ByAintree Group

Warning On SMSF Asset Valuations

The ATO has issued a warning to trustees of SMSFs about sloppy valuation practices.

ATO data analysis has revealed that over 16,500 Self Managed Superannuation Funds (SMSFs) have reported assets as having the same value for three consecutive years. With many of these assets residential or commercial Australian property, you can forgive the ATO for being incredulous.

For trustees of SMSFs, where asset values are consistently reported at the same value, it’s likely your SMSF will be flagged for closer scrutiny by the ATO.

The value of assets in your SMSF impacts on member balances and by default, can impact:

And, as we move closer to the implementation of the 30% tax rate on $3 million superannuation balances, valuations will be very important for anyone with a member balance close to or in excess of $3 million.

If the asset is an in-house asset, for example a related unit trust, then an accurate valuation is essential to ensure the fund remains within the 5% in-house asset limit. If the value of in-house assets rises above 5% of total assets, the asset/s need to be sold to bring the limit back below 5%.

Valuing at market value:

Each year, a valuer must value the assets of your SMSF and provide evidence to your auditor. Broadly, market value is the amount that a willing buyer of the asset could reasonably be expected pay to acquire the asset from a willing seller. It’s a common sense test that looks at the value you could reasonably expect to achieve for an asset.

If your SMSF holds collectible and personal use assets, a valuation must be performed. This is usually by a qualified independent valuer on disposal. This does not necessarily mean that an independent valuation needs to be completed every year. But, at least every three years would be prudent.

If you are not utilising an independent valuer, you will still need to make an active assessment based on market conditions. For example, if you hold artwork and the artist who created your investment artwork died, has this changed the value? Are the primary and secondary markets for the artwork transacting at a higher value? Leaving the value of the asset at its acquisition price calls into question the rationale for acquiring the asset. If the asset is unlikely to add any value to your retirement savings, then should it be held in your SMSF?

In most cases, the ATO require trustees to value an asset based on ‘objective and supportable data’. This means that you should document the asset being valued, a rational explanation for the valuation, and the method in which you arrived at it.

Valuing real property:

You don’t need to get commercial and residential real estate valued by an independent valuer. It is a good idea to have a written independent valuation from a valuer or estate agent undertaken if:

  • There have been significant changes to the property, the market, or the property is unique or difficult to value.

If you are completing the valuation yourself, ensure that you document the time period the valuation applies to. Also, document the characteristics that contribute to the valuation. You should also access credible sales data either on similar properties in the same suburb that have sold recently or from a property data service. We recommend you use more than one source of data.

The estimates on a lot of online property sales sites are general in nature and not reliable for a valuation of a specific property. Your valuer can use the average price change for the suburb as supporting evidence of your valuation.

For commercial property, you must support the valuation with net income yields. If related parties are tenants, provide evidence that they pay a commercial rent comparable to the market and that the rent keeps pace with market changes. An example of this is if your business leases a commercial property owned by your SMSF.

Valuing unlisted companies and unlisted trust investments:

Valuing unlisted companies and unlisted investments can be difficult. The financials alone are not enough. If your SMSF invested in an unlisted company or unit trust shares, trustees should base their initial decision on the asset’s value, growth potential, and income. If you assessed the market value before investing, valuing the asset annually should be straightforward.

The difficulty for many investors is that in unlisted companies or trusts. The initial investment was broadly equivalent to the cash requirements of the activity being undertaken.

Generally, the starting point is the value of the assets in the entity and/or the consideration paid for the shares/units. For widely held shares or units, this is the entry and exit price.

Where property is the only asset, then the valuation principles for valuing real property are likely to apply.

Where there is no reliable data or market:

We’ve seen a few scenarios where the assets purchased or created by the SMSF have no equal or there is no market. You will only know the true extent of the value when the asset is realised.

These unusual items default to either a professional valuation or a viable market assessment. This might be a derivative of the purchase price or data from a related market.

Valuations and the impending Division 296 tax on superannuation earnings:

The value of assets will be particularly important for those with superannuation balances close to or above the $3 million threshold for the impending Division 296 tax on fund earnings. Because the tax will measure asset values and tax the growth in earnings above the $3 million threshold, accurate valuations will be important. This will ensure that the fund does not pay tax when it does not need to. It will also reduce the likelihood of anomalies artificially inflating tax payable.

If you’d like more information or assistance, please contact our superannuation team here.

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your financial advisers.

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