SMSF valuations: Common mistakes and what really matters

Why do valuations matter so much for an SMSF?

Valuations are important for a number of reasons. The first of this would be total super balance. So total super balance is a measure of all of your superannuation. And it determines how much, how much you can put in in terms of contributions. So obviously the higher the value, the less able you may be to be able to make contributions, the lower, the more able. So it is important to get it right. Obviously valuations also impact your member balance. So if you’re in pension phase, it impacts how much you have to draw down as a minimum pension each year. If transactions aren’t at market value and aren’t done on an arm’s length basis, then the ATO introduces or could deem the income to be non-arm’s length income, which is taxed at a whopping 45%. Nobody wants to pay 45% tax. And then lastly, with the new tax coming in, the Division 296 tax, obviously the measure of your total super balance determines whether you’re in or out of the system. So it is critical for those measurements.

What is commonly misunderstood about the term market value?

I think it’s not necessarily what market value is, but for SMSF purposes, the requirements to kind of meet that market value threshold and provide the appropriate amount of documentation and supportable data to verify that something is at market value. And just the general frequency that we’ve got to do it, it is an annual requirement. And so all that data needs to continually be provided every single year, but it needs to be relevant. So even if a market value hasn’t moved from year to year, you do need to continue to support why that has occurred and make sure you’ve got all that documentation for your auditor.

Do the ATO and auditors care more about how a figure is determined than the precise figure?

Yeah, it’s the process. You know, it’s, I mean, obviously it does need to be the right number. The auditor needs to ensure that it is fairly stated, but very much so because I mean, valuation is such a, it depends kind of answer. Every situation is unique, circumstances are unique. So it is important to document clearly the process thought process of the trustees, how they arrived at that number, because that’s what will be able to be checked, verified, supported by data.

For property valuations, what sort of documentation is seen as acceptable or not?

There are lots of different ways that you can get that evidence to support a market value, including like property is probably a big one where it doesn’t have to be that licenced valuation that can often cost a lot of money. So a letter from a real estate agent, a local real estate agent, would be acceptable provided they had that expertise to be able to provide that valuation. But it’s important that it does set out that valuation methodology, the reasoning as to how they’ve come to that valuation. It is no longer acceptable to have a one sentence on a letterhead that says, I think that your property is valued at this. It does need to be supported by other information, valuation methodology, and comparable sales.

How recent do property valuations need to be?

Certainly the ATO’s view is sort of 3 months either side of the end of the year. It probably also then depends upon if there’s been market movement. So I think most trustees and auditors are happier that if it’s outside that timeframe, so long as you’ve supported what might have happened in that local market in that period of time, you can then almost re-engineer or backwards engineer what it is. But again, supported by verifiable data, not just, I think it’s gone up 15%.

How should trustees support a property valuation when comparable sales are scarce?

That’s harder because obviously comparable sales is the most common way of supporting a property valuation. I mean, if there’s truly been none, certainly the ATO view is you probably need a sworn valuation. And that can be very difficult. And certainly I know we’ve seen clients in farming properties in regional areas where there aren’t a lot of sales or farms are passed from father to son and nothing ever gets sold. Your sworn valuation is probably the way you have to go.

Why do off-market share transfers create valuation and compliance issues for SMSFs?

I think the form itself creates sort of a bit of a problem for the fact that it does allow you to put two different dates on it. So the main issue that we’re seeing with those off-market transfer forms is the date, when the date of transfer and the date of signing don’t align to each other. If that is, if the off-market transfer form is the only document that’s been executed to affect the transfer between two parties, then it’s the date of signing that we take to be that CGT date and therefore the date that you need to ascertain the market value of that transfer. Often we see people putting in the market value on the transfer date that they’ve signed selected, which can quite often be a couple of days different. We’ve seen it be a few weeks different. And where the market has moved and that price is no longer the market value on that date, then you’re no longer dealing with yourself at, on arm’s length terms, and that can potentially create gnarly issues. Fortunately, the ATO have recently updated their TR 2010/1 ruling, which allows you to replace the market value that you’ve used.

So even if the form has been completed incorrectly, you can actually just put the correct market value into your accounts, tick that box, and there’s no issues from that perspective. So that’s been a really good sort of change from the ATO to help people out because we see more often than not that these forms just aren’t completed correctly.

For unlisted shares or private company investments, what’s the minimum level of documentation?

That’s a hard one because it really is an it depends because they are quite different. I split private entities into really two categories. There’s the property owning entities, companies or trusts. Value is then probably heavily dependent on the asset. So you go back to your property valuation principles to work out the market value of shares or units. But if the entity is a trading company or runs a business or does something else, it makes it more difficult. If those shares are traded, so it’s more widely held, then obviously the value of the more recent trades can give you market value because that’s what somebody will pay for the shares. But if it’s not widely traded or it’s not traded at all, it makes it very difficult. And certainly in very extreme circumstances, you may actually need to go and get a business valuation. And that’s an expensive exercise for trustees. So you need to think about what the company does or the trust does, and then where is the value in that, in those operations.

If a valuation is challenged, what documentation should trustees have to support it?

Comes back to the documentation. The ATO’s little catchcry on valuations is objective and supportable data. So, so long as the auditor can see what it is you’ve relied on and how you’ve relied on it, generally that will be accepted. I always say that, you know, auditors aren’t necessarily smarter than anyone else unless they have some inherent knowledge about a particular asset, investment, location, whatever. If you set out a logical process, you can explain it to someone else, you’ve got the documentation and the data to back it up, then generally it is the process that’s important far more than the actual value.

If trustees remember just one rule about SMSF valuations, what should it be?

I think it’s about that documentation. Your accountant’s going to ask for it, the auditor’s going to ask for it. It’s perfectly fine for a trustee to have an opinion, and quite often we find trustees have a certain level of expertise about the asset that they’re talking about, especially with property. It’s not enough to say, based on my expertise, it’s this. You do really then need to go and get that data, that verifiable information, and sort of work through those data sources to make sure that an auditor can come along and agree with that valuation methodology and that logic. As we’ve said, it’s not about the number, then it’s not about questioning the number. It’s about questioning that methodology and that documentation that sits behind it to go, does this properly support that information?