Compliance, Pensions, SMSF

Lumpy assets require regular valuation

SMSF asset valuation large assets lumpy assets Pension standards Minimum pension payments Heffron Lyn Formica

Regular valuations for large assets in an SMSF are vital in order to comply with the pension standards and the minimum payment requirement.

SMSF trustees should obtain valuations for large assets on an annual basis as not doing so may result in the fund failing to meet the required pension standards, according to a technical specialist.

Heffron head of education and content Lyn Formica demonstrated the challenge of complying with the minimum payment requirement by citing a case where valuations for two farms had changed substantially over the course of a few years.

Formica said Adam, who owns two cattle properties within his SMSF, recently obtained a valuation of $10 million and $2 million for each property, current as at 30 June 2023, however, a review of the records revealed both were valued together at $4 million in 2020.

“When [the ATO] see a huge spike in an asset valuation and they can see the values haven’t changed for the previous years, they’re going to wonder whether this asset should have been revalued more regularly,” Formica told attendees of a Heffron webinar last week.

“The other problem for Adam’s fund is this is a pension fund. So if in fact that spike in value happened back in 2022, then the minimum pension calculation for 2023 has been understated.

“If they were just drawing the bare minimum, perhaps they have not taken enough out of the fund, in which case we’ve got a potential issue that we’re going to lose our exempt pension income, or at least part of it, in relation to that fund.

“The second problem that he’s got is that the fund doesn’t have enough cash to meet their minimum pension obligations for 2023/24 because the assets are now worth $12 million.

“The minimum pension is quite high and it’s well in excess of the rent that’s being generated by these properties, which is a common problem with farming assets these days.”

The client asked if making an in-specie transfer of the smaller property to a member as a pension payment could rectify the issue, which Formica confirmed was not the case.

“That will not work. Pension payments need to be in cash and in-specie transfers of an asset will not count towards your minimum pension obligations,” she stated.

“Essentially the fund could sell that asset through to the members. The members will need to pay $2 million into the fund and that $2 million can then be used to make pension payments.

“If your minimum pension is not that high, just take what you need before 30 June to satisfy your minimum pension obligations because you might need some of that cash in the fund to make next year’s pension payments as well.”

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