The law constrains SMSF trustees to use market values for fund assets in a wide range of situations. The ATO has recently released new valuation guidelines for SMSFs, and it is important that trustees are aware of these requirements, which are summarised below.
Where market valuations might be needed
The law requires market values to be obtained in a number of situations relating to SMSFs. These include:
- in preparing the annual financial statements of an SMSF, assets must be valued at market value;
- generally, SMSFs are prohibited from acquiring assets from related parties, but where the exceptions relating to listed securities, business real property and in-house assets apply, the acquisitions must be at market value;
- an SMSF must deal with other parties at an arm’s length basis. Where the SMSF is dealing with a related party, the market value of an asset may need to be determined to ensure the transaction reflects the circumstances which would apply in an arm’s length dealing;
- when a super pension is commenced, the assets which support the pension must be valued at market value at the date of commencement. This also affects the amount to be applied against the member’s transfer balance cap;
- the assets which support an existing pension must be valued at market value each 30 June. This affects the minimum pension required to be paid in the following financial year, and
- where an SMSF holds in-house assets, the market value of in-house assets should not exceed 5% of the market value of total assets held by the fund.
What is required?
In most circumstances, the ATO is more concerned with the valuation process undertaken than who conducts the valuation. In particular, the ATO requires that valuations be based on objective and supportable data. However, there are also more specialised requirements relating to collectables and personal use assets, such as artworks, jewellery, antiques, coins, stamps, wine and motor vehicles, which mandate the use of a qualified independent valuer.
Valuations should be arrived at using a “fair and reasonable” process. Generally a valuation will be considered fair and reasonable where:
- it takes into account all the reasonable factors and considerations likely to affect the value of the asset;
- it has been undertaken in good faith;
- it uses a rational and reasoned process, and
- it is capable of explanation to a third party.
Listed securities generally present no valuation problems.
Real property in SMSF financial statements can usually be valued on the basis of an “appraisal” by a real estate agent, or an online valuation service. It is usually expected that property be revalued at least every three years. A formal valuation by a licenced valuer may be needed for property transactions with a related party.
Investments in unlisted companies and trusts often present particular difficulties in arriving at a market value. Trustees should be aware that audit standards, and the outcomes of recent court cases, require that valuations of unlisted investments be completed on an annual basis and that trustees will be required to provide objective and supportable data to support valuations (in the form of financial statements or other similar documents) at least every three years. Although there may be situations where an investment is recorded by the trustee at nil or a nominal amount, the auditor of the fund is required to take reasonable steps to ensure the value of the investment has not in fact been understated. Where the trustee is unable or unwilling to provide objective and supportable data, the auditor would usually qualify their audit report in relation to the valuation of the investment. Where the investment has failed and the trustee cannot make contact with the promoter or with management, we would request a copy of the relevant correspondence for our audit file.
If you have any questions about how the new valuation guidelines effect your SMSF please contact one of our advisors.