Naz Randeria, managing director of Reliance Auditing Services, said that to maintain compliance, SMSF trustees cannot make an educated guess or simply apply inflationary increases to the value of their assets.
“There are a variety of ways in which [valuation] can be done, whether by using publicly available data to determine market value, a valuation based on replacement or reproduction cost or a valuation based on a range of outcomes or discrete events for example,” she said.
“While there is a vast range of assets that are required to have an annual valuation undertaken, trustees may benefit from engaging with a professional valuation service for some common assets.”
One of the more common assets that require valid and documented valuation is residential properties, and while publicly available market data can assist in providing a valuation, Randeria said it may be more difficult to use this information.
“Providing an accurate representation may be more difficult if there are no comparable properties, such as in remote or regional towns, or if the property has been renovated, has unusual features, has development or subdivision potential, or during times of rapidly changing market conditions,” she said.
She said commercial properties are also often more complex to provide a valuation due to similar reasons as residential properties, as well as due to limited market activity.
“Commercial property can also change functions, or there could be changes in area zoning such as a medical business operating out of a residential property,” she said. “Other complexities that may make it difficult to obtain objective and supportable data on commercial property may include owning farmland, holding a long-term lease on Crown land, or owning overseas property,” she said.
In regard to listed shares, Randeria said that while they must be valued at their closing price on the relevant stock exchange as at June 30 of the year, shares in an unlisted company may be more complex to determine market value, and a financial statement is often not sufficient on its own.
“Additional evidence such as recent equity transactions or capital raising may be required to support market value of underlying assets,” she said.
For loans, she said valuations must take into account the purpose of the loan, terms, recoverability, and whether repayments, either interest only or interest and principal, are being made regularly.
“Further financial documentation from the borrower may also be required,” she said.
“For trustees holding unusual assets such as unlisted options, convertible notes, and/or convertible loans, for example, director assessments will need to be provided, which includes a detailed basis of the valuation.”
Randeria said that while providing annual valuations can be time-consuming and come at a cost, especially for assets that increase in value only marginally over time, annual valuations would reduce the risk of non-compliance.
