Unsure of what the valuation guidelines are for your self-managed superannuation fund (SMSF)? With the end of the financial year fast approaching, we have compiled a guide on what you need to know about asset valuation – a process that became mandatory for all SMSFs from the 2012-13 income year as SMSFs are now required to use market value reporting for all their financial accounts and statements.
What is market value?
“Market value” means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:
- the buyer and the seller dealt with each other at arm’s length in relation to the sale
- the sale occurred after proper marketing of the asset, and
- the buyer and the seller acted knowledgably and prudentially in relation to the sale.
What are the valuation requirements?
There are a few situations outlined below where SMSF assets must be revalued in a particular way (see table on the following page).
When does a valuation need to occur?
The ATO does not require SMSF trustees to undertake an external valuation for all assets each year. For instance, assets such as real property may not need an annual valuation unless a significant event (i.e. natural disaster, market volatility, macroeconomic events or changes to the character of the asset) occurred that has created the need to review the most recent valuation.
On the other hand, assets such as cash, widely-held managed funds and listed securities can be valued easily each year and should be valued at the end of each financial year. It is typically easy for auditors to value shares, managed funds and other listed investments because they can obtain daily valuations online (the value for listed securities, for instance, are
easily obtainable from the security’s approved stock exchange) but SMSFs with real estate, exotic assets or investments in private companies or trusts will require additional work from auditors.
Who can value your assets?
Generally, the valuation can be undertaken by any appropriate person provided it is based on objective and supportable data. Depending on the situation, appropriate valuers may include a registered valuer, a professional valuation service provider, a member of a recognised professional valuation body, or a person without formal valuation qualifications but who has specific experience or knowledge in a particular area.
In certain cases however, valuations must be undertaken by a qualified, independent valuer. The ATO recommends you use a qualified, independent valuer if:
- an asset represents a significant proportion of the fund’s value, or
- the nature of the asset indicates that the valuation is likely to be complex.
- In the case of collectables and personal use assets, the valuer should be a current member of a relevant
professional body or trade association such as the Australian Antique and Art Dealers Association, the Auctioneers and Valuers Association of Australia and the National Council of Jewellery Valuers. For real estate, valuations can be undertaken by a property valuation service provider – including online services or a real estate agent.
Why pay for a valuation?
Valuations are worth every cent as it is often the fastest and simplest way of ensuring your fund is complying with super laws and taking advantage of the full array of tax concessions available. The cost of not complying with super laws is more costly – penalties for not valuing assets at least once a year can be exorbitant.
Trustees should keep appropriate records of how valuations were determined, so they can be readily verified if required. As part of its compliance processes, the ATO may review an SMSF valuation and ask for evidence of the valuation method to determine if the valuation is acceptable or not. Valuations prepared by qualified, independent valuers are less likely to be challenged by the ATO. Consult this office if you are unsure of your obligations and responsibilities when it comes to SMSF asset valuations.
|Situation||What you need to know||Valuation requirement|
|Preparing financial accounts and statements||Assets should be reported at market value.||Based on objective and supportable data|
|Collectables and personal use assets – acquired after July 1, 2011 and transferred or sold to a related party after that date||A collectable or personal use asset is an investment in: a. artwork
|Qualified, independent valuer|
|Collectables and personal use assets – acquired before July 1, 2011 and transferred or sold to a related party before 1 July 2016||Transfer must be made at arm’s length price* that is based on objective and supportable data|
|Collectables and personal use assets – acquired before July 1, 2011 and transferred or sold to a related party from July 1, 2016||Qualified, independent valuer|
|Acquisitions or disposal of an asset from or to a related party of the fund||SMSF trustees often transfer personally held assets into their SMSF but there are limited types of assets that can be sold or transferred into your SMSF:
None of these assets can be transferred into your fund unless the transfer is done at a fair arm’s length market value. Formal valuations are important to prove that the sale price was market value, especially when the asset transfer is an in-specie contribution into your fund. Consult this office on the legalities of in-specie contributions. The ATO devotes special attention to transactions between members of the fund, relatives or related parties as they all have to be on arm’s length market terms.
Acquisition price should reflect market value based on objective and supportable data.
Sale price should reflect a true market rate of return
|Determining that the market value of in-house assets does not exceed 5% of the value of the SMSF’s total assets||In-house assets refer to investments in, loans to or leases with related parties. However, there is a rule that your SMSF’s in- house assets must not exceed 5% of the market value of the fund’s overall assets. To verify this however, your auditor has to sign off every year on the most up-to-date market value of the in-house assets as well as all the SMSF’s assets.||Based on objective and supportable data|
|Determining the value of assets that support a super pension or income stream||
All super fund assets must be revalued at the date the pension commences, with ongoing pensions requiring the member’s account balance to be determined at July 1 every income year. The ATO has shone a spotlight on exempt pension income claims and it is becoming increasingly common for the ATO to review pension funds and ask for copies of valuations used at pension commencement. Risk having your exempt pension income
claim disallowed if the ATO discovers your assets have not been revalued to market value with appropriate evidence to match.
|Based on objective and supportable data|
*Arm’s length means the price should be the same as it would have been had the parties to the transaction not been related to each other.
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