SMSFs are required to value their assets at market value every financial year. This is easy enough for listed assets, such as equities, but it’s not so straightforward for unlisted assets like commercial property or collectables.
The Australian Taxation Office (ATO) defines market value as the following:
It is the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if all the following assumptions were made – that the:
- Buyer and the seller dealt with each other at arm’s length in relation to the sale.
- Sale occurred after proper marketing of the asset.
- Buyer and the seller acted knowledgeably and prudentially in relation to the sale.
Why are valuations important?
Valuations are used for many things in the day-to-day running of an SMSF, not least of which is in preparing an SMSF’s annual financial statements. An accurate valuation is also required to make sure your SMSF has complied with the relevant superannuation laws around SMSFs acquiring assets from related parties, and investments made on an arms-length basis.
A commercial property used by a viable business that is acquired by an SMSF for $1, for example, has not been acquired at the correct market valuation or on an arms-length basis.
If it had been acquired from a family member at less than its market price then the SMSF has also likely contravened the related party transaction requirements as well.
So how should SMSFs go about valuing their assets? Here’s our five-step guide:
Step 1: Assess your SMSF’s holdings
Get the valuation of your listed assets in order – which is likely to be as simple as assessing their trading value on the last day of the financial year. Once you’ve done that you should have an understanding of the proportion of your fund that is represented by non-listed and listed assets. Even if you are not sure of the current value of your unlisted asset you will recall the price you paid for it and that should give you some idea of whether or not it makes up a significant percentage of your fund.
Step 2: Work out whether you need to pay to get an asset professionally valued
This will depend on what proportion of the fund the asset takes up or if the nature of the asset indicates the valuation is likely to be complex – for example, a boat or a boating club membership. If most of your SMSF is invested in a property, then you need to seriously consider a professional valuation for that asset.
Step 3: Get the asset valued
The ATO says it is more about the valuation and the data used to obtain the valuation than the valuer themselves. Unlike auditors (which need to be approved by the Australian Securities and Investments Commission) you only need to use a qualified independent valuer in certain instances (see Step 4). Otherwise a valuation can be conducted by one of the following:
- A registered valuer.
- A professional valuation service provider.
- A member of a recognised professional valuation body.
- A person without formal valuation qualifications but who has specific experience or knowledge in a particular area.
Step 4: Use a qualified independent valuer if required
In many instances collectibles and personal use assets will need to be valued by a qualified independent valuer. Collectibles and personal use assets include (but are not limited too) artwork, jewellery, antiques, coins, medallions or bank notes, rare folios, manuscripts or books, memorabilia, wine or spirits, recreational boats, and memberships of sporting or social clubs. As a general rule of thumb, a qualified independent valuation is probably a good idea for all collectibles.
Step 5: Get the asset re-valued as required
Sometimes, such as for real property, unless there is a major event that effects the valuation you will not need an external independent valuation every year. A new valuation will be required if the trustee believes the value of the property has been materially affected by natural disaster – or a pandemic. Just because an external valuation is not technically required every year doesn’t mean a valuation is set and forget. You should consider whether your valuations for unlisted assets are up to date and accurate every year. Your auditor may also suggest that it’s time for a new valuation when they do your accounts.
The ATO suggests the following as sources of evidence of a valuation:
- Independent appraisals from a real estate agent (kerb side).
- Contract of sale if the purchase is recent and no events have occurred to the property that could materially impact its value since the purchase.
- Recent comparable sales results.
- Rates notice (if consistent with other evidence on valuation).
- Net income yield of commercial properties (not sufficient evidence on their own and only appropriate where tenants are unrelated).
But the regulator says just one of the above on its own is not likely to provide sufficient evidence. Rather, it would be best to provide a number of these documents.
There is some relief provided to SMSFs if they have difficulty valuing assets because of COVID-19. Auditors will still be required to file a contravention report if they believe the trustee has provided insufficient evidence for an asset valuation. But if they cite COVID-19 related issues as reasons for why the trustee couldn’t provide evidence, and the ATO is satisfied that is the case, the regulator will not impose penalties on the trustee.
“Instead the trustee will receive a letter from us advising them to ensure they comply with our valuation guidelines and have supporting valuation evidence by the time of their next audit if possible, as repeated contraventions can lead to penalties,” the ATO says.
An accurate valuation of all the assets in your SMSF is crucial to ensure you maintain compliance with the relevant superannuation laws. So, make sure you don’t get complacent and follow our five-step guide.