Incorrect asset valuation affects pension allocation, warns adviser
An incorrect valuation of fund assets could lead to an incorrect value for pensions, warns a senior adviser.
Mark Ellem, head of education for Accurium, said if an SMSF undervalues its assets, it will also undervalue its net assets, which subsequently impacts its pension payments.
The ATO recently announced it was targeting SMSFs who had not properly valued assets within their fund, sending communication to more than 16,000 trustees who had reported the same value for assets for the past three years.
However, undervaluing assets does not just expose an SMSF to penalties for compliance breaches, it can also have implications on pension allocations.
“We have those clients that say I only want the absolute minimum pension and not a dollar more, and that's based on the balance at the start of the year,” he said.
“From an accounting point of view, we know the opening balance from one year equals the closing balance from the previous year, so if those asset values are understated, the opening value of the pension is understated.”
Ellem continued that in calculating the pension payments, it is necessary to apply the minimum pension rate percentage, and if assets are undervalued the minimum pension is probably going to be understated as well.
“In the end, you could end up with an underpayment of pensions. It won't appear to the pension standards and the fund doesn't get to claim exempt current pension income,” he said.
“Also, again, in undervaluing assets, as we've seen with an overvaluing of assets, it can affect a member’s entitlement to relevant caps and concessions, as a lot of those are based on total super balance, which is based on what was reported in the SMSF annual return.”
He added that the ongoing ramifications of not valuing assets correctly could mean the client may not be entitled to a non-concessional cap.
“Going back, you may realise the asset wasn’t disclosed at market value which could tip the total super balance over the threshold and the member is then entitled to that cap which could lead to adverse consequences,” he said.
Ellem said the incorrect valuing of assets could also impact the commencing of a retirement phase pension, as its value is reported by the fund’s transfer balance count reporting which is assessed against the member’s personal transfer balance cap.
“Again, if we're not getting the value of assets right at that time, then we potentially can be under-reporting the transfer balance cap,” he said.
“If it's reviewed and the value was less than what market value is and is then readjusted, it could mean that the individual has exceeded their transfer balance cap.”
