What are these myths?
When was the last time that you heard these myths over a weekend barbeque:
“the property in my fund only needs to be revalued every 3 years….”
“yes it’s an unlisted investment so there is no ready-market so I can just use the cost price as the market price”
“isn’t it the auditor’s role to value the asset?”
It is time to clarify the real answers when it comes to valuations of SMSF investments.
Why is the ATO cracking down on this now?
There are over 16,500 SMSF’s who have reported the same value for at least three consecutive years across various asset classes, including property (residential and commercial), unlisted companies and unlisted trustees. As the number of auditor contravention reports reporting breaches on the market valuation rules have not been large, it is no wonder the ATO is homing in on trustees and auditors, and reminding them about their obligations to report SMSF assets at market value every 30 June.
What is market value?
Market value refers to the price a willing buyer would likely pay for an asset in a fair transaction with a willing seller, where both parties are independent and well-informed, making decisions with care. It serves as a realistic estimate of the price an asset could fetch under typical conditions.
The auditor’s role needs to be de-bunked – their role is to not determine the value of an asset, but to evaluate the evidence provided by the trustees to support the valuation presented in the financial statements.
The requirement to have SMSF assets valued at least annually on 30 June is in accordance with superannuation legislation – specifically the SIS Regulation 8.02B. This is one of the regulations that the auditor must check as part of their annual audit.
Why is it important to meet the market valuation requirements?
The financial statements of a SMSF consist of the fund’s assets and liabilities, and the net amount equates to the member balances. Not reporting the assets at market value will impact:
- each member’s contribution caps
- the annual minimum pension calculation and ability to claim exempt current pension income if the minimum pension is not met
- whether existing in-house assets remain below the 5% total asset level. Otherwise the in house asset would need to be sold to bring it back to under 5%
- whether members will be subject to the new Division 296 Tax when their total super balance is close to or above the $3m cap effective from 1 July 2025.
Failure to comply with the market valuation requirements could put trustees at risk of an administrative penalty by the ATO on each trustee of $3,130 and potentially loss of complying status for the SMSF.
What will I need to provide to my administrator and auditor to establish market value?
The onus is on SMSF’s trustees to provide objective and supportable evidence to justify the market value adopted in the financial statements every year. What this means in practice is that you should provide documentation to support the asset that is being valued and a clear rationale for the valuation as well as the methodology used to determine it.
For some asset classes this will be relatively easy as there is a readily available market, but for others it can be a little more tricky. Below are the methods of valuation relevant for each asset class:
- Listed securities – market valuations based on the closing price of each security’s approved stock exchange or licensed market
- Residential or commercial property
- using a qualified independent valuer especially if it represents a significant proportion of the fund’s assets
- real estate appraisals with recent comparative sales in the area of similar properties
- auto generated online valuations with a high accuracy of market value otherwise additional evidence will be required if there is a medium to low rating. The standard deviation is too broad to only be relying on this one automated report
- for new acquisitions – contract of sale if the purchase is recent and no events materially impacting the property value have happened since purchase
- Unlisted securities and unit trusts – the approach will depend on various factors including but not limited to:
- whether these investments represent a significant proportion of the fund’s assets
- the underlying assets held within the entity and when they were last revalued (eg. is there real estate held in the trust that the SMSF has invested in?)
- if an independent valuation of the entity is not available then:
- signed preferably audited financial statements (in full and not extracts) for the unlisted company or unit trust
- recent evidence of shares/units being bought back or issued in the secondary market
- Cryptocurrency
- for those listed on a cryptocurrency exchange, evidence includes the official reports from the exchange. Excel files extracted from the exchange and/or screenshots do not constitute sufficient and objective audit evidence
- Loans – just because there is a loan agreement doesn’t mean that’s sufficient audit evidence as the auditor needs to evaluate the recoverability of the loan and this is often problematic so they may also request evidence of:
- repayment of the loan post year end;
- the financial position of the borrower and confirmation of their ability to repay (eg. financial statements);
- the value of the loan and ownership of any assets held as security.
Trustee valuations without supporting evidence
For those investments without a ready market, it is not acceptable for trustees to cite this as a reason the market value cannot be substantiated and that is why the asset has been valued at cost. The ATO expects the trustees to have considered the asset’s value, potential for capital growth and capacity to generate income at the time of acquiring the asset. Without this knowledge, the investment would not be considered prudent for supporting retirement goals and the sole purpose test of a SMSF. As such, if you evaluated the market value when entering the investment, it should not be difficult to continue this assessment annually as part of their trustee obligations.
When will an audit be qualified?
If there is insufficient audit evidence to justify the market value of any investment, the auditor may choose to qualify Part A of the audit report. This means the auditor will be saying they cannot accurately value and/or have audit evidence to substantiate the market value of an asset. Therefore, there is a risk the financial statements could be materially misstated. If the investment value(s) which can’t be substantiated is material, then the audit may also be qualified under Part B. Depending on the extent to which the market valuation rules have not been adhered to the auditor may also need to lodge an Auditor Contravention Report to the ATO.
SMSF trustees need to understand the ATO does not accept trustee valuations deeming an investment’s market value to be the cost price or “same as last year” without having any objective and supportable evidence to justify this. It’s not to say you can’t use the same market value as last year, but the trustees need to prove to the auditor that it still applies as at 30 June.
To assist SMSFs to understand their valuation obligations, the ATO publication “Valuation guidelines for self-managed super funds” is a useful tool for trustees to implement procedures and obtain the relevant audit evidence, prior to the annual audit.
If you have any queries in relation to specific assets within your SMSF please don’t hesitate to contact our client manager.
Author: Anna Wong – Senior SMSF Manager at Premier SMSF Solutions
*Correct as of 26 September 2024
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
