Does your SMSF need insurance? The ATO says yes!

Co-founder of the Switzer Report
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The ATO has recently amended the Superannuation Industry (Supervision) Regulations to require trustees of self managed superannuation funds to consider insurance for their members as part of the fund’s investment strategy, and for SMSF assets to be valued at ‘market value’ for reporting purposes.

These changes were originally recommended by the Cooper Review and are now part of the ‘Stronger Super’ reform process. They haven’t received a lot of coverage, and while the impact is limited, it will mean some extra work for many trustees.

Considering insurance?

Less than 15% of SMSFs take out insurance cover for their members, which is probably why the ATO is introducing this new regulation. There are some advantages and disadvantages of taking insurance through your SMSF, which are set out in Andrew Bloore’s article ‘Should I take out insurance using my SMSF’.

While there is no requirement to take out insurance, there is also no requirement to take it out for all members of your fund. You might consider that insurance is appropriate for one member, and not for another member. For example, if your adult child was a member and they were reasonably financially independent and had no dependants, life insurance may not make a lot of sense. Conversely, it might make sense for you.

In the absence of any formal guidelines as to how you evidence your “consideration”, we suggest the following:

  • At least once a year, the Trustees meet formally to review their fund’s investment strategy;
  • As part of this review, consideration should be given as to the needs of each member, and the appropriateness or not of applicable insurance cover; and
  • The trustees record in the minutes that the “financial, investment and insurance needs of the individual members were considered”, and any arising decision (eg. “The Trustees decided to defer consideration of the purchase of life insurance for Jane”).

Assets at “market value” for reporting purposes

Put simply, this regulation now requires that the fund’s assets be valued at “market” in the SMSF’s financial accounts and statements. Most funds have been valuing, for some time, listed assets, such as shares and managed funds at “market” value in the year end accounts, so in that regard it is not new. It now formalises the practice in relation to all other assets, such as property and unlisted securities.

It follows earlier and more onerous regulations covering the sale or transfer of collectables (such as artwork) and personal use assets to related parties. Collectables and personal use assets acquired since 1 July 2011 must be valued at market by a qualified independent valuer when transferred or sold to a related party, and for those assets acquired before July 2011, this will apply from1 July 2016.

What is “market value”?

The ATO defines market value as:

“The amount that could be expected to be received in an orderly market – that is, what a willing buyer could reasonably be expected to pay to acquire the asset from a willing seller if:

  • The buyer and seller deal with each other on an arm’s length basis; and
  • The sale occurs after proper marketing of the asset; and
  • The buyer and seller acted knowledgeably and prudentially in relation to the sale.”

Will I need an external valuation?

The ATO has not mandated the use of external valuers. Generally, the valuation can be undertaken by anyone, as long as it is based on objective and supportable data. A qualified independent valuation should be obtained if the asset represents a significant proportion of the fund’s value, or the nature of the asset suggests that the valuation is likely to be complex.

Nor does the valuation have to be annual. If a ‘significant event’ has occurred since it was last valued, such as a natural disaster, changes in the character of the asset, market volatility or macro-economic events, then a valuation will be required

Property

While you are required to consider the value of the property in your fund each year, you are not required to obtain an external valuation. A recent valuation will be required if a significant event has occurred that may have impacted the value of the property since it was last valued.

The valuation can be undertaken by anyone as long as it is based on objective and supportable data. A valuation undertaken by a property valuation service provider, including online services or a real estate agent, is acceptable.

Unlisted Securities

If you are holding unlisted bonds or debentures, you can probably obtain a market value from the broker or other agent you purchased them through.

With unlisted shares in a private company, the ATO suggests that you may need to take into account several factors, including the value of the entity’s assets (translated into a ‘per share basis’), and the purchase price paid to acquire the shares.

Investments without a ready market

While it may be difficult for the fund to substantiate the reason for holding those assets, the ATO acknowledges that there may be instances where investments fail. Potentially, the asset may be recorded at nil or nominal amount.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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