The value of your SMSF’s investments is key to preparing the fund’s financial accounts. For the 2016/17 financial year getting the value right is more important than ever, especially with the super changes requiring accurate valuations as at 30 June 2017. Getting it wrong may impact on the fund’s compliance and whether you can make non-concessional contributions or commence a pension.
How do I go about determining market value?
The value of some of the fund’s investments may be easy to obtain, such as listed company shares and bank account balances. However, when it comes to real estate and other fund investments, market value may not be that obvious and a valuation may be required for some investments from an appropriately qualified person, such as an independent registered valuer or real estate agent.
The following guide provides an outline of what is required to help in valuing fund investments where market values are not readily available.
Real estate valuations
Real estate needs to be valued at market value every year at 30 June, but this does not mean that the trustees must obtain a formal external valuation each and every year. An external valuation would be prudent if an event has occurred that has affected the value of the property, such as a renovation, extension or rezoning. Valuation of real estate can be undertaken by anyone, including the trustee(s), if suitably qualified, as long as it is based on objective and supportable data.
The following would generally be considered adequate audit evidence:
- Formal valuation from a qualified and independent valuer (required for commercial properties leased to related parties).
- Real estate agent valuation (appraisal letter).
- Valuations from online real estate services can be used, however, it must be based on comparable data for sales of similar properties.
- Valuation from trustees (with evidence of market valuation such as recent sales or online valuations).
The SMSF auditor may request an independent valuation of the real estate. It’s not mandatory, but it’s advisable that a formal valuation is organised at least once every three years.
If the fund owns residential or commercial real estate, the auditor will also assess if the rental income received by the fund is paid on commercial terms.
Audit evidence that would be considered satisfactory:
- Lease agreement organised via a real estate agent or other written lease agreement covering the lease of the property during the year.
- Rental statements from a real estate agent covering the lease of the property during the year.
- Rental appraisal by an independent real estate agent (for related party transactions).
- Supporting evidence and an explanation from the trustees if no rental income was received during the year.
Units in unlisted trusts or shares in unlisted companies
It can sometimes be tricky to obtain reliable audit evidence to support the value of unlisted investments. The company or trust may not be required to value their assets at market value and trustees must consider the value of the assets held by the entity. For example, where the trust or company holds property, any value should be based on the guidelines for real estate outlined above.
Another consideration is that unlisted entities may not be required to get their financial statements independently audited, which makes them less reliable from an audit perspective.
The following would generally be considered adequate audit evidence:
- Audited financial statements of the entity.
- Financial statements of the entity, with evidence that the underlying asset is valued at market value.
- Independent valuation of the underlying assets of the entity.
- A share/unit price based on recent sales or purchases of the shares or units.
Loans to related and non-related parties
When a fund makes a loan to another entity or individual (who is not a fund member or relative of the member), the loan agreement will specify the terms and conditions of the loan, including whether the loan is secured or unsecured.
The market value of a loan is determined by its recoverability, which could be:
- Evidence of repayment of the loan (if applicable).
- Details on the financial position of the borrower confirming their ability to repay (e.g. net asset position, sources of cash).
- Details and value of security held as collateral for the loan (if applicable).
Business assets
Business assets cover items such as equipment, machinery and licences. Similar to real estate, they must be valued at market value each year at 30 June, but it is not compulsory for the trustees to obtain a formal external valuation. A recent valuation is prudent if an event has occurred that has affected the value of the asset. Trustees also need to consider depreciation of the asset. For certain business assets, the ATO provides guidelines on the applicable depreciation rate. Trustees may organise a formal valuation of the business asset from a:
- Registered valuer
- Professional valuation service provider
- Member of a recognised professional valuation body
- Person without formal valuation qualifications but who has specific experience of knowledge in a particular area.
Collectables and personal use assets
Collectable and personal use assets cover items such as artwork, memorabilia, collectable coins and bank notes, wine and vintage cars. Metals such as gold and silver are only considered collectable items if their value exceeds the value of the metal based on its weight. When a precious metal is not considered a collectible item, the value is determined by its spot price.
In most cases, collectables and personal use assets must be valued by a qualified independent valuer. The valuer should generally be a current member of a relevant professional body or trade association.
What if a fund does not use market value for assets in annual financial statements?
If the fund’s investments are not included in the accounts in line with the ATO’s market value guidelines a fine of $2,100 per trustee can be imposed.
Who’s going to check?
A check is made by the fund’s auditor as to whether the annual financial statements have investments shown at market value based on objective and supportable evidence.
If assets are not valued at market value, delays can occur in lodging the fund’s tax return and lack of adequate information can result in a qualified audit opinion. Any qualified opinion will be reported by the auditor to the ATO, for which the trustee(s) can expect follow up action.
Where can I get more information?
The ATO provides guidelines on their website to assist SMSF trustees when valuing assets [1] for superannuation purposes. If trustees follow the ATO’s guidelines [1] they will accept the valuation provided by the trustees, as a general rule.
Market value is important for all SMSFs
Ensuring investments of an SMSF are valued appropriately is important to comply with the superannuation law and avoiding penalties. Appropriate valuations can be used to determine:
- accurate member balances;
- the minimum and maximum amount of the pensions a member should be drawing from the fund;
- a member’s non-concessional contribution cap;
- whether a member will have access to the new catch up concessional contribution cap; and
- whether the SMSF can use the segregated method for claiming exempt pension income.
For SMSF members affected by the $1.6m transfer balance cap, an appropriate valuation is essential for the 2016/17 financial year to determine whether the member’s pension balance(s) may exceed the cap and for purposes of the CGT cost base reset.
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.