Valuation Guidelines for SMSFs

As an auditor looking at the new super changes impacting funds from 1 July 2017, I will be looking at the $1.6million transfer balance cap and what evidence the trustees and administrators can show to prove the market values of the assets in the fund as at financial year end.

The ground work for this has to happen before financial year end to ensure the fund meets the auditors and ATO guidelines, and can accurately calculate the $1.6 million balance cap transfer as at 30 June 2017.

The good news is that the ATO has confirmed that the current guidelines for valuations, which all super funds are required to follow for the year to 30 June 2017, have not changed for the following year.

https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/Valuation-guidelines-for-self-managed-super-funds/

Determining the value of assets held within an SMSF is not only important to comply with the new balance cap transfer rules but also with the relevant super law and in providing meaningful accounts so that trustees can effectively manage their retirement savings.

In preparing the financial accounts and statements the ATO expects that valuations are considered each year and that each asset must be valued at market value, based on objective and supportable data. For cash, widely held managed funds and listed securities this is relatively straight forward and, therefore, up to date market valuations should be stated at the end of each financial year.

For real property assets an external valuation is not necessarily required every year, unless a significant event has occurred that would materially change the asset’s market value. In valuing real property, factors and considerations might include the value of similar properties; the purchase price in an arm’s length market; independent appraisals; whether the property has undergone any improvements since it was last valued; and net income yields. Further, a valuation can be undertaken by anyone, not only a property valuation service provider or real estate agent, as long as it is based on objective and supportable data.

As a general rule, it must be demonstrable that an asset’s value was determined through a “fair and reasonable” process. This should be achieved by taking into account all relevant factors and considerations likely to affect the value of an asset; undertaking the valuation in good faith; and using a rational and reasoned process that is explainable to a third party.

In regard to unlisted securities and unit trusts it is expected that consideration be given to the consideration paid on acquisition and to the value of the underlying assets in the entity. If determining the value of unlisted securities is likely to prove complex, it might be wise to engage an external valuer for these assets.

The key message from the ATO and your auditor is make sure you have adequate support for the market valuations of assets held by the fund, particularly when there are big legislative changes like the ones coming into effect as at 1 July 2017.

More information can be found on the ATO website.