SMSF trustees must know the value of their investments
For many investments held by SMSFs, obtaining a market value will be relatively easy. For shares in listed companies and many managed investments, their value is easily attainable either from the ASX share listing or a yearly valuation statement.
The ATO has issued guidelines with regard to valuing other investments that do not have a market value listed at the end of each financial year. Trustees of SMSFs cannot ignore this requirement. The ATO has indicated it will be checking - as part of the compliance audits being undertaken of SMSFs - valuation methods used.
The ATO has stated it will generally accept the valuation method used by trustees unless:
■ It conflicts with a guide issued by the ATO called Market Valuation for Tax Purposes.
■ It differs from the valuation method used to calculate a capital gains tax event.
■ There is objective and supportable data that the method is based on.
During an ATO audit SMSF trustees may be asked to provide evidence of the valuation method used so the auditor can assess whether it is acceptable. This requirement to include investments at market value is important when calculating the value of each member's benefit in an SMSF.
The value of a member's super account becomes even more important when they are in pension mode. When the ATO concludes that the valuation method used is inappropriate, and therefore the investment is either under or overvalued, they will apply the most appropriate valuation method and revalue the investment.
For an SMSF in pension phase this revaluation could have major tax consequences. If the undervaluation is significant, and therefore the shortfall in the minimum pension payment required is also significant, the fund would lose its tax-free pension status. This would mean all income earned to pay the pension would be taxed at 15 per cent.
One of the most common investments of SMSFs that would require a valuation is property. In the Market Valuation for Tax Purposes guide there are three valuation methods the ATO deems acceptable. They are the comparison approach, depreciated replacement cost approach and the income-based approach.
Under the comparison approach, sales of similar properties are reviewed. Aspects such as location, accessibility, utility services, town planning zoning and restrictions, size of the property and land and any other relevant factors need to be taken into account in arriving at the valuation.
The other two acceptable valuation methods are very complicated and in most cases would be difficult for SMSF trustees to use. One sure way of arriving at a valuation for a property that will involve no work by the trustees, and that the
ATO would have difficulty in finding fault with, is a valuation by an independent third party that takes into account all of the relevant facts.
The requirement for investments in an SMSF to be shown at market value does not necessarily mean investments must be valued each year. Instead, trustees will need to assess whether there have been any major changes in the investment or market conditions.
If there have not been any major changes, they could conclude the value has not changed.
Frequently Asked Questions about this Article…
From July 1 trustees of self-managed super funds (SMSFs) must show all fund investments at market value each year. The change, driven by legislation passed during the 2013 financial year, makes what was previously considered good practice by the Tax Office an enforceable requirement.
Shares in listed companies and many managed investments are generally easy to value because market prices are available from the ASX listing or from annual valuation statements, making it straightforward for trustees to record market value.
The ATO has issued guidelines for valuing investments without a listed market price, and trustees cannot ignore this requirement. During compliance audits the ATO may ask trustees to provide evidence of the valuation method used so an auditor can assess whether it is acceptable.
The ATO will generally accept a trustee’s valuation method unless it conflicts with the ATO’s Market Valuation for Tax Purposes guide, differs from the method used to calculate a capital gains tax event, or is not based on objective, supportable data.
For property the ATO’s Market Valuation for Tax Purposes guide lists three acceptable approaches: the comparison approach, the depreciated replacement cost approach and the income-based approach. The comparison approach reviews recent sales of similar properties and considers factors such as location, accessibility, size, zoning and other relevant features.
Yes — an independent third-party valuation that takes into account all relevant facts is a straightforward way to arrive at a property market value and is unlikely to be challenged by the ATO, because it removes the need for trustees to perform complex calculations themselves.
Not necessarily. Trustees should assess each year whether there have been major changes in the investment or market conditions; if there have been no major changes they may reasonably conclude the value has not changed and not revalue that asset for that year.
If the ATO concludes a valuation method is inappropriate and finds a significant undervaluation, it can revalue the investment. For an SMSF in pension phase this could create a shortfall in the minimum pension payment and cause the fund to lose its tax-free pension status, meaning income used to pay the pension would be taxed at 15%.
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