Who determines market value?

The value of some investments may be straightforward, such as listed shares, managed investments, term deposits and bank accounts. However, when it comes to certain property investments and investments in private companies or trusts, amongst other things, market value may not be that obvious. As such, a valuation may be required for some investments from an appropriately qualified person, such as an independent registered valuer or real estate agent.

The following provides a guide as to what is required to value fund assets where market values are not readily available. It is not an exhaustive guide, and professional advice should be sought when valuing unusual or unconventional assets.

Real estate valuations

Real estate needs to be valued at market value every 30 June; however, this does not mean trustees must obtain a formal external valuation each year. An external valuation is prudent if an event has occurred affecting the property. Such an event may be a renovation, or favourable re-zoning. Valuation of real estate can be undertaken by anyone, including the trustee(s), if suitably qualified, and based on objective and supportable data.

According to the ATO, the following would generally be considered adequate audit evidence:

• Formal valuation from a qualified and independent valuer (required for commercial properties leased to related parties)
• Real estate agent valuation (appraisal letter)
• Valuations from online real estate services can be used, however, it must be based on comparable data for sales of similar properties
• Valuation from trustees (with evidence of market valuation such as recent sales or online valuations).

The SMSF auditor may also request an independent valuation of real estate. Whilst not mandatory, it is advisable a formal valuation is organised at least once every three years.

The auditor will also assess if the rental income received by the fund is paid on commercial terms.

Audit evidence showing arms-length rental income that would be considered satisfactory:

• Lease Agreement organised via a real estate agent, or other written lease agreement covering the lease of the property during the year
• Rental statements from a real estate agent covering the lease of the property during the year
• Rental appraisal by an independent real estate agent (for related party transactions)
• Supporting evidence and an explanation from the trustees if no rental income was received during the year.

Units in unlisted trusts or shares in unlisted companies

Obtaining reliable audit evidence to support the value of unlisted investments can sometimes be problematic. The company or trust may not be required to value their assets at market value. Trustees of SMSFs, however, must consider the market value of the assets held by the entity. For example, where the trust or company holds property, any value should be based on the guidelines for real estate outlined above.

Another consideration is unlisted entities may not be required to get financial statements independently audited, which make them less reliable from an SMSF audit perspective.

The following would generally be considered adequate audit evidence for these assets:

• Audited financial statements of the entity
• Financial statements of the entity, with evidence that the underlying asset is valued at market value
• Independent valuation of the underlying assets of the entity
• A share/unit price based on recent sales or purchases of shares or units.

Loans to related and non-related parties

When a fund makes a loan to another entity or individual (who is not a fund member or relative of the member), the Loan Agreement will specify the terms and conditions of the loan, including whether the loan it is secured or unsecured.

The market value of a loan is determined by its recoverability:

• Evidence of repayment of the loan (if applicable)
• Details on the financial position of the borrower confirming their ability to repay (e.g. net asset position, sources of cash)
• Details and value of security held as collateral for the loan (if applicable).

Business assets

Business assets cover items such as equipment, machinery, and licenses. Like real estate, they must be valued at market value each 30 June. But again, it is not compulsory for trustees to obtain a formal external valuation. In a similar vein to real estate, a recent valuation is prudent if an event has occurred affecting the value of the asset. Trustees also need to consider depreciation of an asset. For certain business assets the ATO provides guidelines on the applicable depreciation rate.

Trustees may organise a formal valuation of the business asset from:

• A registered valuer
• A professional valuation service provider
• A member of a recognised professional valuation body
• A person without formal valuation qualifications but who has specific experience or knowledge in a particular area.

Collectables and personal use assets

Collectable and personal use assets cover items such as classic cars, rare stamps, wine, and antiques. Metals such as gold and silver are only considered collectable items if their value exceeds the value of the metal based on its weight (such as Chinese New Year commemorative gold coins). When a precious metal is not considered a collectible item, the value is determined by its spot price.

Again, the ATO refers to a valuation as being fair and reasonable where it meets all the following criteria:

• Considers all relevant factors and considerations likely to affect the value of the asset
• Has been undertaken in good faith
• Uses a rational and reasoned process
• Is capable of explanation to a third party.

Collectables and personal use assets most likely require a valuation by a qualified independent valuer, due to the unique nature of such assets.

Transfers of collectables and personal use assets to a related party of the fund must be made at a market price determined by a qualified independent valuer.

Who is going to know?

A check is made by the fund’s auditor as to whether the annual financial statements have investments shown at market value based on objective and supportable evidence.

If assets are not valued at market value, delays can occur in lodging the fund’s tax return and lack of adequate information can result in a qualified audit opinion. Any qualified opinion will be reported by the auditor to the ATO, for which the trustee(s) can expect follow up action.

Where can I get more information?

The ATO provides guidelines on their website to assist SMSF trustees when valuing assets for superannuation purposes. As a rule, if trustees follow the ATO’s guidelines, they will usually accept the valuation provided.

Conclusion

The recent compliance action announced by the ATO, endless changes to superannuation legislation and action by the regulators against SMSF auditors has led to increased scrutiny of asset valuations. Working with the fund’s auditor to ensure valuations are up to date, whilst it can be frustrating, is infinitely better than being audited by the ATO. Ensuring investments of an SMSF are valued appropriately is also important for several other reasons. Appropriate valuations can be used to determine:

• Member balances (particularly death benefits)
• Minimum and maximum income stream amounts to be drawn from the fund
• A members bring-forward non-concessional contribution cap
• A member’s ability to utilise the catch-up concessional contributions cap
• Eligibility to receive government co-contribution
• Whether the SMSF can use the segregated method for claiming exempt current pension income.

The proposed extra super tax on amounts above $3m will only make the ATO more officious in ensuring SMSF assets are valued at market. This will in turn mean auditors become ever more vigilant as they themselves become increasingly subject to penalties and onerous compliance regimes. Many may be wondering, “Why has the auditor become so much stricter than in previous years?” This is because auditors are being scrutinised like never before. With AI and data technology, the ATO’s powers of persuasion are becoming irresistible.