As a trustee of a self-managed super fund (SMSF), your role is not just about compliance and ticking boxes. It’s about maximising the potential of your investments and securing a prosperous future for your fund and its members. Amidst a diverse array of possible assets and investments, one asset class demands special attention: property.
Understanding the impact of your most valuable assets
Property holds tremendous significance for many SMSFs, but it’s not just about owning real estate. The key lies in accurately valuing these properties within your fund, unlocking meaningful reporting and safeguarding your financial position.
In this exploration, we uncover the essential reasons why accurate property valuations are vital for SMSFs. From regulatory compliance to strategic decision-making, we touch on the critical role these valuations play in shaping the future of your fund.
Compliance with superannuation regulations
SMSFs must report the market value of their assets each financial year for compliance with superannuation regulations, including those outlined below. Conducting periodic valuations ensures that the property value is accurately reported.
Additionally, it is important for SMSFs to calculate the market value of their assets at other times, including the commencement of a pension for example. The market value of assets serves as a basis for determining the tax-free and taxable components of the pension, as well as establishing the account balance from which pension payments are made.
Sole purpose test
The “sole purpose” test forms the basic premise of your SMSF, which is that your SMSF must be run for the sole purpose of providing retirement benefits for its members. An accurate property valuation helps you demonstrate that the investment is solely for generating income or capital growth to support your members’ retirement savings.
At arm’s length test
Similarly, the “at arm’s length” test requires that transactions and dealings within your SMSF are conducted at market value, without preferential treatment to related parties. Having an accurate property valuation helps establish the fair and objective value of the property, ensuring that the investment is in line with this test.
In-house assets rule
It is also crucial to know how much assets are worth to follow the “in-house assets” rules. In-house assets are investments made within your SMSF, such as loans or properties to related parties. If the value of these assets is more than 5% of your total assets, there could be penalties and extra taxes to pay. Whilst your properties themselves might not be in-house assets, their market value could be crucial in determining whether other in-house assets exceed the 5% threshold. So, it’s important to keep an eye on the value of your property investments to stay within the limits.
Total super balance (TSB)
The TSB is the total value of your superannuation savings across all your super accounts, including your SMSF. This value affects your ability to make certain super contributions, such as non-concessional and concessional contributions. It also determines your eligibility for specific government benefits, like the government co-contribution and spouse contribution tax offset. Monitoring and managing your TSB is crucial to understand how it impacts your superannuation strategy and entitlements.
Transfer balance cap (TBC)
The TBC limits the amount of funds that can be transferred to your retirement phase account. To report the correct commencement value of an account-based pension for the purpose of the TBC, the member’s account balance must reflect the true value. This includes ensuring that any real property owned by the fund is carried at the market value.
Minimum and maximum pension requirements
Minimum pension requirements are calculated on the member’s balance at the commencement of a pension and at the beginning of each financial year. If, for example, the auditor or Australian Taxation Office determine that the member balance is understated due to the fund’s property not being carried at market value, then the fund may not have met minimum pension requirements. This could have significant affects for member and the fund, such as loss of exempt current pension benefits. Transition to retirement pensions also have a maximum withdrawal amount. In this case, if the member balance is later determined to have been overstated when calculating the maximum, the member may exceed withdrawal limits resulting in illegal early access to superannuation money.
Carry forward concessional contributions
It is also important to accurately know the true value of your SMSF’s assets, including property, in assessing eligibility for carry forward concessional contributions. These contributions allow members to access unused concessional contribution cap amounts from the previous years. Eligibility is based on the member’s balance at 30 June of the prior financial year.
Financial reports and member statements
Accurate valuations are essential for preparing financial reports and member statements for an SMSF. Valuations provide a realistic assessment of your fund’s assets, which assists in determining accurate member balances and net asset values (NAVs). These figures are vital for regulatory reporting, financial statements, and member communications. Having reliable property valuations ensures transparent reporting, strengthening the confidence of fund members and regulatory bodies.
Asset allocation and investment strategy
Regular valuations help trustees assess the performance of the property investment within your SMSF portfolio. It allows you to track changes in the property’s value over time and make informed decisions regarding the investment strategy.
Estate planning and asset distribution
Accurate property valuations in your SMSF aid in creating a comprehensive estate plan and making informed decisions regarding property distribution. This helps ensure fair and equitable outcomes for beneficiaries and minimises the potential for disputes or legal complications.
Unveil the power of property valuations in your SMSF
In summary, accurate valuation of your SMSF’s assets is critical for compliance with regulatory requirements and for making informed decisions. Relying on outdated or unqualified estimates for property valuations can have serious legal and financial repercussions. Repercussions can include fines, penalties, and even disqualification of your SMSF.
To avoid these risks, it is crucial to regularly obtain up-to-date property valuations for all your SMSF’s property investments. This ensures that the property is valued based on current market conditions, considering factors like supply and demand fluctuations, location, and the property’s condition.
Synectic’s SMSF accountants and advisers can help you navigate the complexities of property valuations, ensuring that your fund is fully compliant and positioned for long-term success.
If you haven’t recently had your SMSF property independently valued, we recommend taking this proactive step to get things in order before the 30th of June.
About the author
Kerrie is passionate about helping our clients grow their self-managed superannuation funds. With a background in audit, taxation and office management, Kerrie joined Synectic’s specialist SMSF team in 2010. Contact us today and ask to speak with Kerrie.