? If so, how many bedrooms, what size is it, how big is the block, what area / town / suburb is it in. Most residential properties are located in a metropolitan area of a capital city. It’s an area which is considered dense and developed. There are many roads and houses everywhere. Most suburbs have populations of between 40,000 and 200,000. What all this essentially means is that lots of houses are bought and sold. Alot of the same or comparable houses are bought and sold.

Recent sales means a sufficiently recent enough time prior to the date we actually want the value for. Given that anything older than six months is more relevant to the prior year than it is to the current year, I think it would no longer be a recent sale. The ATO would agree with me on this – and I witnessed it first hand at a popular event from the ATO’s Audit Portfolio speaker at one of my professional bodies’ annual conferences.

If I were to approach a valuer, I bet that they can give me a realistic opinion of what my property is worth. They bring in comparable sales, they use methodologies, they might look at many factors. Critically though, they have good solid data to be able to achieve a good valuation without or minimal doubt. The good news here is that historical valuations are possible – they are using historical objective data to provide you with a historical opinion. The older the opinion though, the less legitimacy it carries. SMSF Auditors should be looking very carefully at a valuation dated today but is for 30 June 2016. SMSF Auditors have every right to use their professional scepticism (and are legally required to do so) for valuations old and new.

Some Valuation providers are not qualified valuers – and this is where experienced discretion needs to be deployed. I will not automatically take a piece of paper that says ‘valuation’ on the header and just accept what is in front of me. And many auditors wont either.

We look at the reputation of the valuation provider, we look at their methodologies, we look at the valuation itself – are their valid comparable sales on it. How many? Are there a minimum of 3 – because some fail to achieve the bare minimum. How do we know if our residential property in our SMSF is worth what its worth if only one property was sold almost 12 months ago. Is it worth that today? Let’s just say I doubt it. In addition, I don’t think the ATO will be happy with anyone saying being confident in that valuation either.

The ATO is so adamant that the value that is written down on paper with the one sale from 12 months ago in a town 100kms outside of the border of the nearest capital city is not accurate, that they would expect the trustee, the smsf specialist accountant and their smsf auditor whose job it is to tell the Australian Taxation Office to all agree that there is an asset in the super fund for which a value cannot be ascertained.

In this sense, the auditor would have to communicate this to the trustee and the ATO.

Commercial properties are tricky. You know the ones – Factories, Warehouses, Retail, Offices, Storage Units, and, lets throw in Agri and Rural. It’s a big list. There may be more here. How on earth does anyone ever know the value of these things! I know those online SMSF property valuer – you know – the one whose email I received mentioned earlier, they were offering a service where they can tell the SMSF trustee what their commercial property is worth. Whilst as a whole they are solid, and overall pretty good in the way the information, methodology and presentation of the report is laid out – all seems very compliant, as an auditor let me say this. They are not all acceptable in terms of a definite valuation of your property. Most are, some are not. Auditors need to check these carefully before deciding if you need to know it is acceptable or not.

You know, there are other valuation methodologies such as rental yields. However, we run into trouble and doubt when trustees attempt to do this one on their own as well. This methodology is best left for the valuation experts as is perhaps (maybe?) one more lesser known method.

Some property types are actually easier to achieve a compliant valuation for, such as residential in a big city with lots of buys and sells. Some property valuation service providers such can actually do this quite cheaply now, and even your local estate agent can do these for free if you ask nicely. There is no shortage of agents. Ensure the opinion in the report you receive is unbiased, if the agent is asking you what amount to put on there, that’s a serious issue and the SMSF Auditor will know.

In some situations our (SMSF Auditors) hands are tied. We happen to have this amazing property or just a property at all – in a given location which simply does not have objective data which is comparable and recent. What do we do? Do we sell it? Do we keep it? Do we look for more comparables or a new valuation? Do we change the SMSF Auditor maybe the new one won’t say anything?

The fact is that all auditors no matter how big or small they are – are required to notify you and the ATO that there simply are not enough sales, data, comparables, objectivity or whatever you want to call it or however you want to state it. But that does not mean you have to sell your property. That is unless the ATO steps in for whatever unlikely reason and requires you to do so. If your report to you from your auditor tells you there is a weak valuation, and you have discussed with them there is nothing you can do, then that’s that. It’s on the file, it’s in the report, we move to the next financial year where it just may be so that the outcome is the same.

I have written to countless trustees telling them this very thing. Should everyone be informed and aware of this – yes. Should anyone be alarmed or even emotional of this scenario – absolutely not. You see, the reason SMSF Auditors even mention this to you in the first place is because there are strict regulations in place requiring SMSF Auditors to tell you this (and the ATO). In most cases where it is communicated to you in the report, the situation starts and ends there.