The recently passed Superannuation Industry (Supervision) Act, requiring self-managed superannuation funds to value investments at market value, came as welcome news. Originally the Cooper review had recommended SMSFs value the investments at net market value.
Under the net market value method, SMSFs would have been forced to calculate the estimated selling costs for each investment and deduct this from the market value. Had this been adopted, a great deal of extra work would have been created for no benefit.
Before the new regulation became law there had been very few instances when SMSFs were forced to value investments at market value. One of these was when a pension was started by a member.
The market value of the investments needed to be calculated at the close of the previous financial year to establish the value of the member's balance at the time the pension was started. This was needed to calculate the minimum pension that must be paid.
The other instances when an SMSF was required to value investments were when they were purchased from or sold to members or related parties. This included when shares were made as an in specie contribution.
For super funds in accumulation phase, the Tax Office had previously made it clear that it considered SMSFs should value their investments at market value as a part of adopting best practice. Before the new regulation became law, the Tax Office did not have any legal backing to force an SMSF to adopt this best practice.
To help trustees of SMSFs with valuing investments the Tax Office recently issued an information sheet providing valuation guidelines for SMSFs.
For many investments made by SMSFs there will be markets in place and establishing a value will be relatively easy. For listed shares the value shown on the last trading day of the financial year, supported by published share tables, will be more than adequate. For managed funds the annual statement showing the value could be used.
The requirement to value investments at market value does not mean all investments must be valued by a valuer. In fact collectables and personal-use assets are the only investments that must be valued by a qualified independent valuer.
Where a property has been invested in by an SMSF the Tax Office does not even require a formal valuation by a real estate agent.
Instead, the Tax Office in its information sheet states, "the valuation may be undertaken by anyone as long it is based on objective and supportable data". The Tax Office even goes further by outlining the relevant factors and considerations to be considered in arriving at a market value. These include:
The value of similar properties.
The amount paid for a property in an arm's-length transaction.
Appraisals by an independent person.
The cost of improvements since the property was last valued.
Using net income yields for commercial properties.
The Tax Office is also taking a practical approach to how often a property needs to be valued. Unless there is an event that may have affected the property since it was last valued, such as a big change in market conditions or a natural disaster, the property does not need to be valued each year.
In the absence of these events, it is generally accepted a property only needs to be revalued every three years. It would be wise, however, for trustees to state, as a part of the fund's annual investment strategy, that in their opinion the value of properties had not materially increased since last valued.