SMSFs should avoid giving any assets a zero value as doing so may raise questions as to why the fund is holding the asset and what effort has been undertaken to value it, a SMSF technical expert has warned.
Heffron SMSF technical and education services director Leigh Mansell said the ATO was seeking more detailed evidence for the valuation of assets within a fund following the release of its updated ATO guidance in October 2020 and a zero value could raise red flags.
“Occasionally we hear people state: ‘There is no ready market for this particular asset, so I will value it at zero because there’s no willing buyer,’” Mansell said during a recent Heffron webinar.
“Now the ATO came out in their recent guidance and said: ‘Well, hang on a minute? Would a normal prudent trustee invest in that thing if there’s no known value,’ so they have put that issue of the prudent trustee on notice.
“Reading between the lines of the ATO’s guidance, however, it sounds like they will only accept or it would only be acceptable for a trustee to put something through at nil if you are dealing with a failed investment.
“If it’s an investment that has not failed and it’s chugging along but it’s hard to get a value, that’s a completely different kettle of fish.
“It’s just hard to value, but it’s not a nil value and I don’t think a nil valuation is going to be acceptable.”
Heffron head of SMSF technical and education services Lyn Formica advised against placing the asset in a fund.
“I say to clients if you’re not going to be able to get an easy value for this, it probably doesn’t belong in your SMSF,” Formica said.
“Consider it an investment for one of your other entities because every year you will need a value for this thing.”
Mansell said SMSF practitioners should raise this issue with clients considering an investment where the value may be hard to calculate.
“They are just going to have a compliance breach year in and year out, so a repeat breach, and this is something to bear in mind as the ATO have put it on notice now in written guidance,” she said.