SMSF and property — preparing for a smooth audit
For many SMSF trustees, property is one of the most significant assets held by their fund. Unlike personally owned assets, every SMSF asset must be valued at 30 June. This can be straightforward for assets with a ready market, such as listed shares, but property valuations can be more involved.
Trustees are responsible for determining the market value of fund assets. After the annual financial statements are prepared, the fund auditor will need objective and supportable evidence showing how that value was reached.
Evidence for property valuations
Trustees can use a qualified independent valuer and should consider doing so when an asset represents a significant part of the fund’s value or may be difficult to value.
Where trustees choose not to use an independent valuer, they need evidence from multiple sources. For property, this will typically include:
- Recent comparable sales: generally at least three properties that are genuinely comparable in size and location
- A real estate agent appraisal: supported by comparable sales
- Net income yields for commercial property: generally not sufficient evidence on their own
The ATO provides further information in its Guide to valuing SMSF assets.
Related-party leases must be commercial
Where an SMSF owns property that meets the business real property (BRP) definition, it may be possible to lease that property to a business operated by a member or another related party. However, the fact that the arrangement is permitted does not mean trustees can charge a non-market rate of rent.
A rental arrangement with a related party must be on arm’s-length, commercial terms and supported by a rental appraisal. A useful test is to ask: do all the lease terms reflect what would be agreed if the tenant were an unrelated third party?
To show that a related-party arrangement is on commercial terms, an auditor should be provided with:
- A properly documented lease
- A rent appraisal from when the lease was first entered into
- Evidence that the arrangement is operating according to the lease terms
- Evidence that, where a prior lease term has expired, the terms have been reset to market value and supported by a new rent appraisal
Your 2026 SMSF audit may still be some months away, but the process will be much smoother if trustees start compiling this evidence now rather than waiting for the auditor’s request.
