As the end of the financial year approaches, it is timely to remind SMSF trustees of their compliance obligations and in particular the need to ensure assets are valued correctly.
While this is regular practice, given the ATO recently published a reminder on valuing assets and with plans to tax unrealised capital gains proposed to begin next year, it is a fair assumption asset valuations will likely face increased scrutiny in coming years.
The ATO’s reminder made particular mention of more than 16,000 SMSFs that have reported certain classes of assets at the same value for at least three years.
Put simply, trustees must value the assets of the fund at market value each year, that is, the amount a willing buyer would pay to acquire the asset.
However, it’s not simply enough for trustees to make an educated guess or apply inflationary increases to the value of their assets, but rather the valuation must be objective and provide supportable data.
There are a variety of ways in which this can be done, whether by using publicly available data to determine market value, a valuation based on replacement or reproduction cost or a valuation based on a range of outcomes or discrete events, for example.
While there are a vast range of assets that are required to have an annual valuation undertaken, trustees may benefit from engaging with a professional valuation service for some common assets, which include:
- Residential properties: While publicly available market data can assist in providing a valuation, it may be more difficult to use this information to provide an accurate representation if there are no comparable properties, such as in remote or regional towns, for example, if the property has been renovated or has unusual features, property that has development or subdivision potential, or during times of rapidly changing market conditions.
- Commercial properties: Commercial properties are often more complex to provide a valuation for due to similar reasons as for residential properties, but also due to limited market activity, changing functions of the commercial property in question or changes in area zoning, for example, a medical business operating out of a residential property. Other complexities that may make it difficult to obtain objective and supportable data may include owning farmland, holding a long-term lease on Crown land or owning overseas property.
- Shares: While listed shares must be valued at their closing price on the relevant stock exchange as at June 30 of the year in question, it may be more complex to determine market value for shares in an unlisted company and a financial statement is often not sufficient on its own, with additional evidence, such as recent equity transactions or capital raisings, required to support the market value of underlying assets.
- Loans: Valuations must take into account the purpose of the loan, its terms, recoverability and whether repayments, either interest only or consisting of interest and principal, are being made regularly, among other considerations. Further, financial documentation from the borrower may also be required.
It should also be noted for trustees holding unusual assets, such as unlisted options, convertible notes and/or convertible loans, for example, director assessments will need to be provided, which includes a detailed basis of the valuation.
While it is fair to acknowledge providing annual valuations can be time consuming and come at a cost, especially for assets that increase in value only marginally over time, annual valuations would reduce the risk of non-compliance.
It is vital all relevant compliance requirements are understood and met, and I urge trustees and administrators to work with an auditor who will ensure valuations satisfy the ATO’s standards around objective and supportable data.
Naz Randeria is managing director of Reliance Auditing Services.