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Is near enough good enough when valuing SMSF assets at market value? Not according to superannuation regulations, which require SMSF trustees to value all assets at market value when preparing financial statements.

The challenge is getting it right because the true impact of incorrect market valuations can have financial and operational repercussions for an SMSF.

What is market value?

The first rule is that the market dictates the value of an asset, not the trustee. Adopting a Goldilocks pricing strategy whereby the trustee has different values depending on their SMSF goals will result in a compliance breach.

The next logical step is to use the market value definition in relevant super rules that refer to the amount that a willing buyer could reasonably be expected to acquire the asset from a willing seller given the following assumptions:

  1. Both parties dealt with each other at arm’s length in relation to the sale
  2. The sale occurred after proper marketing of the asset
  3. The buyer and seller acted knowledgeably and prudentially in relation to the sale.

For clarity, the definition covers all types of property, including money. It essentially expects SMSF trustees to make valuation decisions using careful consideration and sound judgment, resulting in a fair and reasonable sale.

ATO general valuation principles

The ATO is aligned with the auditing standards because it also says an annual independent valuation is not required.

A valuation is fair and reasonable if it considers all the relevant factors and considerations that are likely to affect the value of an asset while using a fair and reasoned process.

Trustees, however, must provide objective and supportable data as evidence to support the reasons for their valuations. They must be able to explain the valuation in terms of the methodology and evidence to an independent third party.

It means that trustees are obliged to document what value has been adopted and how that value has been determined.

It is not the SMSF auditor’s job to value the asset.

The ATO has said that if trustees follow its guidelines, the valuation will generally be accepted if:

  1. It does not conflict with its general valuation guidelines or market valuation for tax purposes guide.

  2. There is no evidence that a different value was used for the corresponding capital gains tax event.

  3. It is based on objective and supportable data.

Trustee decisions and market values

SMSF trustees must decide whether to pay for an independent qualified market valuation report. If they do, the Fund will be ready for audit.

Alternatively, they must provide objective and supportable data annually for SMSF auditors to confirm compliance.

Trustees (or their SMSF advisers) need to allocate time and effort to obtain sufficient appropriate audit evidence for the audit. Where trustees cannot provide evidence, the SMSF auditor may be unable to confirm compliance, and the Fund may breach regulations.

Most importantly, if the ATO disagrees with a trustee valuation, it will apply an appropriate method to an amended value, which can impact transfer balance caps, non-arm’s length income (“NALI”), a member’s total superannuation balance and the potential Div 296 tax impost.

It means that the true impact of an incorrect market valuation can make an SMSF worse off where there are potential tax or compliance issues.

Administrative penalties

A breach comes with administrative penalties, attracting 20 penalty units currently worth $6,260 per trustee.

Where a fund has a corporate trustee, the penalty applies once, whereas it applies separately to each individual trustee. Yet another reason to have a corporate trustee.

Acquisition of assets from related party

Some exceptions allowed enable an SMSF to acquire assets from a related party, such as listed shares, business real property, widely held trusts, insurance policies, in-house assets up to 5%, acquiring an asset from another fund as a result of a relationship breakdown or a merger of super funds.

To ensure compliance and avoid the true impact of incorrect market valuations, related party assets must be acquired at market value, with an independent formal valuation undertaken as close to the transaction as possible where relevant.

Acquiring assets not at market value triggers the non-arms length income (NALI) provisions, whereas rectifying a breach of rules requires the trustees to sell the asset.

Case study 1: Scott decides to transfer listed shares to his SMSF as an in-specie contribution. He transfers $100,000 worth of listed shares using the 15 June 2024 share price and fills in the off-market share transfer form.

Life gets in the way, and Scott finally signs the form on 25 August 2024. He sent it to the share registry that day. Does the transaction comply?

Suggested answer: While Scott planned to transfer the shares on 15 June 2024, the form was dated and signed on 25 August 2024. Given that the share price is different on 25 August, the Fund has breached regulations, which are reportable yearly until the shares are disposed of.

The NALI provisions are also triggered because the transfer form specified an incorrect purchase price, and the parties are not dealing with each other at arm’s length.

The market value substitution rules apply to modify the cost base but do not affect the application of the NALI provisions. Disposal of the shares will result in a CGT event taxed at the top marginal tax rate and any income incurred before the sale.

NALI

Where an asset is purchased under the terms of a contract in the Fund’s name and not through an in-specie contribution, any difference between the amount paid by the Fund and the market value is not an in-specie contribution.

As a result, the Fund will trigger the NALI provisions, and all income from the asset will be NALI and any capital gains on disposal.

Case study 2: Scott decides to purchase business real property from an unrelated party. He personally pays the deposit of $60,000, which is correctly treated as a non-concessional contribution. The Fund paid the remaining $540,000 out of the bank account. Does this comply?

Suggested answer: The purchase contract is in the Fund’s name, which paid for part of the asset ($540,000), and the member paid for the other part ($60,000).

Effectively, the Fund has paid for an asset “less than market value” by paying $540,000 for a $600,000 property.

The Fund has triggered the NALI provisions because the asset was acquired under the terms of a contractual agreement and not through an in-specie contribution. All income from the property will be NALI, as well as any capital gain from disposal.

If Scott, as trustee of the Fund, recorded the acceptance of the contribution in writing and reported the market value of the contribution in the SMSF’s account and to the ATO, the NALI provisions are not triggered.

Collectable and personal use assets

There is no requirement to have an annual independent valuation undertaken for collectable and personal use assets as long as the trustee provides objective and supportable evidence to show how they value the asset.

However, when an asset is transferred to a related party, the trustee must have the sale price at a market value determined by a qualified, independent valuer.

Each breach, such as the asset being leased to a related party or stored in a related party’s private residence, is worth 10 penalty units per instance, or $3,130. In this example, the fine would amount to $6,260 per trustee, providing insight into the true impact of an incorrect market valuation.

Loans

Loans are considered high-risk within an SMSF primarily because of recoverability. The evidence required is the loan agreement and whether it is on commercial terms by reviewing factors such as the interest rate, whether it is secured or unsecured, and whether it is being repaid.

Where the terms of the loan agreement are not met, the question of recoverability and the market value of the loan is raised, which may result in a breach of rules.

Complex assets

Complex assets, such as property and unlisted entities, do not require an annual independent market valuation.

Regarding property, the cost purchased during the audit year at arm’s length is acceptable audit evidence. Where the value remains the same in subsequent years, the trustees must be able to provide evidence each year to show how and why they have continued to rely on that valuation.

It dispels the industry myth that a property valuation is required every three years.

Unlisted entities, on the other hand, require the consideration of several factors, such as the most recent sale price between unrelated parties or a property valuation when a property is the only asset of the entity.

Issues arise when a different accountant prepares the financials. The reports are challenging to obtain, and there is no requirement for any other entity apart from an SMSF to value their assets at market value.

Apart from the penalty units that can apply for a breach, all parties waste significant time, never to be recouped, trying to obtain objective and supportable data.

Conclusion

The complexities surrounding market valuations will mean more onerous obligations and responsibilities for all SMSFs and the professionals they rely on.

Shelley Banton is Head of Education at ASF Audits.

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