The rules regarding valuations for SMSFs have seen a raft of changes in recent years, so it's vital practitioners ensure their clients are across the various requirements.
Prior to 7 August 2012 trustees of SMSFs had no legal obligation to value their fund assets at market value, unless the fund was paying a pension, commencing a new pension or if it held 'in-house' assets. According to the ATO Superannuation Circular 2003/1, SMSFs were encouraged to use market value for the purposes of preparing financial statements. It was not a legal requirement to do so.
AAS 25 Financial Reporting by Superannuation Plans requires that superannuation plans measure their assets at net market value. AAS 25 is only applicable to reporting entities, and as SMSFs are generally not considered reporting entities, as a result this standard is not applicable to them.
SIS Regulation 8.02B came into force on 7 August 2012. This amendment to the SIS Regulations required trustees to value each fund asset at its market value when preparing the annual financial statements of the fund. Before the legislation was passed the term ‘net market value’ was amended to ‘market value’. This ensured consistency as market valuation was already used by funds for the purposes of pensions and for in-house assets.
Market value is defined in the SIS Act as being “the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:
i.) that the buyer and the seller dealt with each other at arm's length in relation to the sale
ii.) that the sale occurred after proper marketing of the asset;
iii.) that the buyer and the seller acted knowledgeably and prudentially in relation to the sale."
The ATO expects that valuations will be based on objective and supportable data. Valuations are to also satisfy the general valuation principles, in that they must take into account all relevant factors and considerations likely to affect the value of the assets. They also need to be undertaken in good faith, using a rational and reasoned process that is capable of explanation to a third party. If the trustees provide their own market valuation appraisal, proper documentation is required to substantiate that the valuation is based on objective and supportable data. The ATO has stated a market valuation should be undertaken if there has been a significant event that could affect the value of assets, such as a natural disaster, macroeconomic event, market volatility and changes to the character of the asset.
For funds that hold listed shares and managed investments, the valuation of these assets is fairly straightforward for accountants. Quite often, issues or uncertainties can arise in relation to the valuation of assets in an SMSF, such as residential and commercial property, collectables, shares and units in unlisted entities. When a fund has an investment in a related unit trust (pre 99 trust or 13.3A trust), often the accounts of the trust are recorded at cost. The trustees are therefore required to revalue the units to reflect the market value of the investment in the fund’s accounts. The trustees would be required to obtain a valuation for the assets held by the trust, or to provide a trustees valuation that is based on objective and supportable data.
Trustees of SMSFs that own nonstandard assets, such as fishing licenses, livestock (agricultural assets), marina berths and taxi licences should be aware that obtaining market valuations can be problematic. The auditor will require sufficient appropriate audit evidence that these assets have been recorded at market value. The auditor will require an understanding of the valuation methodology employed by the trustees and will be required to exercise professional judgement in relation to the appropriateness of the valuation.
Where a fund has an investment in a closely held unit trust that is not controlled by the fund or related parties, obtaining a valuation in relation to the trust assets may be more difficult due to the lack of control. The fund trustee may need to contact the trustee of the unit trust to arrange a valuation or their own independent valuation, to ensure that SISR 8.02B is complied with. Recently completed unit transactions completed on an arm’s length basis may also provide guidance as to current valuations.
Valuation of assets is required to be considered annually; however, this does necessarily mean that trustees are required to obtain a new valuation each year. In some circumstances there may have been no material movement in the valuation of an asset. The trustees are able to document such conclusions based on objective and supportable data.
Another complex area for auditors is when a SMSF owns foreign property. Obtaining valuations or appraisals in a foreign country may not be as simple as obtaining one in Australia. An auditor will often require additional documentation to confirm:
i.) There are no encumbrances over the property;
ii.) The property is adequately insured (to safeguard the members benefits);
iii.) Documentation that confirms the beneficial ownership of the property by the fund;
iv.) The sole purpose test and in-house asset rules have been complied with;
v.) The investment is in line with the investment strategy and complies with the trust deed.
Prior to the introduction of SISR 8.028B it was generally accepted industry practice for trustees to revisit the valuation of unlisted assets once every three years. The ATO valuation guidelines and SIS regulations do not support this as an acceptable approach. Auditors and advisers should ensure that trustees are aware of the legislative changes to ensure they understand the present SIS requirements.
A valuation can be undertaken by a fund trustee as long as it is based on objective and supportable data. Valuations or appraisals obtained by using online providers are generally acceptable methods for valuing properties. There is no explicit requirement for trustees to engage a registered valuer to value a property. Often a market appraisal by a real estate agent is sufficient audit evidence. However, a qualified independent valuation is required by an SMSF if the fund disposed of any collectables or personal use assets, subject to transitional provisions. This is a requirement of SIS Regulation 13.18AA.
The ATO developed a detailed document covering most issues in relation to the market value of assets within an SMSF titled Valuation Guidelines for Self-Managed Superannuation Funds. This document is useful to assist SMSF trustees in understanding the ATO’s approach to market valuations.
Ron Phipps-Ellis, Executive Director, and Brendan Frawley, Audit Manager, Evolv
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