Trustees of SMSF’s could be forgiven in thinking that the rules concerning valuation of assets held by the fund was only required every 3 years when it comes to properties and unlisted investments.  This has certainly become the norm from an industry perspective; however, this is not what the regulations proscribe and the ATO are now seeking adherence to the regulations.

What’s been happening?

Trustees with listed shares or investments can generally rely on the closing price at 30 June to value the investments they hold, however, not all SMSF’s limit themselves to listed investments.  Commonly, SMSF’s hold assets such as:

• Commercial or residential property
• Shares in unlisted company
• Units in unlisted unit trusts

The accepted practice historically was to revalue these assets at least once every three years with a view to minimising valuation compliance costs. SMSF auditors accepted this practice, however, driven by the ATO, they are now becoming more vigilant.  This is, in part, preparation for the upcoming Division 296 tax (noting that this takes effect with balances of more than $3m per member), and in part, a reflection of the ATO’s increasing drive on compliance to generate additional revenue.

What does this means for SMSF Trustees?

Trustees will need to consider the market value of the assets within the fund on an annual basis.  Trustees can achieve this a number of ways, the easiest but most expensive being utilisation of an independent qualified valuer.

For real property an alternative can be an appraisal from a real estate agent if the appraisal includes the methodology for their opinion which shows comparable sale data. If the investment is in vacant land, council rate notices may also be appropriate for meeting the market value criteria.

For other assets (e.g. unlisted units or shares), the valuations can be more complex and costly.  Trustees may wish to consider obtaining a formal valuation periodically, with a trustee’s update being calculated annually using the valuers methodology, however, this relies on the facts and circumstances remaining consistent across the period.

Alternatives to this approach include using the most recent sale to an unrelated party or the valuation of the underlying property if this is the sole asset held.

Where is this heading?

Ultimately, the movement away from historical valuation practices will mean an increase in valuation and compliance costs for trustees where unlisted investments are held.

The increase in formal valuations could mean a significant movement in the valuation of some SMSF’s potentially bringing them into the scope of Division 296.

The increased costs could also ultimately see trustees re-evaluate the investment options and move away from unlisted assets.  This may be part of the ATO’s overall strategy and a desire to increase revenue.

Should you have any questions about how these changes will impact you please reach out to your Engagement Partner.