An analysis of ATO data has unveiled that for three consecutive years, in excess of 16,500 self-managed superannuation funds (SMSFs) have documented assets with the same value. With a significant portion of these assets consisting of commercial or residential property in Australia, one could excuse the ATO’s astonishment. 

In the case of SMSFs, if asset values are consistently reported at the same value, the ATO will likely alert your SMSF for closer examination. 

By default, the value of assets in an SMSF can affect member balances, the amount that can be contributed, the ability to segregate assets for exempt current pension income, eligibility for catch-up concessional contributions, and the work test exemption. 

Moreover, as the implementation of the Division 296 $3 million superannuation tax approaches, valuations will become critical for all organisations with members’ balances of $3 million or more. 

 

Assessing worth at market value

The assets of your SMSF must be valued at “market value” annually, and your auditor must receive supporting documentation. In general, market value refers to the amount that a reasonable purchaser could anticipate to pay to obtain the asset from a willing vendor, presuming all parties involved are acting prudently and impartially and are conducting business at arm’s length. 

It is a measurement of common sense that considers the expected value of an asset in the future. 

When disposing of collectable and personal use assets held in an SMSF, such as motor vehicles, artwork, or jewellery, a qualified independent valuer is required to conduct a valuation. 

This does not imply that an annual impartial valuation is required, but it would be advisable to conduct one at least every three years. Regardless of whether an independent appraiser is being employed or not, an active evaluation predicated on market conditions remains mandatory. 

Should an asset that is improbable to contribute any value to one’s retirement resources be retained in an SMSF when a higher rate of return could be obtained elsewhere?

ATO regulations stipulate that trustees must value an asset on the basis of “objective and supportable data” in the majority of instances. This necessitates the recording of the asset’s valuation, a logical justification for the assessment, and the approach employed to ascertain its value. 

 

Assessing the worth of properties

The valuation of residential and commercial property is not required to be performed by an independent valuer. However, in cases where substantial modifications have occurred to the property, the market, or the property itself is distinctive or challenging to appraise, it is advisable to procure an independent written valuation from a valuer or real estate agent. 

When performing the valuation independently, it is imperative to meticulously record the time period for which the valuation is applicable as well as the contributing characteristics. 

Additionally, you should obtain reliable sales data from a property data service or from comparable properties that have recently sold in the same suburb. It is important to consult multiple sources of data.

In the context of commercial property valuation, net income yields are deemed indispensable. In situations involving related parties as tenants, such as when your business leases a commercial property owned by your SMSF, you will be required to provide substantiating evidence that the rent paid is commensurate with the market rate and is comparable in nature.

 

Valuing investments in unlisted companies and trusts

It can be challenging to assign a value to unlisted investments and companies. Financials in isolation are insufficient. However, in the case where an SMSF allocates funds to an unlisted company or unit trust shares, it is presumed that the trustees determined the asset’s initial purchase decision in consideration of its valuation, potential for capital appreciation, and ability to generate income. 

If the market value of the asset was determined prior to the investment, then annually determining its value should not be too difficult. 

One challenge encountered by numerous investors is that the initial investment in unlisted companies or trusts was essentially equivalent to the financial needs of the undertaking. 

 

The forthcoming Division 296 levy on super earnings and valuations

Those whose superannuation balances approach or surpass the $3 million threshold will find the value of assets especially significant in light of the forthcoming Division 296 tax on fund earnings. 

Due to the fact that the tax will assess asset values and levy taxes on earnings growth exceeding the $3 million threshold, precise valuations will be crucial in order to prevent the fund from paying unnecessary taxes and to diminish the probability of anomalies inflating tax obligations unduly.

If you have any questions regarding the SMSF asset valuations, give us a call on (02) 9957 4033.