Self-Managed Super Funds (SMSFs) have become the largest growing investment sector within the Australian Superannuation industry with tens of thousands of new funds created each year. Investing money from SMSFs into property is becoming increasingly popular as there are significant tax advantages and the potential to obtain the income and/or capital gains from the property tax-free once your fund changes over to a pension.
The Australian Taxation Office (ATO) has a mandatory requirement for all assets held in SMSFs to maintain a record of accurate, current market values for those assets. It should be noted that inaccurate valuations of assets have led to situations where the SMSF has become non-compliant with the ATO legislative and regulatory requirements. The outcome of this can therefore result in the ATO actioning penalties payable for non-compliance.
Guidelines provided by the ATO regarding the valuing of property assets for SMSFs state that a valuation can be conducted by:
- A registered valuer;
- A professional valuations service provider;
- A member of a recognised professional valuation body;
- A person without formal valuation qualification but who has specific experience or knowledge in a particular area.
In order to obtain an accurate and fair valuation of a property, there are many factors which need to be assessed. Determining a property’s value requires a specialist level of expertise and due diligence in order to analyse the complexities of the property, the locality, the market and macroeconomic factors. From an auditor’s perspective, a valuation from an independent party holds a lot more weight than an assessment from a trustee of a SMSF.
What type of property can a SMSF buy?
When investing in property through a SMSF, there is a specific criteria that the property must conform to and it must also meet the ‘Sole Purpose Test’ whereby retirement benefits are provided to members of the fund, or to dependants if the member dies.
- The asset or property purchased must be a single acquirable asset as defined by the superannuation law, rather than several assets, or several properties.
- The property can be a residential or commercial property, but cannot be vacant land, and must be a single title of more than 50 sqm.
- Residential property cannot be purchased from a member of the SMSF, or a related party, like a business partner or spouse.
- Residential property must be strictly for investment purposes and cannot be your place of residence, or your holiday home.
- Residential property must be tenanted but not by a member of the fund or any family member.
- Commercial property can be your place of business where the SMSF buys the property then leases the property to a fund member or a related party.
- Overseas property investments are permitted, however consideration needs to be given to the laws within that country.
The independent auditor of the SMSF must each year ensure that the financial statements are presented with an accurate value of the assets. As a general rule of thumb, the majority of SMSF auditors state that property investments held by the fund must be valued as least every three years.
In accordance with ATO recommendations, an approved SMSF auditor will seek a qualified independent valuation if either the value of the asset represents a significant proportion of the funds value, or, the nature of the asset indicates that the valuation is likely to be complex or difficult (particularly in the case of commercial/industrial property).
There are some circumstances where property held by a SMSF must be re-valued on a more frequent basis:
- When a pension is commenced, a valuation from within 12 months prior to the commencement of the pension must be used.
- When the auditor believes that the valuation used in the accounts is either too high or too low.
- Where the SMSF has in-house assets and the auditor need to ensure that the 5% in-house asset ratio has not been exceed.
In addition to ensuring that a SMSF has complied with relevant superannuation laws, a valuation of the fund’s assets assists the trustees with making prudent investment decisions to maximise returns. As the property market is one asset class that is particularly difficult to accurately gauge true value, it is judicious practice for investors to engage specialist expertise when undertaking property valuations for SMSFs.
LMW provides independent licensed valuations for residential, commercial/industrial and rural property nationally and is fully conversant in valuing property for SMSFs.
If you wish to discuss any aspect of property valuation, please contact WA State Director Nathan King on +61 416 082 499 or email email@example.com.