30 June is approaching – time to value assets

First, we should get rid of a few myths.

There is no “3-year rule” for valuing properties (ie, a rule that says it’s fine to only update values every three years). As I mentioned in the introduction, an updated value every year has been required for many years now.

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The ATO now specifically checks to see if values change year to year on the basis that surely they would normally? (The ATO’s checking isn’t perfect, though. They can only check the information reported to them, which will highlight that – say – the fund’s total investments in a particular asset class haven’t changed. But it’s not “investment by investment”. So, funds that have multiple properties, for example, where some values have been updated and some haven’t, won’t be obvious to the ATO. But they will be obvious to the fund’s auditor.

Auditors will want to see how each value was determined and who provided it. The latest ATO guidance is clear that valuations should be backed by evidence and data. For example, when it comes to valuing properties, an auditor would expect to see evidence like:

• Value of similar properties and recent sales of similar properties
• An appraisal from an independent real estate agent
• Whether the property has undergone improvements since it was last valued
• Net income yields for commercial properties (providing the tenants aren’t related to the fund members)

If the fund holds shares in unlisted companies or units in unlisted trusts, the auditor would expect evidence like:

• If these are effectively investment vehicles that hold other assets such as shares, managed funds or properties, the value of those underlying investments, including an independent expert valuation of these if they’re not easily verifiable
• Recent acquisitions or sales (note that these are not particularly useful if they’re between related parties, as there is no guarantee those parties were operating at arm’s length)
• If the company or trust is (say) operating a business, evidence of how the market valuation was substantiated by the trustee, any data they relied on, the method used to work out the value and any assumptions made as part of this process.

Remember that other investors in these assets might not need an up-to-date market valuation every year, and it’s important to look carefully at the information you have provided before assuming it will be enough for your SMSF. For example, many unit trusts might show values of all the assets at “cost” (the amount paid for them when they were purchased). This won’t do.

Of course, auditors look more closely when investments represent a large proportion of the fund. But even assets that seem almost insignificant in the context of the overall size of the fund have to be valued, and the trustee will need appropriate support for the value used. That’s because the auditor wants to be confident this isn’t an asset that should have a much higher value than the one shown in the financial statements.

For all these reasons, the time, cost and effort involved in valuing the asset is something to take into account before buying it in the SMSF in the first place.

Both auditors and the ATO have taken an increasingly tough stance in recent years because the value of SMSFs and their members’ balances has become an increasingly important number. These days, it impacts a great many things: contribution caps, pension payments, the amount set aside to start a pension and more.

Trying to avoid valuing assets properly because it’s difficult or “they’re not worth much” just won’t wash these days.

So what can you be doing now?

Remember the critical valuation date for your financial statements is 30 June. If your SMSF holds an asset that might change in value frequently, get your valuation and evidence together as soon after 30 June as you can. Many accounting firms (including Heffron) can access an online service to provide residential property values. This won’t provide a valuation with enough confidence in every case, for example, properties in places where there just aren’t many comparable sales. But it will work where there is enough publicly available information to support the valuation.

If you aren’t sure what’s needed for your SMSF this 30 June, check with your accountant/auditor now. That may save time when it comes to completing the fund’s financial statements and make for a quicker audit.

Of course, sometimes SMSFs need to value assets at a date other than 30 June. If a member started a pension on 1 March, for example, the value of all its assets should be updated to that date. It would only be reasonable to use the previous 30 June value if the trustee could argue (and support with evidence) their claim that it hasn’t changed in the meantime.