If the recent news articles are anything to go by, property prices are on the decline. From Sydney to Melbourne, the property pundits suggest that the property prices are set to decline from between 15 – 40 per cent predicted for the next 2 years.
So, if this is true, what does this mean for SMSF’s, their properties, their LRBA and their pension valuations? The property bubble, which is predicted to burst soon, will ultimately see a massive flow-on effect on SMSFs and other non-SMSF property investors and their investment valuations.
Compliance issues to be noted on this issue include: s109 of the SIS Act, and the ATO Valuation Guidelines.
S109 of the Superannuation Industry (Supervision) Act (SIS Act) suggests that ‘all investment transactions must be made and maintained at arm’s length, incl. purchase, sales price and income from an asset reflects a true market value/ rate of return. S109 comes into play if the Valuation of the property is updated to a lower value.
Let’s re-cap on the ATO Valuation Guidelines:
Why assets need to be valued?
An asset valuation is required to provide SMSF trustees, Accountants and other interested parties a fair and reasonable valuation on your SMSFs overall financial position, and to ensure that the SMSFs financial reports and reported in a true and correct value.
A valuation of investments, particularly property, is key for the Fund when:
- Preparing the financial accounts and statements for the Fund
- Acquiring assets between SMSFs and related parties
- Maintaining assets and investments are arm’s length basis
- Determining the value of the assets for a pension members’ super balance
- Determining the value of new Income Streams at 1 July 2017 as they will now be counted toward the transfer balance cap
- Determining the market value of assets support the Fund members’ total superannuation balances.
A valuation is required (among other situations) when:
- Preparing the SMSF Financial Accounts and Statements – “An asset must be valued at its market value. The valuation should be based on objective and supportable data.”
- Determining the value of assets that support a super pension. This includes for calculating amounts that count towards the transfer balance cap – “The market value of the account balance needs to be determined on the commencement day of the pension, or for ongoing pensions, on 1 July of the financial year in which the pension is paid. The valuation should be based on objective and supportable data.”
An updated valuation will be required where that has been a significant event that affects the value of the asset. These significant events include:
- A natural disaster
- Macro-economic events
- Market volatility
- Changes to the character of the asset
If the impending property bubble does burst, as predicted, this will have a flow-on affect to SMSFs and will require an updated valuation based on market volatility.
Where an updated property valuation is deemed necessary due to market volatility or macro-economic events, a property valuation may be conducted by a:
- Registered valuer
- Professional valuation service provider
- Member of a recognised professional valuation body
- Person without formal valuation qualifications but who has specific experience or knowledge in a particular area; and
In certain circumstances the law requires valuations to be undertaken by a qualified independent valuer.
If the property value is deemed to have actually fallen, as some say up to 40% of its current value, this impact on the pension accounts, especially for the Funds that have to report to the ATO for the Transfer Balance Cap. This issue will be discussed in more detail in our next blog.
About the author:
The author is Dinesh Nanayakkara, an ASIC Registered SMSF Auditor providing SMSF Auditing Services to the wider community for the past 5 years and has been involved in the SMSF Industry for more than 10 years. Dinesh holds a Diploma of Financial Planning and is an SMSF Association SMSF Specialist Auditor.
Dinesh is actively involved in education programs to educate SMSF Accountants and fellow SMSF Auditors to increase their understanding of various compliance issues and its requirements.
D.S Audit Services is an SMSF Audit-only firm and do not provide financial advice. All information provided is general in nature, and has been prepared without taking into account of the Trustees’ objectives, financial situation or needs. Trustees are advised to consider their own circumstances and seek advice from a Licensed Financial Advisor before investing or making any decision.