The ATO has issued a warning to SMSF trustees about not being careful enough with how they value their assets. They've found that over 16,500 self-managed super funds have reported the same asset value for three years in a row. This is especially questionable for assets like residential or commercial property in Australia, and it's no wonder the ATO is skeptical.
If you're a trustee and your SMSF consistently reports assets at the same value, the ATO is likely to take a closer look at your fund.
The value of your SMSF's assets is important because it affects member balances, which in turn can affect how much you're allowed to contribute, your ability to set aside assets for tax-free pension income, eligibility for the work test exemption, and the ability to make additional concessional contributions. With the new Division 296 $3m super tax coming into effect, accurate valuations are crucial, especially for those with balances around or above $3m.
For assets like related unit trusts, correct valuation is critical to keep the fund within the 5% limit for in-house assets. If in-house assets exceed 5% of the fund's total assets, those assets must be sold to bring the percentage back under 5%.
Valuing at market value
Every year, you need to value your SMSF assets at 'market value' and show proof to your auditor. Essentially, 'market value' is what a ready buyer would pay a willing seller, with both parties being reasonable, independent, and informed. It boils down to a common sense approach: what price you could realistically get for an asset.
If your SMSF has collectibles like art, jewellery, or cars, you must get a qualified, independent valuer to appraise them when you sell. This doesn't mean you need an expert valuation every year, but doing it at least every three years is wise. Without an independent valuer, you must still assess the value based on current market conditions. For instance, if the artist of a piece you own passes away, how does that affect its value? Are similar works selling for more? Keeping the acquisition price as the asset's value can be problematic, questioning the reason for its purchase. If the asset isn't likely to boost your retirement savings, consider if it's worth keeping in your SMSF or if your money could work harder elsewhere.
Generally, the ATO wants asset valuations based on "objective and supportable data". This means documenting the valued asset, explaining your valuation reasoning, and how you calculated it.
Valuing real property
You don't always need an independent valuer for commercial and residential real estate. However, if the property has seen significant changes, is unique, or is hard to value, getting an independent written valuation from a valuer or estate agent is wise. Their report should explain how they valued the property and include a list of similar properties for comparison.
If you're doing the valuation yourself, make sure to record when the valuation is for and what features of the property you're considering. For example, if you're valuing a 10-year-old brick house with four bedrooms on 640m2 of land, note its location, any standout features, and how close it is to transport. Use reliable sales data from recent sales of similar properties in the area or a reputable property data service. It's best to use more than one data source.
Be cautious with online property sales sites; their estimates are often too general and not precise enough for valuing specific properties. Yet, the average price change in the area could help back up your valuation.
For commercial properties, you need to show net income yields to support your valuation. If your business is renting from a property you own through your SMSF, and the tenants are related parties, you must show that the rent is comparable to the market and adjusts with market changes.
Valuing unlisted companies and unlisted trust investments
Valuing unlisted companies and investments can be tricky. Financials aren't enough. However, if your SMSF has invested in an unlisted company or unit trust shares, it's expected that trustees chose to invest based on the asset's value, its capital growth potential, and income generation. Essentially, if you assessed its market value before investing, valuing the asset annually shouldn't be hard.
The challenge for many investors comes when the initial investment matches the cash needed for the activity. Usually, you start with the entity's asset value or the price paid for shares/units. For shares or units that are widely held, these are your entry and exit prices.
If the investment is solely in property, then real property valuation principles should apply.
Where there is no reliable data or marketThere are times when the assets bought or made by the SMSF are unique, with no clear market value. We'll only truly know their worth when they're sold. For these unique items, we either need a professional valuation or an estimate based on the market. This could be based on the purchase price or information from a similar market.
Valuations and the impending Division 296 tax on super earnings
For people with super balances near or over the $3m threshold, asset values are crucial due to the upcoming Division 296 tax on fund earnings. This tax will apply to the increase in earnings over the $3m mark, so getting asset valuations right is key. Accurate valuations help avoid unnecessary taxes and prevent errors that could lead to paying more tax than needed.
Where there is no reliable data or market
We've encountered situations where the assets bought or developed by the SMSF are unique, with no clear market value. The real value of these assets becomes apparent only when they're sold. For such unique items, we either need a professional valuation or a practical market assessment, which could be based on the purchase price or information from a similar market.
For any valuation that goes beyond the usual methods, the need for thorough documentation and solid justification is crucial. Trustees need to explain the valuation process clearly and support the importance of objective, supportable, and defensible valuation efforts.
Wrapping it up - Understanding the value of wisdom
The complex process of SMSF valuations demands action, urging trustees to adopt strong and objective valuation practices. In a world filled with financial opportunities, an SMSF stands as a beacon of fiduciary responsibility, thriving with careful and diligent valuation.
The ATO's guidance isn't about setting limits but is a call to expand perspectives, tackle challenges with innovative solutions, and continuously affirm the fundamental value of SMSFs – a reflection of a trustee's judgment and dedication to the fund's financial health.
For trustees and SMSF supporters, the journey of valuations is one of resilience, creativity, and a commitment to financial integrity. It involves vigilant management and sometimes, bold exploration of new valuation methods. At its core, it's about securing a financial future through valuations that represent more than just numbers; they signify a trustee's commitment and financial wisdom.
Adhering to strong valuation practices is essential for compliance and good governance, leading to a safe yet exciting financial journey. Trustees, with valuations as their guide, not only navigate their own SMSFs but also contribute to setting a stable and inspiring course for the broader financial community.
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