A critical function for self-managed super fund (SMSF) trustees is the ability to value their fund’s assets appropriately.
Not only is it important that the assets in your fund are recognised at their market price for tax purposes, but correct values are necessary when you start a pension or want to sell the asset. (Read: Why valuations are worth every cent [1].
To make sure you get it right, the Australian Taxation Office (ATO) has just issued revised guidance on this subject, replacing a document they published way back in April 2003.
Use market values
In the new document, the Tax Office says it would prefer SMSF trustees to always use net market values for the valuation of all assets. Under the current super laws, there are some occasions when it’s not compulsory to use an asset’s market value.
There are eight key events that you need to consider:
1. Preparing financial accounts and statements
Regulations were put in place in early August that require the asset values used in your fund’s financial statements to be valued using objective and supportable market values; this new change applies for the 2013 financial year.
2. Determining the minimum and maximum pension payments
Each year and for the financial year when a pension commences, (you only need to work out the maximum for Transition to Retirement pensions), you must use the net market value of the assets supporting the pension to determine the payments. However the ATO says that whilst the valuation needs to be objective and supportable, “an annual valuation is generally not required unless there has been a significant change in the value of an asset.” Refer below for what the ATO means by the term ‘significant change’. A significant change is a material alteration in the value of an asset caused by:
- a natural disaster;
- macro-economic events;
- market volatility; or
- changes to the character of the asset.
2. Annual in-house asset test
If your super fund holds in-house assets (Read Avoiding in-house assets [2] to find out more about this term), then each year on 30 June you need to perform a test to see if more than 5% of the assets of your fund are in-house assets. If your fund holds more than 5%, then corrective action has to be taken during the next financial year. As with minimum and maximum pensions, the ATO says that an annual valuation isn’t required for this test unless a significant event has occurred, but your valuation must be based on objective and supportable data.
3. Acquiring an asset from your fund’s related parties
These transactions must use an asset’s market value on the day the transaction occurs.
4. Disposing of assets to your fund’s related parties
This must be done on an arm’s-length basis using objective and supportable data (Read Arm’s length transactions [3] to find out more.)
5. Acquiring assets from and disposing assets to your fund’s unrelated parties
This must be done on an arm’s-length basis.
6. Collectibles and personal use assets acquired before July 2011 between a related party
Before July 2016, this must done on an arm’s-length basis using objective and supportable data. From July 2016, this must be done at the market value determined by a qualified independent valuer.
7. Collectables and personal use assets acquired on or after July 2011
These must be done at market value prepared by a qualified independent valuer.
Who can value your assets?
When examining if you’ve used an acceptable valuation, the ATO will want to see who valued the asset. A valuation could be prepared by a:
- registered valuer;
- professional valuation service provider;
- member of a recognised professional valuation body;
- person without formal valuation qualifications, but who has specific experience; or knowledge in a particular area.
In some cases you’ll need to use a qualified independent valuer. In the ATO’s view, this is someone “holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community” which can be “demonstrated by being a current member of a relevant professional body or trade association.”
As the valuer must be independent, they can’t be a related party of your super fund or to you or any other members of your fund.
The Tax Office wants all valuations to be fair and reasonable. This means they need to:
- take into account all relevant factors and considerations;
- be completed in good faith using a rational and reasonable process; and
- can be explained to a third party.
Important information: 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. Anyone should consider the appropriateness of the information in regards to their circumstances.
Also in the Switzer Super Report
- Peter Switzer: The market game changer is arriving [4]
- Lance Lai: All is not well in the global markets. Here’s why [5]
- George Boubouras: There’s value in these cyclical stocks [6]
- Rudi Filapek-Vandyck: The broker wrap: double the downgrades [7]
- Paul Rickard: Road test: a product for the cautious [8]