A process with new-found significance

The valuation of assets has become more important with the introduction of a range of new superannuation balance limits. Liz Westover takes a look at some of the different valuation obligations and methods, along with issues advisers and trustees need to consider.

For the record, SMSFs have been required to use market valuations for reporting purposes since the 2013 financial year. When preparing their financial accounts and statements, trustees cannot use historical or cost accounting methodologies. Regulation 8.02B of the Superannuation Industry (Supervision) (SIS) Regulations 1994 requires that when preparing accounts and statements in accordance with subsection 35B(1) of the SIS Act 1993, an asset must be valued at its market value.

This requirement largely came out of a recommendation following the Cooper review of Australia’s superannuation system. The suggestion at the time was that SMSFs needed to be comparable to Australian Prudential Regulation Authority-regulated funds to give an accurate picture of the SMSF sector. Moreover, individual members/trustees of those funds, in understanding the value of the underlying assets, would prepare more meaningful financial reports. Most SMSFs were adopting a market valuation methodology anyway because they actually wanted to know what their super fund was worth, but there were those that were content not to revalue assets and continue to report on a cost basis.

Notwithstanding the above reporting requirements, there were and are certain triggers that mean SMSFs have to revalue assets to market valuation to ensure they are complying with other legislative requirements. This is predominantly where income streams are being paid, to ensure the correct minimum withdrawal amounts are being made, or where the fund holds in-house assets to ensure the 5 per cent restriction on in-house assets is adhered to. Additionally, market valuations are used to ensure arm’s-length transaction requirements are met, particularly where related parties are involved.

Following the introduction of mandatory market valuation reporting for SMSFs, the ATO issued “Valuation Guidelines for Self-managed Super Funds”. While there was some angst at the time as to how and when market valuations were obtained, most SMSF trustees and their advisers were able to navigate through the requirements to report in compliance with the law. Little has been mentioned since that time.

For the financial year ending 30 June 2017, the focus has returned to valuations. This refocus has arisen due to the significant changes introduced by the current federal government that for the most part took effect from 1 July 2017. Of most significance for these purposes are the new rules as follows:

  • A restriction of the value of income stream accounts from 1 July 2017. An income stream cannot be commenced or an existing income stream be continued with a value that exceeds $1.6 million (the transfer balance cap).
  • Determining a person’s total superannuation balance – relevant for a number of provisions, including the ability to make non-concessional contributions (cannot be made where an individual holds more than $1.6 million in superannuation) and the ability to carry forward unused concessional contribution caps (individuals must have less than $500,000 in super to be eligible).
  • Capital gains tax (CGT) relief available to super funds whose members either held transition-to-retirement income stream (TRIS) accounts or who needed to commute existing income streams in order to comply with the new $1.6 million transfer balance cap.

Clearly, in order to adhere to these new provisions, accurate market valuations will be required and in all likelihood the ATO and SMSF auditors will be paying more attention to the validity of market valuations and scrutinising valuations more than they have previously. Trustees will need to ensure they have documented the methodologies used and are able to provide evidence of the market valuation determined by them.

The ATO has updated its valuation guidelines in line with the new superannuation changes, but importantly it should be noted there are no substantial changes to its view on how valuations are undertaken.

What is market value?

Market value is a defined term in section 10 (1) of the SIS Act. It basically refers to the amount a willing buyer could reasonably be expected to pay to acquire an asset from a willing seller, assuming they were dealing with each other on an arm’s-length basis, after proper marketing of the asset and the two parties acted knowledgeably and prudentially in relation to the sale.Overarching principles for valuing an asset

For most assets, there are no hard and fast rules regarding the correct methodology for valuing assets, although clearly some assets would only have one means of ascertaining values.
Where clear-cut methods are unavailable, the ATO expects trustees be able to demonstrate that a fair and reasonable process has been used. This includes undertaking the valuation in good faith using a rational and reasonable process that considers all relevant factors likely to affect the value of the asset and importantly that it can be explained to another person.

The tax office is looking for trustees to be able to use objective and supportable data for valuations. It has also included other criteria in its guidelines that the valuation does not conflict with the valuation guide itself or their other guidelines for market valuations for tax purposes, and that there is no evidence a different valuation was used for CGT purposes.

