Why asset valuations are worth every cent

Founder and CEO of Engage Super Audits
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One the most popular questions I get from trustees is, “Why do I need to get a valuation?”

The question usually arises due to concern over cost. The difficulty and cost associated with valuations will greatly depend on the nature of the asset. Shares, managed funds and other listed investments will generally be no problem given how easy it is for the auditor to obtain daily valuations online. On the other hand, SMSFs with real estate, exotic assets or investments in private companies or trusts will require some additional work, which could see costs rise.

In what circumstances might your auditor require a valuation, and why?

Commencing a pension

If super laws require that when you commence a pension, all super fund assets must be revalued at the date the pension commences.

With the Australian Tax Office (ATO) focusing heavily on exempt pension income claims, it is becoming increasingly common for the ATO to review pension funds and ask for copies of valuations used at pension commencement. If assets have not been revalued to market value, with appropriate evidence to match, the ATO may well decide to disallow the exempt pension income claim, meaning the income of the fund is fully taxable like an accumulation fund.

Current valuations on a regular basis will also ensure that the correct minimum pension (and 10% maximum if applicable) is calculated prior to 30 June each year. Get this wrong and it means extra tax for your SMSF.

Selling assets to your SMSF

It is very common for members to want to transfer assets held personally into their SMSF. There are only limited types of assets that can be sold or transferred to your SMSF, such as:

  • Listed securities acquired at market value (only available to 30 June 2012);
  • Business real property;
  • Widely held trusts; and
  • In-house assets (up to 5% of market value of fund assets).

However, none of these assets can be transferred into your fund unless the transfer is done at a fair arm’s length market value.

So how can you show your auditor that the sale price was market value?

For listed investments it’s easy. But when you are dealing with business real property and in-house assets in particular, it is especially important that you have collected enough evidence to support the price paid.

The larger the transaction, the stronger that evidence must be. And in reality, it’s unlikely your auditor will accept anything less than a formal valuation where a commercial property is involved.

Formal valuations become more important still where the asset transfer represents an in-specie contribution to your fund. This is because the ATO will pay particularly close attention to the valuation of the assets just in case they could find you trying to escape excess contributions tax!

In-house assets

If you hold ‘in-house assets’ in your fund (that is, investments in, loans to or leases with related parties), your auditor must sign off every year that the value of those in-house assets does not exceed 5% of the market value of the fund’s assets.

So unless the auditor is provided with regular updated market valuations, they will not be able to give an unqualified audit opinion that in-house assets remain below 5%.

This means current market valuations of all super fund assets, not just the in-house asset itself!

Dealing with members and related parties

Any time your SMSF enters into transactions with members of the fund, relatives or related parties, your auditor and the ATO will give those transactions more attention. The law requires all transactions with related parties to be on arms-length market terms.

A common example is where a member’s business leases commercial property from their SMSF. In this case, a rental appraisal would be required to ensure that the related tenant is paying rent at market rates – nothing more and nothing less.

Payments above market rent may give rise to extra tax under the special income rules. Below market rent may give rise to loans or financial assistance to members or related parties in breach of the super laws.

Putting your hand in your SMSF’s pocket to pay for a valuation may seem annoying and unnecessary, but it’s often the quickest and cheapest way to ensure your fund gains full advantage of the tax concessions on offer.

Be guided by your auditor in regards to valuations and understand what your auditor is trying to achieve.

When dealing with property, in many cases a real estate agent market appraisal may suffice (get two or three), but if the value of the asset makes up a large part of the total value of the fund’s assets, you should get a licensed valuer to advise on the market value – they are qualified and provide a great level of detail and analysis in their valuations that is worth every cent.

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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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