To keep your SMSF’s auditor and the ATO happy, it’s essential to take asset valuation seriously. By law, SMSFs must record all of their assets at “market value” – an important requirement that allows funds to accurately report the value of members’ benefits. Additionally, there are a number of SMSF investment rules that specifically require a “market value” to be assessed.
For example, SMSFs are generally prohibited from acquiring assets from related parties – with some notable exceptions such as “business real property” (broadly, 100% commercial property) and listed shares. However, these exceptions only apply if the assets in question are acquired at market value.
Under superannuation law, “market value” is defined as the amount that a willing buyer would reasonably be expected to pay in a hypothetical scenario where all of the following conditions are met:
- the buyer and seller deal with each other at arm’s length;
- the sale occurs after proper marketing of the asset; and
- the buyer and the seller act “knowledgeably and prudentially”.
How does this work in practice? In an audit, your SMSF’s auditor (and the ATO) will expect you to be able to provide evidence supporting your valuation. This should be based on “objective and supportable” data, and should demonstrate a “fair and reasonable” valuation method.
The ATO says a method is fair and reasonable if it is a good faith, rational process that takes into account all relevant factors and can be explained to a third party.
Generally, it’s not compulsory to use a qualified external valuer, however, there are some exceptions, eg before an SMSF disposes of collectables or personal use assets (such as artwork) to related parties. The ATO also recommends a valuation from an expert for any asset that represents a large proportion of your fund’s total value or that is likely to be complex or difficult to value.
Real estate doesn’t need to be valued each year, unless there has been a significant event since the last valuation that may affect the value.
Listed shares and managed units are easy to value, and should therefore be valued at the end of each financial year. Unlisted shares and units (eg investments in private companies or trusts) are more difficult to value than listed assets and require consideration of a range of factors.
For some assets, determining market value can be a complex process that requires professional input. Don’t go it alone – get the right advice and ensure your valuations stand up to ATO scrutiny.