With the federal government’s changes to superannuation all but certain, including the taxation of unrealised gains, SMSFs should start preparing for a shift in the compliance environment, particularly around the reporting and valuation of fund assets.
While we’re yet to see the Division 296 tax bill passed into legislation, trustees should prepare to face a new-look compliance landscape.
The Division 296 tax will target superannuation earnings on total super balances over $3 million, however, it’s important for all SMSF stakeholders to understand every fund will face increased scrutiny with the onus on trustees to prove their balance doesn’t exceed the threshold.
Supporting, evidence-based documentation will be vital.
Regulations allowing trustees to make their own valuation assessments remain unchanged and we’ve seen in the past that self-evaluations have been made based on an individual’s own research.
In this environment, well-documented, fact-based evidence will become even more critical.
I have previously highlighted the importance of ensuring assets are valued correctly and I again warn it will be unacceptable for trustees to make an educated guess or simply apply an inflationary increase to existing asset values.
This will be especially true in the context of the Division 296 tax and I would expect ‘close enough’ will not be ‘good enough’. In order to strengthen the credibility of their claims, trustees should instead seek independent, market-based evidence obtained as close to June 30 each year as possible.
Those who continue to self-assess should be prepared to produce extra information for their accountant and auditor, who simply won’t be able to accept anything less than evidence-based documentation ideally supplied from an adequately qualified third party.
Supporting valuation documentation will be particularly important for funds containing the following:
- Property: Residential property valuations can be supported by real estate listings, third-party appraisals or a contract of sale. I cannot stress enough the importance of comparable sales data, though it may be difficult to obtain for properties in regional and remote areas, renovated or unique properties, or during times of market volatility. Commercial property valuations can be complex due to limited sales data, change in function or use of the property, or changes in area zoning, for example, a medical business operating out of a residential property. There may be additional complexities for farmland, Crown land leases and overseas properties.
- Loans: Documentation to prove a loan is legitimate, enforceable and recoverable, such as a formal loan agreement, evidence of repayments, evidence highlighting the financial position of the borrower and adequate security over the loan (if applicable).
- Unlisted investments: Annual financial statements, net asset value or net tangible asset statements, capital raisings within the past 12 months, evidence of arm’s-length dealings if the parties are related.naz
Given the complex nature of asset valuation, not all supporting documents will be able to be obtained and in some instances may not even exist, for example, in the case of comparable data for regional property.
Despite this, trustees should demonstrate they have done all they possibly can to prove to the ATO their balance does not exceed the $3 million threshold for the proposed tax.
It’s worth noting if trustees and/or qualified professionals are unable to obtain the documentation required, the ATO is likely to face the same challenges in obtaining the data.
In these cases an auditor may be forced to lodge a contravention report, not because the trustee has done anything wrong, but simply to notify the regulator there is a lack of supporting documentation to substantiate the market valuation.
It’s one of several new compliance challenges created by the Division 296 tax that will be experienced by the sector more broadly, with professional services wait times and cost efficiencies also likely to be impacted.
There’s been much discussion around the Division 296 tax and the true number of people set to be impacted by the changes. However, it would be a dangerous assumption for anyone to make that because a person’s total super balance sits under the threshold, they won’t be affected in practical terms and that the changed compliance landscape won’t impact them.
Naz Randeria is managing director of Reliance Auditing Services.