All SMSFs must maintain all assets in the annual accounts and financial statements at their market value. Prior to the lodgement of the annual return, it also is a requirement for an SMSF’s auditor to ensure that they have sufficient and appropriate evidence supporting each of the fund's investment values.
Over the past 2 years, the Australian Tax Office (ATO) has provided some guidelines to help SMSF trustees and auditors in this regard.
The publication is "Valuation guidelines for self-managed super funds" (QC 26343).
This article gives a summary of the five main areas the ATO is keen to improve the industry’s knowledge, as well as some practical ways to deal with client situations and audit queries that will inevitably arise.
Trustees must obtain an objective and supportable market valuation of an asset when required by tax and superannuation law. To start with, s10 of SISA includes this definition:
"market value", in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:
a) that the buyer and the seller dealt with each other at arm's length in relation to the sale;
b) that the sale occurred after proper marketing of the asset;
c) that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.
A valuation of assets is required to confirm your SMSF has complied with relevant super laws including:
• preparing the financial accounts and statements of the fund
• acquiring assets between SMSFs and related parties
• investments made and maintained on an arm's-length basis
• disposing of certain collectables and personal use assets to a related party of the fund
• determining the market value of an SMSF's in-house assets as a percentage of all assets in the fund
• determining the value of assets that support a member's super pension
• determining the value of existing retirement income streams on 1 July 2017 as they will be counted towards the transfer balance cap
• determining the value of new retirement income streams on or after 1 July 2017, when they will be counted towards the transfer balance cap
• determining the market value of assets that are eligible for transitional capital gains tax (CGT) relief in the 2016–17 income year
• determining the market value of assets supporting members' retirement phase and accumulation accounts for the purposes of calculating the members' total super balances
• managing your fund’s investments in the best financial interests of fund members.
In SIS Regulation 8.02B and various related auditing standards: an asset must be valued at its market value.
It has been suggested in the past that trustees need to engage a qualified independent property valuer, however, the ATO’s guidelines confirm this isn’t required in all cases. A valuation based on objective and supportable data will be acceptable, and most likely quite a bit more cost-effective for trustees.
If an asset represents a significant proportion of a Fund’s value, or as a non-standard asset it would be difficult to value otherwise, then the ATO recommends using an independent valuer.
It needs to be pointed out that SIS Regulation 13.18AA (7) requires an independent valuer when a Fund disposes of certain collectables and personal use assets to a related party.
It is not clear in the ATO guidance about the annual revaluation requirement, however as all assets must be maintained at market value, and auditing standards require evidence of recent/current values, it would be difficult for trustees to provide the assurance required without going through the process. Despite the ambiguity, the trustees should work with their auditor to satisfy the annual revaluation requirement where possible.
The ATO's guidance provides for multiple sources of valuation data, including comparable publicly available property values and independent property appraisals. It probably goes without saying that one quality source could be sufficient, rather than providing a number of poor quality sources.
An auditor can apply their professional judgment to conclude less but higher quality evidence to be sufficient and appropriate evidence.
Specifically in relation to property valuations, the ATO's expectation is that a valuation should be backed by comparable sales data or other relevant information. This is important to consider when a trustee engages a real estate agent or alternatively uses an online service.
The auditor will carefully review the quality of the data, including the valuer’s conclusion(s).
It is important to pay attention to the requirements outlined in the legislation and auditing standards. The ATO's ‘valuation guidelines’ are just that – guidelines to assist trustees/auditors in satisfying the legislative requirements.
When in doubt, check in with your auditor to work through the questions and prepare for the audit of your Fund, or your client’s Fund.
