No.89: Valuation of property and unlisted investments

This article is relevant for clients with a Self-Managed Superannuation Fund 

Last year we raised with you several areas receiving greater auditor focus and ATO scrutiny. Refer Client Alert No.71: 2020 SMSF Compliance Renewed auditor focus and ATO scrutiny

These issues continue to face close scrutiny, in particular the guidelines for valuing assets, which we explore in greater detail below:

Commercial and Residential property must be valued at market value 

When preparing financial statements for a Self-Managed Superannuation Fund, the Superannuation Industry Supervision Act 1993 (SIS) requires that all assets, including commercial and residential property to be valued at market value.  If you have not already done so, now is a good time to start collating evidence to support this valuation, which will be requested by us when preparing the 30 June 2021 financial statements.

Forms of acceptable evidence sufficient for substantiating the market value of real property other than an external valuation, include:

  • independent appraisals from a real estate agent;
  • a contract of sale if the purchase is recent and no events have occurred to the property that could materially impact its value since the purchase; and
  • recent comparable sales results.

The ATO state that generally, a single item of evidence listed above will not be sufficient on its own unless the property has been recently purchased by the fund. We suggest obtaining evidence from a variety of sources to support compliance with this requirement.

Market rent should be independently valued 

When an SMSF leases commercial or residential property, the terms and conditions of the lease must be consistent with an arm’s length dealing. This includes ensuring that rent is in line with current market conditions and comparable to similar properties in the market.

If the rent received by your SMSF has not been reviewed recently, we suggest you engage an independent real estate agent to perform a review.

Valuation of investments in unlisted unit trusts or companies 

The requirement to value fund assets at market value can present problems when a fund invests in unlisted assets, the most common of these being unit trusts and companies, some of which are closely held. Market prices can be obtained easily for some assets, such as listed securities, because they are traded regularly, and prices are quoted daily. However, for unlisted investments, the market is often limited, and trades occur infrequently.

SMSF auditors are still required to obtain sufficient audit evidence to assess whether unlisted investments have been recorded at market value. To make this assessment the auditor will ask for documentation to support the valuations. Importantly, it is not the responsibility of the auditor to determine market value. Instead, their role is to check fund assets have been reported at market value by assessing the evidence provided and determining if the methodology is appropriate.

The Australian Taxation Office (ATO) has issued guidelines to assist trustees and auditors when making these assessments. This guidance advises appropriate audit evidence could include one or more of the following:

  • An independent expert valuation of assets held in the company or unit trust. If this cannot be provided, then the auditor may accept a director or trustee valuation but will want to see objective and verifiable data to support their valuation. They will also want to understand the valuation method used and any assumptions that have been relied upon.
  • A property valuation where property is a material asset of the company or trust;
  • Bank statements or confirmations to support material cash balances; or
  • The date and price of recent sales of the shares or units between unrelated parties.

The ATO make clear that signed audited financials of the company or trust are unlikely to be sufficient on their own if assets have been valued at cost. Unaudited financial statements are also unlikely to meet auditor requirements and they may seek additional information to verify the balances shown in these statements.

Auditors will also request documentation to support existence and ownership including:

  • Share certificates; and
  • Unit certificates

In some instances, they may seek written confirmation of a share or unit holding directly from the entity.

When will an auditor want to see market valuations undertaken? 

Generally, the auditor will be looking for information to support market valuations at 30 June of each financial year. However, there are other times where the auditor may ask for information regarding market value, for example:

  • When pensions are commenced;
  • To determined compliance with the 5% in house asset limit; and
  • When an asset is acquired from or disposed of to a related party

What are the consequences of not being able to provide this information? 

If the auditor cannot obtain sufficient and appropriate audit evidence that assets are valued at market value and in their professional opinion this could have a material impact on the fund, they may be required to issue a qualified audit report. They may also be required to report the contravention to the ATO in an Auditor Contravention Report (ACR) if the reporting criteria are met.

The ATO will assess the risk of the contravention reported in a ACR and send a letter to the trustees advising them of the outcome of their assessment. Even for low risk breaches the ATO are likely to direct the SMSF trustee to have the asset valued at market value. If the trustee cannot or is unwilling to do this, the trustee may be directed to sell the asset in question. If the ATO determines the breach is high risk, they may commence a review or full audit of the fund, potentially leading to adverse outcomes.

Importantly, the ATO is of the view that if you are unable to appropriately value an asset within your SMSF in accordance with the guidelines then that asset most likely shouldn’t be held by your fund.

For more information, please refer to the ATO guidelines for Valuation for self-managed super funds

Questions? 

If you have any questions about your SMSF compliance or the market valuation guidelines relating to your SMSF, please contact your regular Blaze Acumen advisor or any of the following:

Michelle McKenzie 
Partner                   03 9694 3040      mmckenzie@blazeacumen.com.au

Erica Harper 
Partner                   03 9694 3045     eharper@blazeacumen.com.au

Adam Konsak
Senior Manager     03 9694 3085     akonsak@blazeacumen.com.au