Valuations for SMSFs

The ATO has recently released an updated the message of accurately valuing SMSF assets. As the ATO has stated on their website, ‘asset valuation is a key component in preparing meaningful SMSF financial reports’. As the market goes up and down, impacted by the outside world, this means that the assets inside your SMSF also change to the market. 

 ATO guidelines for valuing SMSF assets

The ATO’s guidelines on valuing SMSF assets set out strict requirements for valuations, however the ATO has noted that a reasonable estimate value may be appropriate for TBAR purposes for funds with unlisted assets. 

The ATO’s updated version of the guidelines for valuing assets in superannuation, includes why assets need to be valued, who can value them and guidance on general valuation principles. The web-based guideline replaces the previous Superannuation Circular 2003/1.

Unsurprisingly, the ATO has stated that they will generally accept a determination of an asset's value, as long as:

• it does not conflict with this guide or Market valuation for tax purposes
• there is no evidence that a different value was used for the corresponding capital gains tax event
• it was based on objective and supportable data.

 Why do assets need to be valued?

Trustees obligation including being in line with the law and providing accurate and up-to-date valuations.

A valuation of assets is required to confirm your SMSF has complied with relevant super law for:

• preparing the financial accounts and statements of the fund
  
• acquiring assets between SMSFs and related parties
• investments made and maintained on an arm's-length basis
• disposing of certain collectables and personal use assets to a related party of the fund
• determining the market value of an SMSF's in-house assets as a percentage of all assets in the fund
• determining the value of assets that support a member's super pension
• determining the value of existing retirement income streams at 1 July 2017 as they will be counted towards the transfer balance cap
• determining the value of new retirement income streams on or after 1 July 2017, when they will be counted towards the transfer balance cap
• determining the market value of assets that are eligible for transitional capital gains tax (CGT) relief in the 2016–17 income year
• determining the market value of assets supporting members' retirement phase and accumulation accounts for the purposes of calculating the members' total super balances.

 Who can value assets?

Depending on the situation, a valuation may be undertaken by a:

• registered valuer
• professional valuation service provider
• member of a recognised professional valuation body
• person without formal valuation qualifications but who has specific experience or knowledge in a particular area.

In certain instances, the law requires valuations be undertaken by a qualified, independent valuer.

 When you need a qualified independent valuer?

The super laws require a valuation by a qualified independent valuer in the following circumstances:

• from 1 July 2011 for any collectables and personal use assets that were acquired on or after 1 July 2011 and disposed of to a related party
• from 1 July 2016 for any collectables or personal use assets that were acquired by the SMSF before 1 July 2011 and disposed of to a related party after 30 June 2016.

You should also consider the use of a qualified independent valuer if either the:

• value of the asset represents a significant proportion of the fund's value
• nature of the asset indicates that the valuation is likely to be complex or difficult.

 Unlisted assets

For each investment, the fund’s auditor will risk-assess the evidence available and whether it is appropriate and reliable. This may include obtaining independent verification.

 The level of evidence required to substantiate the investment may depend on the proportion of the fund allocated to the investment/loan. For example, the auditor may require a greater level of confidence to confirm whether a loan of $500,000 is recoverable compared to a similar loan with an outstanding balance of $20,000.

 In assessing the valuation of these assets, the types of supporting evidence your fund’s auditor would look for include:

• Audited financial statements of the unlisted trust or company
• Financial statements including evidence that underlying assets are valued at market value
• Independent valuations of the underlying assets of the trust or company
• A share/unit price based on recent sales or purchases between unrelated parties
• Written verification from a director or trustee of the trust or company who is not a related party of the SMSF

On the flipside, an auditor would usually seek further information from you where:

• The trust or company provided unaudited financial statements with no evidence of the underlying assets being at market value
• The fund trustees have provided their assessment of the underlying asset of the unlisted investment
• Written verification has been provided from the trustee or director of the trust or company who is a related party of the fund

TBAR lodgement and valuations

The ATO stated that it is acceptable to use a reasonable estimate value to calculate the value of a pension that is commenced partway through the year. For example, where a fund is required to report quarterly, and a pension is started 1 July, the ATO understand that trustees will be unable to access the required documents to value unlisted assets.

Although the reasonable estimate value can be used in the above-described circumstance, the reasonable estimate approach is not appropriate for other valuation requirements (SMSF EOY accounts, calculating ECPI).

How can Tax Controversy Partners help you?

At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and legislation and based on our understanding of likely ATO actions. 

Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.