Valuations validate related-party transfers

SMSF related party transactions valuation arm's length

While not required to do so, SMSFs should seek valuations when disposing of assets to a related party to prove the transactions were at arm's length.

SMSFs disposing of an asset to a related party do not have to seek a valuation as part of the transaction, but doing so would provide clear evidence it was conducted at arm’s length, according to an SMSF specialist.

Cooper Partners Financial Services director Jemma Sanderson said the interaction between the ATO’s recently updated valuation guidelines for SMSFs and the need for them to deal with related parties at arm’s length meant seeking a valuation was advisable.

“Valuations are a really big area of ATO scrutiny, including with respect to the transfer of assets in and the payment out of those that might be in-specie,” Sanderson said during a recent online presentation hosted by The Auditor’s Institute.

“The ATO has some new guidelines under QC26343 and there’s no requirement to get a sworn valuation for assets, but the value has to be based on objective and supportable data.

“An SMSF must also interact with related parties on an arm’s-length basis to avoid the non-arm’s-length income provisions, but we’re not talking about selling the asset on the market, it’s going from one entity to another related entity. So what is the market value?”

She pointed out that while trustees could base the value of an asset on the recent public sale of similar assets in the area, securing a professional valuation would remove any concerns an auditor may have regarding the transaction.

“I could just go and pay a professional valuer, they value it and that is what is used for the purpose of valuing the asset. There’s no requirement for that, but we’re trying to mitigate any risk here and mitigate the ‘faffing around’ factor,” she said.

“If I’m basing it on my trustee decision and valuation, is that sufficient to get it through audit?

“If it was a sworn professional valuation, then the auditor would straight away see what was done and someone’s actually visited the premises and done a proper valuation.

“The guidance states a valuation is not required when an asset is disposed of to a related party, however, it must occur on an arm’s-length basis and you have to justify what that looks like, and it also goes on to define market value.

“So all of these things lend themselves to getting proper market valuations done, particularly when we’re talking about transactions in and out of a fund to a related party.

“I would advise my clients to get a sworn valuation or a proper valuation with any of those transactions happening.”

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