SMSF Property Valuations: What You Need to Know

Tuan Duong

Self-managed super funds (SMSFs) have become an increasingly popular way for Australians to invest for retirement. 

Property is one of the main assets held in many SMSFs, making up 32% of total estimated SMSF assets as of early 2022.

However, with property comes responsibility – SMSF trustees have strict compliance requirements when it comes to holding residential and commercial investment properties. One key obligation is to have accurate and up-to-date valuations for all real estate in the fund.

This guide breaks down the ins and outs of SMSF property valuations for Australian investors and trustees. 

Valuation Methods for SMSF Properties

When it comes to valuing commercial and residential properties in an SMSF, trustees have a few options. However, it’s critical to choose a method aligned with Australian Taxation Office (ATO) guidelines for SMSFs. 

The main valuation methods you may have heard of include:

Qualified Independent Valuer

Using a certified, independent property valuer is the most robust way to assess market valuation. They will provide a detailed, written report outlining the valuation methodology and supporting data. This can include:

  • Recent sales of comparable properties
  • Area market analysis
  • Property inspection and assessment

Professional valuations give trustees confidence they are meeting compliance duties. However, they tend to be more expensive than other approaches. 

Real Estate Agent Appraisal

Getting a free appraisal from a local real estate agent is common. However, a one-page letter estimating value doesn’t cut it anymore for SMSF reporting.

ATO guidance states that documentation should outline the objective data used. This includes comparable sales and area market research. Without those details, a real estate appraisal may not suffice.

A real estate agent’s appraisal may be more suitable when you need a quick, free benchmark on potential value. Real estate agent appraisals can provide a ballpark figure to start with, but not for official tax purposes. 

Online Estimators

Online tools like PriceFinder and Onthehouse provide free property value estimates. They can benchmark general market value using recent sales. However, these automated valuations don’t assess individual property attributes. Generic estimates also likely fall short of ATO standards for SMSFs. 

Online estimators may make more sense when:

  • You want a very quick, easy value check out of curiosity. They provide automated estimates instantly.
  • You are in the early stages and want a general sense before deciding next steps. They can indicate whether a formal valuation is worthwhile.

ATO Property Valuation Guidelines

The ATO has clear requirements when it comes to valuing commercial and residential property assets held in SMSFs. These help guide trustees and auditors on compliance.

Valuations Every Financial Year

SMSF trustees are required to value all fund assets, including property, at market value annually (every financial year) when preparing the fund’s financial statements, as per SIS Regulation 8.02. This is an annual valuation requirement.

While the ATO guidelines state that an external property valuation is generally not required every year, it is still the trustee’s responsibility to determine market value annually using objective and supportable data.

The common practice has been for auditors to request a full external independent valuation at least once every three years. However, if the trustee expects a material change in the property’s value due to market conditions or other factors, a new valuation would be prudent, even if less than 3 years has passed

So, while a new formal property valuation report is not always needed annually, SMSF trustees are still required to value all fund assets (including property) at market value every year when preparing the fund’s financial statements. They need sufficient evidence to support this, with formal independent valuations at least every three years or whenever a material change in value is expected.

Objective and Supportable Data

To confirm market value, documentation must outline the objective methodology used rather than just stating an estimate. This should include comparable sales and area market analysis.

The ATO requires multiple sources like inspection reports, sales data, rental yields, etc. A single item alone, like a short letter from a real estate agent, is now considered insufficient evidence.

Written Reports

Property valuation documentation must be in writing from a qualified professional. It should also detail the following:

  • Valuation approach
  • Assumptions
  • Inputs
  • Calculations
  • Outcome

Common ATO Issues with SMSF Property Valuations

While most SMSF trustees aim to follow the rules, the ATO does frequently find issues when auditing self-managed funds holding property. Some of the problems that can arise include:

  • Not valuing frequently enough: A common mistake is not obtaining updated formal valuations regularly. Outdated reports often trigger ATO compliance reviews.
  • Inadequate property valuation methods: Using free online estimators or relying solely on a letter from a real estate agent does not meet ATO standards for appropriate evidence. Documentation must include market research and calculations to support the value.
  • Poor documentation: Simply stating an estimate without documenting the objective methodology behind it leaves SMSFs open to ATO queries. Detailed reports are necessary.
  • Unrealistic assessments: Funds may also come under ATO scrutiny if property valuations seem excessively high or low compared to reasonable expectations. Justifying how the value was derived becomes critical.

Tips for Keeping Your SMSF Compliant on Property Valuations

As an SMSF trustee, you want to ensure your fund remains fully compliant when it comes to meeting property valuation requirements. Here are some best practices:

Review Property Portfolios Annually

Set aside time each year to check when your last valuation occurred. Tracking this can help prompt you to get updated reports when needed. 

Use Qualified Independent Valuers

While attempting to save money, free online tools or basic letters from real estate agents may not cut it anymore. The ATO prefers detailed reports from professionals

Document Decision Making

Keep records of why and how you determined property values, including the methodology and data sources behind them. Thorough documentation is key.

Assess the Benchmark Market Value

Sense check your valuations using industry benchmarks. Significantly inflated or deflated estimates may raise red flags and prompt audits.

Budget for Valuations

Factor the cost of valuations into your SMSF’s operating budget. Having funds set aside makes the valuation process easier.

Key Takeaways

  • Property valuations are critical for SMSF compliance. Having certified reports regularly is a regulatory requirement to confirm market values.
  • Following ATO guidelines on property valuation methodology, frequency, documentation, and reporting prevents issues with audits and queries.
  • Work with qualified professionals, like independent valuers, when in doubt about meeting standards. They understand compliance duties.

Duo Tax specialises in all kinds of property valuations, and their certified valuations adhere to ATO rules for proper evidence. Contact us today to find out more. 

FAQs

How is property valued in an SMSF?

Property in an SMSF must be valued at the market price to determine its current monetary worth. Reports detail the methodology used, including inspection, comparable sales, rental data, area market analysis, and capitalisation calculations to derive a value.

How often do you need to revalue property in SMSF?

SMSF trustees are required to value all fund assets, including property, at market value annually (every financial year) when preparing the fund’s financial statements. This is an annual valuation requirement. While a full independent valuation report may not be needed every single year, updated valuation evidence must be obtained at least once every 3 years.

What is the average value of SMSF?

According to ATO statistics, the average value of assets held in a self-managed super fund was $1.5 million as of March 2022. As of June 2021, 25.2% of SMSFs had between $500k-$1 million in assets, while 30.7% had over $1 million. Property makes up an average of 32% of the composition.

Is it worth buying property through SMSF?

Buying property via an SMSF can provide tax advantages compared to personally owning investment real estate. Contributions and earnings are taxed at just 15%. Capital gains may also be reduced. However, strict compliance rules apply for holding property in a fund. Trustees should understand the requirements before purchasing.

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Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.

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Tuan Duong

Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.

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