End-of-year valuation principles for SMSFs

With the ATO’s lodgement date for SMSF annual returns looming, the process of preparing and auditing SMSF financial accounts is in full swing.

Often, one of the most controversial and subjective aspects of this process is the requirement to value the assets of the fund.

Questions regularly arise about the frequency of valuations and the basis of the valuation. Are annual valuations required? Is “market value” a reliable indicator? And how do you assign a value to an investment if there is no ready available or observable market for that investment?

Market value versus net market value

Since 1 July 2012 the superannuation legislation has required the assets of an SMSF for reporting purposes to be valued at market value. Interestingly, in 2010 the government-commissioned Super System Review recommended that SMSFs should be required to value their assets at net market value. Essentially “net market value” is the market value of an asset reduced by disposal costs that would reasonably expected to be incurred if the asset were sold.

Given that “market value” makes no allowance for disposal costs, in situations where the disposal costs associated with an investment are likely to be significant, reporting the value of the investment at market value as required by the legislation may overstate the true financial position of the fund.

In a practical sense, the disposal costs associated with most types of investments are likely to have an immaterial impact on the reported value of the investment. Collectables and personal use assets may be an exception as the selling costs associated with auctions, for example, can be significant.

In situations where the selling costs associated with a particular investment are likely to be significant, commercial judgement may be required to decide whether reporting the investment at market value provides a fair presentation of the true financial position of the fund. In some situations auditors may require an “emphasis of matter” or a qualification to be made to the annual audit report.

Are annual valuations required?

The ATO valuation guidelines for SMSFs say the SMSF trustees are expected to consider the value of the assets in their fund each year. This does not mean the trustees are required to obtain an external valuation of all assets each year.

For example, assets such as real property may not need an annual valuation unless a significant event occurred that may have changed its value since it was last valued. As long as the trustees are able to demonstrate that the valuation has been arrived at using a fair and reasonable process, no annual external valuation is required. “Fair and reasonable” for this purpose means it:

• takes into account all relevant factors and considerations likely to affect the value of the asset
• has been undertaken in good faith
• uses a rational and reasoned process
• is capable of explanation to a third party.

Other assets which can be valued easily each year such as cash, widely held managed funds and listed securities, should be valued at the end of each financial year.

Investments that are difficult to value

For some investments, such as unlisted securities and unit trusts, absences of a recognised market can make it difficult to identify their market value. In these situations the ATO expects the SMSF trustees to take into account several factors, including the:

• value of the underlying assets in the entity
• consideration paid on acquisition of the unlisted securities or units.

In a practical sense, where there have been recent purchases or sales in the unlisted security it may be possible to use the price of that transaction to derive the market value of the investment.

There may also be instances where an investment fails and there is neither a current nor a ready market for the investment. This may mean the investment is recorded in the financial accounts at a nil, or nominal amount.

For unlisted investments, to avoid possible compliance issues, it’s a good idea to discuss the valuation requirements with the SMSF trustees before they decide to invest. It’s also a good idea for the SMSF trustees to discuss these requirements with the investment manager.



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