SMSFs urged to weigh up practical issues with private company investments

“If the shares [of the private company] are going to be hard to value and the auditor is likely going to want an independent valuation, then that may be an expensive, complex, and potentially unviable process from an investment perspective,” explained Mr Day in a recent FirstTech podcast.

Colonial First State senior technical manager Tim Sanderson said the ATO has previously released guidelines for valuing assets such as private company shares.

“A couple of the factors that should be taken into consideration include things like the market value of assets in the private company and the amount that was paid by the SMSF to acquire the shares,” said Mr Sanderson.

“In terms of evidence to support the valuation, the ATO talks about ideally having an independent expert value these assets, a property valuation if there’s direct property in there and also the date and price or the most recent unrelated sale and purchase of a share in that company.”

Where there is no independent valuation, Mr Sanderson said the SMSF will need to provide evidence of what method has been used to conduct the valuation and how that market valuation has been substantiated by the trustees.

This includes any objective data that they’ve relied on to come to that valuation, he said.

“It's also worth noting that in a lot of cases, simply looking at the financial statements of that private company is not going to be sufficient to be relied on for market valuation,” he stated.

“In a lot of cases, those financial statements would be based on the cost valuation of those assets.”

Even though a mandatory valuation isn’t mandatory for shares in a private company, except in very limited situations, Mr Sanderson noted that the ATO has said it should be considered where a valuation for a particular asset is likely to be difficult or complex.

“I think at least some private companies are going to fall into that category. For example, if it's running a business and it hasn't been valuing assets at market value in its financial statements,” said Mr Sanderson.

“Independent valuation is also going to be a sensible way, in a lot of cases of minimising the risk of getting things wrong.”

Mr Day said that in some cases it can take months to actually determine a value for the shares in a private company.

“It's a really important issue to take into account if we’re buying or investing into a private business through an SMSF. If that private company is conducting a business then the valuation of those shares could be really complicated,” he said.

“It's not only with the acquisition that the valuation will be important. It’s also going to be important every 30 June when you’re doing the fund’s annual statements, so it's a really important practical issue.”