SMSF Property: What Trustees Should Prepare Before the Annual AuditSMSF Property: What Trustees Should Prepare Before the Annual Audit
Property can be one of the largest assets held by a self managed super fund (SMSF), which makes getting the valuation and supporting documentation right particularly important at audit time.
Unlike personally owned assets, SMSF assets need to be valued at 30 June each year. For investments with a readily available market price, such as listed shares, this is generally straightforward. Property can require a little more work.
Trustees are responsible for determining the market value of the fund’s assets. Once the annual financial statements have been prepared, the SMSF auditor will need objective and supportable evidence showing how the property value was determined.
Getting this information together early can make the annual audit considerably smoother.
How Should an SMSF Property Be Valued?
Trustees can choose to engage a qualified independent valuer to determine the property’s market value.
This is particularly worth considering where the property represents a significant proportion of the SMSF’s overall assets or where its market value is difficult to establish.
An independent valuation isn’t the only option. Where trustees determine the value themselves, however, they need sufficient evidence from multiple sources to support the figure used.
For property, that evidence might include:
- Recent comparable sales – generally at least three properties that are genuinely comparable in terms of factors such as location and size.
- A real estate agent appraisal – ideally supported by details of comparable sales.
- Net income yields for commercial property – although this will generally not be sufficient evidence on its own.
The ATO also provides useful guidance for trustees in its Guide to valuing SMSF assets.
The key point is that the valuation shouldn’t simply be an estimate. Trustees need objective evidence that can be provided to the auditor if requested.
What If the Property Is Leased to a Related Business?
Where an SMSF owns property that satisfies the business real property (BRP) definition, it may be possible to lease that property to a business operated by an SMSF member or another related party.
But just because the arrangement is permitted doesn’t mean trustees have complete flexibility over the rental terms.
A related-party lease needs to operate on arm’s length, or commercial, terms. In practical terms, the arrangement should look like one the SMSF would reasonably enter into with an unrelated tenant.
A useful question for trustees to ask is: would we agree to these same lease terms if the tenant had no connection to the SMSF members?
This includes making sure the rent reflects market conditions and is supported by appropriate evidence.
What Will the Auditor Want to See?
Where an SMSF property is leased to a related party, trustees should be ready to provide evidence showing that the arrangement is genuinely operating on commercial terms.
This will generally include:
- A properly documented lease
- A rental appraisal obtained when the lease was entered into
- Evidence that both parties are actually following the terms of the lease
- Where an earlier lease term has expired, evidence that the new terms have been reset to market value and supported by an updated rental appraisal
Having a lease document isn’t enough on its own. What happens in practice should also be consistent with the agreed terms.
For example, if the lease requires a particular amount of rent to be paid at specified intervals, the fund’s records should show that this is actually happening.
Don’t Wait Until the Auditor Asks
Your SMSF’s 2026 audit may still be several months away, but that doesn’t mean you need to wait before getting the supporting documents together.
Gathering comparable sales, property appraisals, lease documents and evidence of rental payments now can save time later and reduce the risk of delays when the audit gets underway.
This is particularly important for funds holding property because some evidence can be harder to obtain retrospectively.
If your SMSF owns property particularly where it is leased to a related business now is a good opportunity to check that your valuation evidence and lease documentation are up to date. Preparing early can make the annual audit much more straightforward for both trustees and the fund’s auditor.