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 investments at market value each year. This requirement, enforceable by the ATO after a change in legislation passed in the 2013 financial year, makes annual market valuation a compliance obligation for trustees.
Listed shares and many managed investments are generally easy to value because market prices are available from the ASX listing or from yearly valuation statements provided by fund managers or issuers.
The ATO has issued guidelines for valuing investments without a listed market price. Trustees must use an acceptable valuation method and be prepared to show evidence of that method during an ATO audit. The ATO will generally accept a trustee’s valuation unless it conflicts with its Market Valuation for Tax Purposes guide, differs from the method used for a capital gains tax event, or lacks objective, supportable data.
Accurate valuations are critical in pension mode because the member’s account value determines minimum pension payments. If the ATO finds a valuation is inappropriate and the fund has been undervalued, a shortfall in the minimum pension can cause the fund to lose its tax-free pension status, meaning income that funds the pension could be taxed at 15%.
For property, the ATO’s Market Valuation for Tax Purposes guide lists three acceptable methods: the comparison approach, the depreciated replacement cost approach, and the income-based approach. The comparison approach—reviewing sales of similar properties and considering factors like location, zoning, size and accessibility—is commonly used. The other two methods are more complex and often harder for trustees to apply.
Not necessarily. Trustees need to assess whether there have been major changes in the investment or market conditions. If there have been no significant changes, trustees may reasonably conclude the value has not changed that year.
During an ATO compliance audit trustees may be asked to provide evidence of the valuation method used so the auditor can assess acceptability. This could include market price listings for traded assets, valuation statements for managed investments, or documentation supporting the chosen method for unlisted assets.
An independent third-party valuation is a reliable option—especially for property or other complex assets—because it takes into account all relevant facts and is less likely to be challenged by the ATO. It’s a useful way to ensure an objective, supportable market value when the valuation method is complicated or hard for trustees to justify themselves.
Call 1300 880 160
Start a chat
Schedule a call
