By Marjon Muizer
Correctly valuing an SMSF’s investments is key to preparing the fund’s financial accounts. For FY 2016/17, getting the value right is more important than ever, especially with the impact of the new super changes. Getting it wrong may impact on the fund’s compliance and whether you can make non-concessional contributions or commence a pension.
The value of some of the fund’s investments may be easy to obtain, such as listed company shares and bank account balances. However, when it comes to real estate and other fund investments, market value may not be that obvious and a valuation may be required for some investments from an appropriately qualified person, such as an independent registered valuer or real estate agent.
The following guide provides an outline of what is required to help in valuing fund investments where market values are not readily available.
Real estate needs to be valued at market value every year at 30 June, but this does not mean that the trustees must obtain a formal external valuation each and every year. An external valuation would be prudent if an event has occurred that has affected the value of the property, such as a renovation, extension or rezoning. Valuation of real estate can be undertaken by anyone, including the trustee(s), if suitably qualified, as long as it is based on objective and supportable data.
The following would generally be considered adequate audit evidence:
The SMSF auditor may request an independent valuation of the real estate. It’s not mandatory, but it’s advisable that a formal valuation is organised at least once every three years.
If the fund owns residential or commercial real estate the auditor will also assess if the rental income received by the fund is paid on commercial terms.
Audit evidence that would be considered satisfactory:
It can sometimes be tricky to obtain reliable audit evidence to support the value of unlisted investments. The company or trust may not be required to value their assets at market value and trustees must consider the value of the assets held by the entity. For example, where the trust or company holds property, any value should be based on the guidelines for real estate outlined above.
Another consideration is that unlisted entities may not be required to get their financial statements independently audited, which make them less reliable from an audit perspective.
The following would generally be considered adequate audit evidence:
When a fund makes a loan to another entity or individual (who is not a fund member or relative of the member), the loan agreement will specify the terms and conditions of the loan, including whether the loan it is secured or unsecured.
The market value of a loan is determined by its recoverability which could be:
Business assets cover items such as equipment, machinery and licenses. Similar to real estate, they must be valued at market value each year at 30 June, but it is not compulsory for the trustees to obtain a formal external valuation. A recent valuation is prudent if an event has occurred that has affected the value of the asset. Trustees also need to consider depreciation of the asset. For certain business assets the ATO provides guidelines on the applicable depreciation rate. Trustees may organise a formal valuation of the business asset from a:
Collectable and personal use assets cover items such as artwork, memorabilia, collectable coins and bank notes, wine and vintage cars. Metals such as gold and silver are only considered collectable items if their value exceeds the value of the metal based on its weight. When a precious metal is not considered a collectible item, the value is determined by its spot price.
Transfers of collectables and personal use assets to a related party must be made at a market price determined by a qualified independent valuer.
If assets are not recorded at market value in the fund’s financial accounts a fine of 10 penalty units (currently $2,100) per trustee can be imposed.
A check is made by the fund’s auditor as to whether the annual financial statements have investments shown at market value based on objective and supportable evidence.
If assets are not valued at market value delays can occur in lodging the fund’s tax return and lack of adequate information can result in a qualified audit opinion. Any qualified opinion will be reported by the auditor to the ATO, for which the trustee(s) can expect follow up action.
The ATO provides guidelines on their website to assist SMSF trustees when valuing assets for superannuation purposes. If trustees follow the ATO’s guidelines they will accept the valuation provided by the trustees, as a general rule.
Ensuring investments of an SMSF are valued appropriately is important to comply with the superannuation law and avoiding penalties. Appropriate valuations can be used to determine:
For SMSF members affected by the $1.6m transfer balance cap, an appropriate valuation is also essential for FY 2016/17 to determine whether the member’s pension balance(s) may exceed the cap and for purposes of the CGT cost base reset.
