SMSFs warned on pinpoint valuations uncertainty for NALI pricing safeguards
SMSFs dealing with the potential pricing risks in valuations from NALI will need to take care when assessing the pricing range, ensuring increased valuations evidence and documentation in the future to protect against any uncertain risks from the regulator.
Speaking at the recent CA ANZ SMSF conference, DBA Lawyers director Daniel Butler said that there is still uncertainty from the ATO on its approach to valuation price when assessing non-arm’s length income (NALI) risks.
He noted that advisers would need to be careful when finding for clients the exact pinpoint on the range of the price. Typically, a valuation normally comes between X and Y, for example, between $1-1.1 million, with the need to consider if you take it at the lower end, the higher end, or the middle of the range.
“Some material that I’ve been seeing recently on the ATO website and consultation documents is that they want to see a pinpoint value,” Mr Butler said.
“Now, we have no clarity at this stage for NALI whether they all accept within that acceptable range. But I have heard it orally from the ATO recently that they do accept it within an acceptable range; however, we don’t have anything in writing on that.”
Mr Butler said that in the Explanatory Memorandum at [2.49] of the ruling, states: “It can be difficult to determine an exact price that is ‘non-arm’s length’.”
An “arm’s length” price may be accepted to fall within a range of commercial prices. For example, loans may be available at different interest rates based on a range of factors. Accordingly, an SMSF may be able to apply an acceptable commercial rate of interest to a loan within a band of rates available to it on an arm’s length basis.
“Therefore, you don’t necessarily need a pinpoint, but we do want clarification from the ATO that they will accept within an acceptable range because valuers often don’t want to provide a pinpoint; they want to provide a range,” Mr Butler noted.
Practitioners from now on will have to be very careful relying upon property appraisal websites along with curbside valuation appraisals from real estate agents, according to Mr Butler.
“If you are using those sorts of references for the preparation of the financial accounts, you should have some other supporting documentation, such as rates notice or comparable property prices around that area,” he explained.
“But the gold standard and the best evidence you should have is a full valuation report from an independent qualified valuer, which has clear methodology and that it can show the comparable properties.”
Recently speaking at the recent SMSF Adviser Technical Strategy Day, Colonial First State head of technical services Craig Day had also flagged that those looking at valuation risks, especially for something like a business real property, should always go for a full independent valuation as it will be the cheapest insurance policy considering the current non-arm’s length rules.
“As soon as you get that independent valuation that tells you what it is, the auditor is going to be satisfied with that, and the ATO will be much more satisfied with that,” Mr Day said.
“As long as it’s a proper independent valuation that looks at all of the relevant issues to come up with a third-party valuation and what they think it is worth.
“As soon as you get that, you also have a lot of protection against the SIS section 66 breaches as well as any future capital gains being taxed at the top marginal rate. Think about that where an SMSF has held something for 10 years, they finally get to pension phase and they turn on a pension, guess what exempt pension income excludes non-arm’s length income. That capital gain you think is actually going to be taxed at zero, now actually gets taxed at 45 per cent, so watch out for that.”
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.