Valuing the main types of assets

Listed securities

The closing price of the asset on the Australian Securities Exchange (or other relevant exchange) on 30 June 2017 (or other relevant date where the valuation is for purposes other than year-end reporting) should be used.

Managed funds

The value supplied by fund managers at the relevant date. Auditors may require further evidence of the accuracy of the information provided, which could include GS007 reports, which should be provided by the fund manager also.

Unlisted securities

Where the asset is widely held, it is generally reasonably easy to obtain a valuation for the underlying investment of the fund. This may be because the entity is still a reporting entity or has audit obligations. If not widely held, the trustees may need to use best estimates based on available accounts from the relevant entity. Ultimately, however, an independent valuation may be required.

Closely held assets, including private companies and unit trusts

These can be challenging depending on how closely held the asset is. If the trustees have reasonable influence over the underlying entity, or are related companies or trusts, they may be able to direct the management of those entities to provide valuations. However, sometimes a trustee will have no influence and will find it very difficult to obtain valuations, particularly if the company or trust holds significant assets for which it is not otherwise required to revalue. In these cases, the trustees must use their best endeavours to obtain accurate valuations and might ultimately need to use a ‘trustee’s valuation’. That is their own determination of the value of the shareholding or unitholding. Evidence of how the valuation was obtained will be crucial.

Real estate

Trustees are not required to necessarily obtain annual valuations for real property. A general rule of thumb is every three years unless there has been significant movement in the market conditions (a rise or fall in overall prices in a particular area) or a significant event has occurred that might otherwise impact on the value (for example, fire or flood). In these cases valuations may be needed more frequently to truly reflect the market value of the asset at a particular time.When obtaining valuations, an external valuation is not necessarily required. However, certain factors to be considered may include the value of similar properties, amount paid, independent appraisals (rather than full valuations), improvements that have been undertaken and where relevant for commercial property, net income yields.Many trustees use the services of online property valuation providers, which is acceptable for these purposes.

Collectables and personal use assets

Where an SMSF owns collectables or personal use assets, a valuation must be obtained by a qualified, independent valuer when there is a disposal of that asset to a related party. This now applies regardless of when the asset was purchased. While the same type of valuation is not necessarily required for reporting purposes, it may still be needed if the value of the asset is a significant proportion of the fund’s total assets or valuing the asset is likely to be complex or difficult.

What to do when there is a range of values

Frequently, trustees obtain a number of valuations from different sources. They may all, on their own, be considered acceptable, yet can vary considerably. Depending on why the trustee needs the valuation, they may look to cherry-pick the value that gives them the best outcome. Clearly there is risk around doing this and if in this position, the trustees may still need to be able to justify why they have selected one valuation over another. It would be prudent to document why the selection was made.

Audit requirements

SMSF auditors are required to report on trustees’ compliance with requirements under SIS regulation 8.02B to report assets at market value.Occasionally, an auditor may need to qualify an audit report in relation to a market valuation provided by a trustee. This is not necessarily because they disagree with the valuation, but on the basis they are unable to form an opinion on the accuracy of that valuation or they don’t believe there is the requisite objective and supportable data for that valuation. This can arise despite the best efforts of the trustees, administrators and auditors.

Auditors should not be afraid to qualify on this basis, but may need to communicate their rationale to the trustees and to the ATO as well.
While an audit qualification may not result in an auditor lodging an auditor contravention report (ACR), where the asset is a substantial portion of the fund’s total assets or the auditor believes a material discrepancy, error or inaccuracy exists, they may be required to lodge an ACR with the ATO.

Don’t forget the investment strategy

When finalising valuations for the financial year, trustees should also be checking the fund’s investment strategy to ensure any revaluations haven’t caused discrepancies with the strategy to arise. The fund’s auditor will be checking to make sure the trustee’s investments are in line with the strategy of the fund. The strategy should be checked regularly and adjusted as and when needed.

Be reasonable and be objective

Many trustees will be affected by the superannuation changes that came into effect on 1 July. New thresholds for total superannuation balances, transfer balance caps together with CGT relief for those with required transfer balance cap commutations and TRISs mean accurate asset valuations are crucial to determine the eligibility and impact of these new measures. Valuations will be under the microscope. It will be vitally important for trustees to be reasonable and objective when determining what these values are and not inappropriately inflate, or deflate, them to influence outcomes. Whichever method is used or whatever figure arrived at, collect the evidence and be able to demonstrate how the figure was determined.

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