When investing in direct property within a self-managed super fund, a necessary step is to have a prospective investment property valued. There are several ways that self-managed super funds can value properties at different stages in the investment cycle.
This guide takes you through everything you need to know about SMSF property valuations.
What are SMSF property valuations?
Property valuation refers to the process of determining the worth of a real estate property to understand its estimated market value. Property valuations form an important component of SMSF ownership. Not only are valuations a necessary and integral step to purchasing a residential or commercial property, but self-managed super funds in Australia are required to value any direct property assets as part of their annual financial accounts and auditing process.
When are SMSF property valuations required?
There are several occasions where an SMSF property valuation is required:
As we mentioned above, an SMSF must undergo an annual audit. The purpose of the annual SMSF audit is to ensure that the fund remains compliant with superannuation rules and to verify the accuracy and validity of the SMSF’s financial records. Only a registered SMFS auditor can legally audit a self-managed super fund. As part of the audit process, real property assets must be valued to determine their market valuation.
A property valuation is generally also required when a final audit is conducted for an SMSF that is winding up.
Annual financial statements
Like annual audits, SMSF trustees are responsible for preparing and lodging annual financial statements. Typically, a financial practitioner such as an accountant or financial planner assists an SMSF in preparing annual financial accounts — part of the process being to accurately reflect the market value of all of the SMSF’s assets, including direct property investments.
Borrowing to purchase property
Perhaps one of the most commonly recognised times when a property valuation is required for an SMSF property is to secure finance for the purchase. SMSFs may be able to borrow to invest in direct property through a Limited Recourse Borrowing Arrangement (LRBA). Under an LRBA, property valuation plays a crucial role in determining the fund’s borrowing capacity and ensuring regulatory compliance.
More than just valuing the property for an LRBA, SMSF properties must also be valued upon their acquisition to ensure that the SMSF in-house asset rules aren’t breached.
The ATO outlines that a property valuation should be undertaken when the previous valuation has become considerably or materially inaccurate or if a significant event (such as heightened market volatility, major renovation or natural disaster) has occurred that could potentially change the property asset’s value.
Property valuations for tax purposes
Whether to calculate your depreciation, net return, or potential capital gains tax liability upon disposal of a property, there are several situations where an SMSF property is required to be valued.
What is the valuation process for SMSF properties?
Some of the methods for valuing residential property assets, commercial property assets and rural property assets include:
A property appraisal is effectively a professional opinion on the market value of a property. The purpose, scope, methodology and certification can differ between property appraisers and property valuers. It’s essential to understand the purpose of your SMSF valuation to determine whether an appraisal is suitable or if you need to engage a qualified property valuer.
Rent-to-value (RTV) method
Under the RTV method of valuing property, the rent that’s received from the property forms the basis for calculating the property’s market value. A potential downside to the RTV method is that it considers fewer influencing factors to a property’s value than an appraisal or professional valuation would, such as up-to-date market data or the impact of inflation.
Professional property valuation companies are able to determine the property’s estimated market value by conducting thorough research on the property. Property valuers consider similar properties through a market comparison approach and utilise income capitalisation (similar to the rent-to-value method) as well as a cost approach (look at estimating the cost to replace or reproduce the property, minus depreciation).
Are residential property valuations the same as commercial property valuations?
There are several property types that an SMSF can invest in directly, including commercial property, residential property and even rural property assets. There are several different valuation methods to use, depending on the type of property. The ATO’s valuation guidelines set out the required guidelines for tax agents and other industry professionals to adhere to when valuing property.
Residential valuations can vary significantly from rural property valuations or commercial property valuations as they all operate in vastly different property markets, with varying factors in market data to be assessed and different determinants affecting the property’s value.
How do I start the process of investing in the property market through my SMSF?
There are a number of considerations to be made before investing in direct property within a self-managed super fund. Firstly, the trust deed must include provision to invest in direct property. Secondly, the fund’s investment strategy must be reviewed to ensure that property investment remains in line with the fund’s objective and will pass the sole purpose test. Your trusted SMSF adviser, financial planner, tax agent or other finance or tax practitioner is best placed to assist with assessing the viability of property investment for your fund.
If you’re looking to invest in property with borrowed funds, then a condition of SMSF lending is that it is done via a Limited Recourse Borrowing Arrangement (LRBA).
At SMSF Loan Experts, we proudly assist many Aussie SMSF trustees in establishing the proper LRBA structure for their lending needs. By working with you, we can help guide you through the lending process and source a lender that will support your needs.
Contact the SMSF Loan Experts team today to learn more!
Frequently asked questions about SMSF property valuations
What does ‘market value assessment’ mean?
‘Market value’ for the purpose of SMSF valuations refers to the price that a willing buyer would pay in an open property market, reflecting the economic conditions at the time of sale.
Do I need to use a property valuer?
Under their valuation guidelines, the ATO generally considers the property valuation process to govern the acceptability of a property valuation rather than the person or company who conducted it. Regardless of who performs the valuation, objective and supportable data must be used, and a reasonable process must be followed.
Your SMSF auditor may request an independent valuation of your SMSF property, particularly if it’s been more than three years since it was last valued. In this instance, you may need to engage a qualified independent valuer. Similarly, an independent property valuation may be required by your LRBA financier to determine the property’s market value.
Can my real estate agent provide a valuation?
Real estate agents are generally well-positioned to provide property appraisals, however, for accurate valuations for tax purposes, annual statements or audits, a real estate agent may not be able to provide a property valuation that meets the ATO’s valuation guidelines or may not offer that service to property owners.