“There’s significant play in the current system of valuation. What we could see here is where a trustee decides to run up the value of their property by a few $100,000 for the financial year ended 2025,” Kewley said at the SMSF Association SMSF Audit Day.

“Why would they want to do that? Say you have a property that is really only worth $2 million, and the trustee fudges the sales data a little and gets a valuation of $2.5 million. They choose the data carefully. It’s a big increase from the previous year, but they have it in their accounts at $2.5 million. The auditor believes the trust evaluation looks good enough to sign off.”

Kewley said that although it doesn’t seem like much “mischief”, issues may arise when the Division 296 tax starts on 1 July 2025, along with the first year of calculating the tax on 30 June 2026.

“The trustee might get a new valuation, and as the $2.5 million was always too high, and it comes back down to $2,050,000, what happens to that $450,000 difference? It doesn’t just disappear into the ether. It becomes a carried forward capital loss for the fund,” he said.

“The fund gets to bank that capital loss and carry it forward into the future – into 2027, 2028, [and] 2029 onwards – perhaps even for the better part of the decade, depending on the strength of the real estate market. They can avoid paying any Div 296 tax and eat up that carry-forward capital loss they have backed, so they have effectively saved themselves a massive tax bill over the coming years.”

He continued that auditors must be guarded against this strategy as it undermines the integrity of the financial statements, not only for the financial year 2025 but also onwards with the carry forward capital loss figure.

“This is why I believe that SMSF auditors should consider setting the bar at a sworn valuation for the 2025 financial year for all funds that are even close to the $3 million member balance cap,” Kewley said.

“The focus on proper valuation will drop in future income years, and any significant increase in value would be taxable for the fund in financial year 2026 and onwards, so we would have removed that trustee temptation to temporarily over-inflate asset value.”

Kewley said it is in the next couple of years that this potential strategy could become an issue, but he warns that once asset values for affected funds have been “concreted” through a sworn valuation as of 30 June 2025, the auditor should be comfortable with the trustee reverting to curbside appraisals and trust evaluations for the financial year 2026 and onwards.

“We are not rejecting regulation 8.02(b) or the valuation guidelines. As auditors, we are identifying risk and placing a higher emphasis on the evidence that is required for these funds to avoid the possibility of mischief and things going wrong,” he said.