.png)
A SMSF intends to sell its residential rental property to its members. A LRBA is in place. The members are seeking funding from a financial institution via a broker who has obtained a CoreLogic report over the property for an assessed value. The purpose of the report states as "mortgage security (refinance)". The report states a Risk Analysis for Property Risk as 419/1000, and Market Risk as 120/1000. The disclaimer states that the report is not an accurate representation of the Market Value, as defined. Furthermore, the report specifically refers to its user as being the "mortgage insurance provider". The SMSF members want to rely on this report to enter into a "Buy" contract at the assessed value.
My issues:
1 ATO accepts Forecast Standard Deviation, FSD, of not more than 10% from RP Data report for market value. The Property Risk of this report goes beyond that level
2 the report is prepared specifically for the purpose of mortgage insurance, instead of a related party purchase
3 the members are wanting to reduce the assessment of stamp duty and reduce the borrowing as well. They are at liberty to choose the lowest possible sale value, provided it is at "arm length". How many independent valuations should they obtain so as to strike a balance
The trustees/members of the SMSF want me to give them clearance to proceed based on this report. I am aware that an independent real estate agent has provided a market appraisal, based on open market, at $1,250,000. I am uncomfortable with this proposal.
Can I have a second opinion please. I attach extracts of the disclaimer.
Hi Stephen
Thanks, I can see that the FSD requirements are as per a Heffron presentation. I assume they got that information from the ATO. It would be great to see that information from the ATO if anyone has access to it.
In relation to sales history my view is one sales history would be sufficient if there is an appropriate explanation as to why it has been relied upon.
Thanks
SMSF AAA
Hi Stephen
Thanks. I am not aware that the ATO has made a statement re the 10% deviation re the RP Data report. If you can share details on this that would be great.
The ATO has a guide re valuations at:
My view is that as the property is being sold to a related party and I assume it represents a significant proportion of the Fund's assets then you cannot rely on the RP Data report to determine its value (based on the reasons you outline).
Further in my view you do not have to obtain more that 1 valuation however for your example it should be prepared by an independent qualified valuer. As you are aware that an independent estate agent has provided an estimate of value as $1,250,000 then I cannot see any ability to be able to rely on the RP Data valuation of $1,075,000.
Per the ATO in their valuation guide an extract is:
"A valuation undertaken by a property valuation service provider, including online services or real estate agent, would be acceptable. However, the valuation must stipulate the supportable data. For example, in the case of a real estate agent appraisal or online report, the valuation should list the comparable sales it relied on.
Under the super laws, business real property can only be acquired from a related party of the SMSF at market value. Disposals of real property to a related party of the SMSF must also be conducted at arm's length."
Further the ATO states:
"When valuing real property, relevant factors and considerations may include:
the value of similar properties and recent comparable sales results
the amount that was paid for the property in an arm's length market – if the purchase was recent and no events have materially affected its value since the purchase
independent appraisals from a real estate agent (kerbside)
whether the property has undergone improvements since it was last valued
the rates notice (if consistent with other valuation evidence)
for commercial properties, net income yields (not sufficient evidence on their own and only appropriate where tenants are unrelated)."
Based on the above the trustees this also supports that they cannot rely of the RP Data report and further work is required to obtain an appropriate valuation.
Thanks
SMSF AAA