With the ATO tightening its grip on SMSF asset valuations, trustees need to step up their game to ensure compliance and optimise their fund’s performance. Recent findings from the ATO reveal that over 16,500 SMSFs have reported consistent asset values across three years—a red flag that could attract unwanted attention.

Why Proper Valuation Matters

Accurate asset valuation is not just about compliance; it affects everything from member balances to contribution caps and tax liabilities, especially with the looming Division 296 superannuation tax on the horizon. Here’s why getting it right is crucial:

  • Impact on Contributions and Benefits: The value of SMSF assets directly influences how much members can contribute and their entitlements under various exemptions and thresholds.
  • Strategic Financial Planning: Proper valuations affect strategic decisions, such as asset segregation for pension income or assessing the fund’s ability to meet long-term retirement goals.

Navigating Valuation Challenges

Valuing assets within an SMSF isn’t always straightforward. From real estate to unlisted shares, each asset class has its nuances and regulatory expectations.

  • Real Property: While not always requiring independent valuation, significant market changes or unique properties should be assessed professionally to ensure accuracy.
  • Collectibles and Personal Use Assets: Items like artwork and jewellery need valuations from qualified independent valuers at disposal, and a prudent approach is valuation at least every three years or when significant value changes are suspected.

Valuing at market value

Each year, the assets of your SMSF must be valued at ‘market value’ and evidence provided to your auditor. Broadly, market value is the amount that a willing buyer of the asset could reasonably be expected pay to acquire the asset from a willing seller assuming that the buyer and seller are dealing at arm’s length, and everyone acts knowledgeably and prudentially. It’s a common sense test that looks at the value you could reasonably expect to achieve for an asset. 

If your SMSF holds collectible and personal use assets like artwork, jewellery, motor vehicles etc., a valuation must be performed by a qualified independent valuer on disposal. This does not necessarily mean that an independent valuation needs to be completed every year but at least every three years would be prudent. If you are not utilising an independent valuer, you will still need to make an active assessment based on market conditions. For example, if you hold artwork and the artist who created your investment artwork died, has this changed the value? Are the primary and secondary markets for the artwork transacting at a higher value? Leaving the value of the asset at its acquisition price calls into question the rationale for acquiring the asset within the fund in the first place. If the asset is unlikely to add any value to your retirement savings, then should it be held in your SMSF when you could achieve a higher rate of return elsewhere?

In most cases, the ATO require trustees to value an asset based on “objective and supportable data”. This means that you should document the asset being valued, a rational explanation for the valuation, and the method in which you arrived at it. 

Valuing real property

Commercial and residential real estate does not need to be valued by an independent valuer. But, if there have been significant changes to the property, the market, or the property is unique or difficult to value, it is a good idea to have a written independent valuation from a valuer or estate agent undertaken (their report should also document the valuation method and list comparable properties). 

If you are completing the valuation yourself, ensure that you document the time period the valuation applies to and the characteristics that contribute to the valuation. For example, a 10 year old brick four bedroom property on 640m2 of land in what suburb and any features that make it more or less attractive to a buyer, for example proximity to transport. And, you should access credible sales data either on similar properties in the same suburb that have sold recently or from a property data service. More than one source of data is recommended.

The estimates on a lot of online property sales sites are general in nature and not reliable for a valuation of a specific property. The average price change for the suburb however could be used as supporting evidence of your valuation.

For commercial property, net income yields are required to support the valuation. Where the tenants are related parties, for example your business leases a commercial property owned by your SMSF, you will need evidence that a comparative commercial rent is being paid and the rent is keeping pace with the market.

Valuing unlisted companies and unlisted trust investments

Valuing unlisted companies and unlisted investments can be difficult. The financials alone are not enough. But, if your SMSF invested in an unlisted company or shares in a unit trust, then there is an expectation that the trustees made the decision to make the initial acquisition based on the value of the asset, its potential for capital growth and income generation. That is, if you assessed the market value going into the investment, then it should not be a stretch to value the asset each year. 

The difficulty for many investors is that in unlisted companies or trusts, the initial investment was broadly equivalent to the cash requirements of the activity being undertaken. 

Generally, the starting point is the value of the assets in the entity and/or the consideration paid for the shares/units. For widely held shares or units, this is the entry and exit price.

Where property is the only asset, then the valuation principles for valuing real property are likely to apply.

Where there is no reliable data or market

We’ve seen a few scenarios where the assets purchased or created by the SMSF have no equal or there is no market – the true extent of the value will only really be known when the asset is realised. These unusual items default to either a professional valuation or a viable market assessment. This might be a derivative of the purchase price or data from a related market. 

Actionable Advice for Trustees

To avoid the pitfalls of valuation and ensure your SMSF remains compliant while maximising its financial potential, consider these tips:

  1. Regular Reviews: Conduct regular valuations to reflect current market conditions, especially if significant changes have occurred.
  2. Professional Assistance: Engage with professionals for complex valuations, such as commercial properties or unique assets, to ensure accuracy and compliance.
  3. Documentation is Key: Maintain detailed records of how valuations were determined, including any evidence used and the rationale behind the chosen methodology.
  4. Stay Informed: Keep abreast of changes in legislation and ATO guidelines to ensure your valuation practices are up-to-date.

Your Proactive Approach Matters

In the complex and ever-evolving landscape of SMSF management, staying proactive with asset valuations is more critical than ever. With strategic planning and diligent compliance, trustees can safeguard their funds against scrutiny and ensure a robust financial future for all members.

Need Expert Guidance?

Navigating the nuances of SMSF valuations can be intricate and demanding. If you’re unsure about the valuation process or need expert advice tailored to your unique situation, contact Hemisphere Accounting today.

Our team of specialists is here to help you make informed decisions that align with both regulatory expectations and your financial goals.