All Things … Property and SMSF Audit

A Self-Managed Super Fund (SMSF) can invest in many different types of investments, including residential property, commercial property and vacant land.

Completing the audit can be straightforward if trustees are aware of the things the auditor needs to review and the evidence the auditor needs to have on file.

When getting prepared, keep in mind that the job of the accountant is different to that of the auditor. The accountant processes transactions in line with the trustee’s instructions. The auditor needs to subsequently verify this against independent supporting evidence. Documentation in editable format or declarations made by the trustees might be useful for the accountant but not for the auditor.

The number 1 question - What evidence should be provided to support the market value of SMSF property?

Every year, the most common question SMSF auditors are asked is what documentation needs to be provided to support the market value of investments. The ATO website states the following in relation to property valuations:

“Each year trustees must provide objective and supportable evidence in accordance with the requirements under our SMSF valuation guidelines to their auditor”.

 AND

 “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 generally not on its own be sufficient and appropriate”.

AND

“The evidence should also support a market value for the property as close as possible to 30 June, especially where the market is potentially volatile”.

So what does this mean? It doesn’t mean a formal external valuation must be obtained every year. It does mean the auditor should be provided with evidence every year to support the value used in the financials. A valuation can be undertaken by anyone provided it is based on objective and supportable data.

Practical examples of evidence to support the market value

A simple way to look at this is to consider the evidence you would provide a potential buyer to support the value if the investment at 30 June. The following would generally be considered adequate audit evidence:

• Formal valuation from a qualified and independent valuer.

• Real estate agent valuation - with comparable sales listed in the valuation.

• Online valuation – these will normally indicate whether the reliability is high, medium or low. The valuation needs to have a high reliability and include comparable sales.

• Valuation from trustees - with evidence included such as recent comparable sales.

 Some examples of valuation evidence that would generally be acceptable:

• A valuation report from a professional valuer which includes a description of the property within 5 months of 30 June.

• A trustee resolution assessing the market value of a one-bedroom apartment with evidence included of recent sales in the same building for an identical apartment.

• Online valuations for the relevant property as noted by websites such as domain.com.au and realestate.com.au provided the valuations have a high accuracy rating and list comparable sales.

For more guidance issued by the ATO refer to QC 64053 which specifically covers property valuation requirements and examples:

 ATO 2020, “Regulation 8.02B and evidence required to support real property valuations” (QC 64053),https://www.ato.gov.au/Super/Sup/Regulation-8-02B-and-evidence-required-to-support-real-property-valuations/

What does the SMSF auditor look at?

The role of the auditor is not to value assets, but to assess whether the market values recorded in the SMSF financials based on sufficient, appropriate and independent evidence.

They will consider the quantity, reliability, relevance and source of the evidence provided. They will also take into consideration the characteristics of the fund and the property and complete a risk assessment. As a result, they may not require the same level of evidence for the same types of investments.

For example, where a property has a significant value, the auditor may form the opinion that a basic appraisal letter by the real-estate agent responsible for leasing the property is not adequate and request additional evidence. This could also be the case where the valuation evidence provided suggests no or little change compared to the prior year but market data suggests otherwise.

Example

Let’s say the auditor receives a valuation report from a qualified valuer for a storage unit valued at $500,000. The report was prepared in February 2024, just under 5 months before the end of the financial year. In previous years, the auditor has considered valuation reports within 5 months from 30 June adequate evidence.

While performing the audit, the auditor noticed that in July 2024 two identical storage units in the same building were sold for $550,000. After making further inquiries, the auditor may conclude the property appears undervalued.

Market valuation is covered in both the Financial audit (Part A audit) and the Compliance audit (Part B audit). A potential misstatement of $50,000 is likely not material for the Financial audit. However the ATO requires auditors to lodge a contravention report in relation to Regulation 8.02B where a potential under or overvaluation exceeds either $30,000 or 5% of fund assets.

