1 July 2017 was a major date when it comes to SMSF changes and accurate valuations are key to compliance with many of the changes. Unsure of what the valuation guidelines are for your self-managed superannuation fund (SMSF)? I have compiled a guide on what you need to know about asset valuation as SMSFs are now required to use market value reporting for all their financial accounts and statements. For Financial Year 2016/17, getting the value right is more important than ever, especially with the impact of the new super changes. Getting it wrong may impact on the fund’s compliance and whether you can make non-concessional contributions or commence a pension.
What is the market value of an asset?
“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 knowledgeably and prudentially in relation to the sale.
How do I go about determining market value?
For assets such as cash, term deposits, widely-held managed funds, ETFs and listed securities, these can be valued easily each year and should be valued at the end of each financial year. It is typically easy for trustees to value shares, managed funds and other listed investments because they can obtain daily valuations online. Here are a few links that may be helpful for historic share prices or for companies that have been delisted from the exchange.
Just always remember to add .ax to the share code e.g. TLS.AX
DeListed carries historical share prices for many listed and delisted companies at this website, including prices for the former names of such companies. The prices go back as far as 1986 in some cases and include to mid-year 2009.
SMSFs with real estate, exotic assets or investments in private companies or trusts will require additional work from auditors. from an appropriately qualified person, such as an independent registered valuer or real estate agent.
The following guide provides an outline of what is required to help in valuing fund investments where market values are not readily available.
Real estate / Property valuations
Property needs to be valued at market value every year at 30 June, but the ATO does not require SMSF trustees to undertake an external valuation for all assets each year but is recommended at least every 3 years. 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.. Valuation of real estate can be undertaken by anyone, including the trustee(s), if suitably qualified, as long as it is based on objective and supportable data.
The following would generally be considered adequate audit evidence:
- Real estate agent valuation (appraisal letter which they back up with comparable sales or listed properties)
- Formal valuation from a qualified and independent valuer (compulsory if for commercial properties leased to related parties)
- Valuation from trustees (with evidence of market valuation such as recent sales or online valuations). We recommend at least a comparison with values of 4-6 comparable properties if doing it yourself.
- The latest cost-effective option is valuations from online real estate services like RPData can be used so ask your Administrator if they have access to this service.
Is the rent at commercial terms?
The fund’s auditor may also request evidence to show the rental income received by the fund is paid on commercial terms, such as
- Annual Rental Income & Expenses Schedule from your real estate management agent covering the lease of the property during the year. Some charge $30-$50 for this but if you say it is offered free on your other properties you can squeeze them!
- Lease agreement organised via a real estate agent or other written lease agreement (see Is your SMSF leasing commercial property: Tips and traps).
- Rental appraisal by an independent real estate agent (for related party transactions)
- Supporting evidence such as For Rent listing or tenants notice to end contract and an explanation from the trustees if no rental income was received during the year
Units in unlisted trusts or shares in unlisted companies
It can sometimes be tricky to obtain reliable audit evidence to support the value of unlisted investments. The company or trust may not be required to value their assets at market value and trustees must consider the value of the assets held by the entity. For example, where the trust or company holds property, any value should be based on the guidelines for real estate outlined above. Sometimes the other owners (individuals. companies or family trusts) in the trust do not require the same degree of scrutiny and can refuse to incur the extra costs to to suit the SMSF requirements. You will need to work around this issue with your fund sometimes picking up the expense.
Another consideration is that unlisted entities may not be required to get their financial statements independently audited, which make them less reliable from an audit perspective.
The following would generally be considered adequate audit evidence:
- Audited financial statements of the entity
- A share/unit price based on recent sales or purchases of the shares or units
- Financial statements of the entity, with evidence that the underlying asset is valued at market value recently.
- Independent valuation of the underlying assets of the entity
Loans to related and non-related parties
Firstly your fund is not meant to lend money to a fund member or relative of the member under any circumstances.
The market value of a loan is determined by its recoverability which could be:
- Evidence of repayment of the loan (if applicable)
- Details on the financial position of the borrower confirming their ability to repay (e.g. net asset position, sources of cash)
- Details and value of security held as collateral for the loan (if applicable)
Collectables and personal use assets
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. Collectable and personal use assets cover items such as artwork, memorabilia, collectable coins and bank notes, wine and vintage cars. Metals such as gold and silver are only considered collectable items if their value exceeds the value of the metal based on its weight.
If a trustee holds bullion at a storage facility or at the mint the documentation provided by these places will act as proof of the holding to the auditor.
If trustees choose to store their bullion at home or their business premises the auditor will require a resolution as at 30 June of each year which confirms the following;
• Inventory listing of the type(s) and quantities of metal held.
• Confirmation the asset is stored securely and not available for personal use by the members.
• Confirmation that the metal(s) are insured for the correct value.
Valuation in this format is less costly than holding in the form of a collectible. The market value can easily be verified to live spot prices which are readily available on a number of Bullion dealers’ websites.
Who needs this information
Your administrator or accountants needs this information to complete the annual accounts. Apart from preparing your annual accounts, you will also need to value assets:
- if your fund has investment dealings with, or sells assets to, a related party
- if you need to determine the percentage of in-house assets in your fund
- on the commencement day of a pension
- if your fund transfers a collectable or personal use asset to a related party – in this case the valuation must be done by a qualified independent valuer.
So who’s watching me?
Your fund’s independent auditor (your accountant may hide this person fairly well in the background but you should make yourself know to them and make it a team relationship not an adversary one). It is their responsibility to be making checks as to whether the annual financial statements properly reflect the market value based on objective and supportable evidence. they may request you get further evidence if not satisfied and they can issue a qualified audit opinion. Any qualified opinion will be reported by the auditor to the ATO.
On assessing the auditor’s report if the ATO is not satisfied that the assets are not recorded at market value in the fund’s financial accounts a fine of 10 penalty units (currently $2,100) per trustee can be imposed.
ATO Valuation guidelines for self-managed superannuation funds
The ATO provides guidelines here on their website to assist SMSF trustees when valuing assets for superannuation purposes.
For SMSF members affected by the $1.6m transfer balance cap, an appropriate valuation is also essential for FY 2016/17 to determine whether the member’s pension balance(s) may exceed the cap and for purposes of the CGT cost base reset.