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The ATO has SMSF asset valuations in its crosshairs

The ATO recently wrote to the trustees of approximately 16,500 self-managed superannuation funds (SMSFs) which have reported unlisted assets at the same value for at least the last three financial years.

Unlisted assets identified as a concern by the ATO include residential and commercial property, unlisted companies and unlisted unit trusts. The ATO also wrote to approximately 1,000 auditors who have performed audits on the 16,500 SMSFs where no audit contraventions were reported in respect of the market valuation rules.

In this article we will review the asset valuations requirements for SMSFs.

Legislative requirements

Superannuation law requires all assets to be valued at market value for the 2012/13 year of income, and all subsequent years [1].

Market value is defined as 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:[2]

  1. that the buyer and the seller dealt with each other at arm’s length in relation to the sale;
  2. that the sale occurred after proper marketing of the asset;
  3. that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.

ATO guidance

The trustee needs to have a reasonable basis for determining the market value of an asset. The ATO has published valuation guidelines for SMSFs which provides guidelines that are relevant for all funds when interpreting the market valuation definitions.

The ATO’s valuation checklist provides that valuations based on objective and supportable data should be used when:

  • preparing SMSF financial accounts and statements
  • testing whether the market value of an SMSF's in-house assets exceeds 5% of the fund’s total assets
  • determining the value of assets that support a pension
  • acquiring an asset from a related party
  • disposing of an asset to a related party

A valuation conducted by a qualified independent valuer is required when collectables and personal use assets are transferred or sold to a related party.

The proposed Division 296 tax may also have focused the Government’s attention on valuations since the value of a member’s total super balance is the basis for how the proposed tax will be calculated.

Valuation principles require the trustee to be able to demonstrate that the valuation has been determined on a 'fair and reasonable' basis. A valuation is generally considered fair and reasonable where:

  • it considers all relevant factors likely to affect the value of the asset
  • it has been undertaken in good faith
  • it uses a rational and reasoned process
  • it can be explained to a third party

The acceptability of a valuation is more likely to depend upon the process of obtaining the valuation rather than the person who conducted the valuation. The valuation must be based on objective and supportable data.

Depending on the situation, a valuation may be undertaken by a:

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

The ATO valuation guidelines specifically state that trustees are not automatically required to arrange an external valuation for all assets each year. For example, assets such as real property may not need an annual valuation unless a significant event occurred that may change its market value since it was last valued. Unfortunately, in Australia recently, property prices have been erratic. In many instances, it would be difficult to be confident that the value of a property hadn’t changed in the last three years.

In practice

I frequently hear trustees and advisers say that property assets only need to be valued every three years. This is simply not true, never has been and most certainly has not been for the last 12 years.

Trustees should consider the use of a qualified independent valuer if an asset represents a significant proportion of the fund's value or if the nature of the asset makes it likely that the valuation will be complex.

SMSF trustees need to demonstrate that a valuation has been determined using a fair and reasonable process that is based on objective and supportable data. This may involve research including market appraisals, council valuations and searches of similar property values. Trustees should retain all of the information used to determine the market value and present this to the SMSF auditor. Following a robust process can allow trustees to save the fund considerable expense whilst still meeting the legal requirements for valuing fund assets.

It is important to appreciate that auditors are not licenced valuers. The auditor’s role is to examine the evidence that the trustee has provided to support the valuation and determine if that evidence is fair and reasonable, based on the objective and supportable data provided.

Penalties

The requirement to value assets at least annually is an operating standard which means it is a requirement that auditors review the evidence supporting the valuation.

If a trustee’s valuation fails to meet the valuation requirements, the trustee is likely to be liable for administrative penalties. Serious failures could result in the SMSF losing its complying status.

Summary

SMSF trustees need to ensure that they value their assets at least annually and that their valuations are fair and reasonable and based on objective and supportable data. It is not adequate that trustees only apply the required level of effort to valuations if they expect the valuation to impact an important threshold such as a pension commencement, related party transactions or total super balances to determine eligibility to make certain contributions.

 

[1] Superannuation Industry Supervision Regulations 1994 regulation 8.02B
[2] Superannuation Industry Supervision Act 1993 section 10(1)

 

Julie Steed is a Senior Technical Services Manager at MLC TechConnect. This article provides general information only and does not consider the circumstances of any individual.

 

  •   3 July 2024
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8 Comments
Paul Szumski, AAPI, CPV, CPP (Fin)
July 04, 2024

As a Registered Valuer with over 30 years' experience, I have seen many "valuations" completed for SMSF's provided by non-valuers that would not meet said standards. Many have no "objective and supportable data" included, and it would seem have been completed by parties with vested interests i.e., not at arm's length. Time to clean up this part of the SMSF equation given the size of the pool of funds and its large current and future effects of the Australia economy.

George
July 05, 2024

Not sure why people do not provide annual valuations on unlisted property investment as annual valuations are always provided by the managers of the trusts. I have many and have never had a problem.
Must be just laziness on the part of some people.

Aussie HIFIRE
July 07, 2024

Presumably many of the unlisted assets here are single rental or commercial properties rather than unlisted property trusts.

Expenses for these types of property are already fairly high (I use one third of the gross yield as a rule of thumb) and people don't want to have to add getting a valuation every 12 months to the list of expenses, particularly if they're not planning on selling and don't want to potentially have to pay more tax or a higher pension especially if the cash flow wouldn't support it.

rob
July 05, 2024

Any rules on Unlisted Share Options that are "in the money"? Simplistically it should be closing price of Ord Stock as at June 30th minus the Exercise price but the ATO is rarely simple!

Tim
July 05, 2024

I have found a program to manage these issues for my reporting. I use Sharesight for all these needs.
I use a report in it that works as the perfect way to look at valuation from the beginning of the year to the end of the financial year including listed and unlisted assets.
I use another report to report on asset allocation.

Franz
July 07, 2024

I’m guessing the motivation for not revaluing a direct property investment really bites in the pension phase. A property may have appreciated so much in the last few years and thus form such a large part of the fund, the minimum withdrawal cannot be paid without selling the property.

John Abernethy
July 07, 2024

Thanks Julie

Obviously the focus for the ATO will ( initially) be on SMSFs in pension mode because the value of the fund determines or affects:

1. The pension payout amount per annum; and
2. The tax free thresholds on entering pension stage from accumulation stage.

However, the possibility of the unrealised tax on capital gains for a SMSF above $3 million in value per beneficiary will see increase scrutiny of larger funds.

Presumably, the valuation costs is a tax deductible expense for a tax paying fund?

Meanwhile assets held individually, through trusts or private companies do not need to be valued - unless and until the unrealised capital gains tax proposal drifts into other investment structures.

My point being that the Opposition is not vocal enough on its policy to vote against unrealised capital gains tax and every self funded retiree needs to be concerned about this tax proposal.

Ryan Mcdonald
April 20, 2026

Yep, its pretty much done incorrectly in all SMSFs with private shares or business holdings.

It's usually too cost prohibitive but that's why we've created ESS Valuations to solve this challenge

essvaluations.com.au

 

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