While the auditor would generally provide guidelines on acceptable audit evidence, there is no “one-size-fits-all” approach as the auditor is required to assess the evidence provided and document a risk assessment, reasoning and conclusion.

Another key thing to keep in mind is that the auditor can’t use evidence in editable format, such as an email forwarded by the trustees from a real estate agent confirming the market value of a property or information in word or excel format.

Rental income

The auditor will also assess if the rental income received by the fund is paid on commercial terms. The following would generally be considered adequate audit evidence:  

• Lease agreement organised via a real estate agent or other written lease agreement covering the lease of the property during the year.

• Rental statements from a real estate agent covering the lease of the property during the year.

• Rental appraisal by an independent real estate agent or valuer (for related party tenants).

• Supporting evidence and an explanation from the trustees if there was no rental income received during the year.

 Commercial property leased to a related party tenant

The auditor will generally pay close attention to determining if the rental income is charged on commercial terms where the property is leased to a related party tenant. The terms and conditions are expected to be similar compared to when the fund is dealing with an unrelated party. It is a requirement that the SMSF does not provide financial support to a related party. Factors that determine whether the terms of the arrangement are commercial include: 

-       There is a written lease that is up-to-date and enforced

-       The terms of the lease are consistent with commercial terms

-       The amount of rent and any increases in rent are on commercial terms

-       The agreement includes appropriate clauses regarding the recovery of unpaid rent and the consequences of unpaid rent

-       Any extensions or renegotiations of the lease are documented in writing

 The trustees are responsible for enforcing the terms of the lease agreement. If the agreement notes rent is payable on a monthly basis, rent should be received by the fund on a monthly basis. Rent paid in arrears is generally considered evidence that the transaction is not at arm’s length.

 Who owns the property?

In Australia, any property acquired by an SMSF will be registered in the names of the trustees. This means either the name of the individual trustees or the corporate trustee will show on the title. So how can the auditor verify they hold the property in their capacity as trustee of the SMSF?

• While the SMSF name may not be registered on the title, it may be included on the contract of sale.

• Other documentation such as a settlement statement, lease agreement and land tax notice may refer to the fund name.

• An acknowledgement or declaration of trust is a legal document that notes the trustees hold the property on trust for the SMSF. These should be prepared by a lawyer to ensure there are no adverse stamp duty implications.

The title search will generally only include the title number, not the property address. To link the title search to the fund, the auditor will generally also need a council rates notice, contract of sale or online address search to link back the title search to the property address.

The annual title search will also confirm whether the property has been mortgaged or encumbered.  If the property has been mortgaged, the fund may be in breach as the SMSF compliance rules prohibit charges being placed over an SMSF asset. The only exception to mortgaging the property is where it forms part of a limited recourse borrowing arrangement.

The SMSF Audit Process & Audit Checklist

The SMSF audit consists of two parts, the financial audit and a compliance audit. While they are closely linked they cover different aspects. As part of the financial audit, the auditor reviews existence, ownership, accuracy, valuation and classification of investments.

In relation to rental income and expenses, the auditor will review if:

• The fund has paid for all relevant property expenses such as water, strata and council rates. The lease agreement will outline which property expenses are payable by the tenant and which are payable by the fund.

• All rental income & expenses have been recorded in the correct accounting period.

 The auditor will also review if the property is insured to protect member benefits in case the property is damaged.

For more detailed information on the audit process, including a checklist, review the SMSF property fact sheet in the resource section of our website at www.redwillowsuper.com.au/resources

How can Red Willow Super help you?

We would love to help you, whether it is with completing SMSF audits, providing compliance support or delivering technical SMSF training.

Our team has extensive experience which means we can assist with a range of SMSF issues. We have assisted many accountants, advisors and trustees deal with compliance issues.

We provide cost effective audits and offer support to solve potential problems, let us be your competitive advantage.

Want to find out more? Check out our website, call us on 1300 920 2230 or email Support@RedWillowSuper.com.au

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