The recent bugbear for SMSF Trustees has been the increased scrutiny from their Auditor when it comes to obtaining valuations of their investments, particularly property valuations. The reason for the agitation is that many Trustees have successfully lodged their SMSF annual return each by supplying the Auditor with a letter from their local Real Estate Agent mixed in with the occasional formal valuation. Commencing in the 2013 tax year, the SMSF Regulator, the Australian Taxation Office (ATO) attempted to improve the valuation of investments inside SMSFs, and It has been a requirement for SMSFs to prepare financial statements with SMSF assets valued to their market value in accordance with SIS Regulation 8.02B since 1 July 2012. At that time, however, the ATO’s language around what evidence was required to show market value was still quite broad and included:
Independent appraisals from a real estate agent
A contract of sale if the purchase is recent and no events have occurred to the property that could materially impact its value since the purchase
Recent comparable sales results
The net income yield of commercial properties
In October 2020, the Tax Office updated its guidance regarding real estate appraisals and online property valuation reports to require that they include comparable sales data as sufficient audit evidence of the market valuation. So, for the 2021 year audits, Accountants and Trustees were having to make a bigger effort to provide this new audit evidence. Many though just pushed back and perhaps a number of auditors were happy to defer the pain via a management letter point making the current 2022 year audits more difficult for all involved as the missing evidence will need to be reported to the ATO if it is not provided.
Pain or Best Practice?
There is always a period of Accountant / Trustee / Auditor tension when the ATO decides on a new priority and puts pressure on the audit role. Pushing back against the auditor is usually the first step in the process for Trustees. The problem is that whilst you are happy in the short term, you will eventually need to find the evidence the auditor needs at some time in the future and if you continue to push back the outcome will just be worse.
There are a number of reasons why accurate valuations are beneficial to the Trustees and Members of the SMSF including:
Ensures compliance with SIS
Arm’s length transactions
In House Assets
Accurately determines the total super balances which impacts eligibility to make some contributions
Reduces potential contribution errors
Reduces minimum and maximum Pension amount calculation errors
The potential for costly unwanted outcomes far outweighs the extra effort required to get an appropriate valuation of the properties.
When the ATO changes its approach to evidence, they do so via the Auditor so it is very much a case of don’t shoot the messenger! Rather it is important for you to consider the long-term view and possible unintended consequences of not complying with requests made by the Auditor.
At Lifetime SMSF we are passionate about your retirement. We know that the journey to retirement determines the quality of your retirement outcomes and we help Australians maximise these outcomes through Best Practice SMSF practices that encourage seamless and simple ongoing management of your SMSF. With over 4o years experience in the SMSF Industry we deliver industry best SMSF Accounting, Taxation and technical support services to Australians that want the best for their SMSF journey and retirement. With hand picked industry partners we assure our clients that their growth and protection are our only focus.