It has been a requirement for a SMSF to prepare financial statements with fund assets to their market value in accordance with SIS Regulation 8.02B since 1 July 2012.

Prior to this regulation taking effect, unless the fund was paying a pension or held in-house assets, trustees could provide a valuation for fund assets every three years. This is no longer sufficient, and assets must be reported at market value every year with evidence to support the valuation.

When valuing real property, an SMSF trustee may consider using a qualified independent valuer (external valuer), especially where the property represents a significant proportion of the fund’s value. If they choose to do this, an external valuation is not required each year, with further evidence only required where there is a significant event that may affect the value of the asset.  It is at this time, that the trustees should no longer rely on the current valuation and obtain a new one or look to other sources of evidence supporting the valuation.  Examples of such a change may events such as a natural disaster or COVID-19.

Objective & supportable evidence

It is a requirement set out within SISR 8.02B that the trustees must provide objective and supportable evidence each year to support the market value of the fund’s assets.  This must be done in accordance with the requirements under the ATO’s SMSF valuation guidelines, which acts as the support for auditors to demonstrate compliance with the regulation.

The ATO has indicated in its recent updated guidance (QC 64053) that real estate agent appraisals stating what the property is likely to sell for based on sales in the area, without listing details of those sales, would not on its own be sufficient and appropriate.  Furthermore, any such evidence should also support a market value for the property as close as possible to 30 June, especially where the market is potentially volatile.

A list has been provided by the Regulator as to some of the documentation that they consider acceptable evidence for substantiating the market value of real property other than an external valuation.  This includes:

• independent appraisals from a real estate agent (kerb side)
• 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
• rates notice (if consistent with other evidence on valuation)
• net income yield of commercial properties (not sufficient evidence on their own and only appropriate where tenants are unrelated).

Importantly it is the ATO’s view that generally, a single item of evidence from the above list will not be sufficient on its own unless the property has been recently sold.  Therefore, they suggest a variety of sources of evidence to support compliance with SISR 8.02B.

Trustee & auditor responsibilities

It is the trustee’s responsibility to provide documents requested by their auditor which supports the market valuation of the fund’s assets. It is not the auditor’s role to determine the market value of the fund’s assets.

The auditor must obtain sufficient appropriate evidence for their audit file (in accordance with Auditing Standard ASA 500 Audit Evidence), either from the trustee or external sources, to form an opinion about whether the SMSF has complied with SISR 8.02B.  Where the evidence is not sufficient and appropriate to enable the auditor to form an opinion the asset was valued at market value, the auditor must modify their audit report and consider whether an Auditor/actuary contravention report (ACR) should be lodged.

COVID-19 impacts

During the 2019-20 and 2020-21 financial years, if the trustee has difficulty obtaining valuation evidence due to the impacts of COVID-19, auditors should still consider modifying Part B of the audit report and lodge an ACR if necessary. They should provide reasons on the ACR as to why the trustee was unable to obtain the appropriate evidence.

If the ATO is satisfied this was due to the impacts of COVID-19, the contravention will not result in any penalties being applied. Instead the trustee will receive a letter from the Commissioner advising them to ensure they comply with the ATO’s valuation guidelines and have supporting valuation evidence by the time of their next audit (if possible), as repeated contraventions can lead to penalties.

Just another area and reason for trustees and auditors to be spending much closer attention to the valuations of fund assets, in particular where there’s not a ready-made market determining its price.