The recent bug bear for SMSF Trustees has been the increased scrutiny from their Auditor when it comes to obtaining valuations of their investments particularly property valuations. The reason for the agitation is because many Trustees have successfully lodged their SMSF annual return each by supplying the Auditor with a letter from their local Real Estate Agent mixed in with the occasional formal valuation. Commencing in the 2013 tax year, the ATO attempted to improve the valuation of investments inside SMSF’s, and It has been a requirement for a SMSF to prepare financial statements with SMSF assets to their market value in accordance with SIS Regulation 8.02B since 1 July 2012. The issues since then is that their language around what evidence was required to show market value had only gone slightly further and included:
Independent appraisals from a real estate agent
A 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
The net income yield of commercial properties
In October 2020, the Tax Office has updated their guidance regarding real estate appraisals and online property valuation reports to include an additional requirement for comparable sales data for this supporting evidence. So, for the 2021 year audits, Accountants and Trustees were having to make a bigger effort providing audit evidence. Many though just pushed back and perhaps a number of auditors were happy to defer the pain via a management letter point making the current 2022 year audits more difficult for all involved as the missing evidence will need to be reported to the ATO if not provided.
Pain or opportunity?
There is always a period of Accountant / Trustee / Auditor tension when the ATO decides on a new priority and puts pressure on the audit role. Pushing back against the auditor is usually the first step in the process. The problem is that whilst you are keeping your client happy in the short term, you will eventually need to find the evidence the auditor needs at some time in the future and if you continue to push back the outcome will just be worse for the client and your relationship with them may suffer. The best plan of action is to educate the client into why an accurate valuation is in their best interests.
There are a number of reasons why accurate valuations are beneficial to the Trustees and Members of the SMSF including:
Ensures compliance with SIS
Market valuations
Arm’s length transactions
In House Assets
Accurately determines the total super balances which impacts eligibility to make some contributions
Reduces potential contribution errors
Reduces minimum and maximum Pension amount calculation errors
The potential for costly unwanted outcomes for the client far outweighs the extra effort required to get an appropriate valuation of the properties.
We support many Accountants and Advisers that are on the front foot with their clients. We support them by providing the search for the evidence for residential properties as part of our ongoing administration service. Rather than spending additional time deferring the tough conversation for 12 months, we saw it as an opportunity to add further value to our clients by removing the need for them to even bother their clients to ensure that this additional hurdle to compliance was cleared.
When the Auditor changes their approach to evidence, it is important to consider the long-term view and possible unintended consequences for your clients. We get it that many clients are averse to change but educating them on what could go wrong and providing them with a simple solution is a much better outcome for all.
At Keep It Simple Super we work with all of our partners to help them provide simple solutions and outcomes for their SMSF Trustees. Our all-inclusive SMSF Administration service offers flexibility to Advisers and Accountants so they can provide their own unique service but with the knowledge that however they service their clients, the SMSF will be compliant. Get in touch for a quote today.