The challenge is getting it right because the true impact of incorrect market valuations can have financial and operational repercussions for an SMSF.

What is market value?

The first rule is that the market dictates the value of an asset, not the trustee. Adopting a Goldilocks pricing strategy whereby the trustee has different values depending on their SMSF goals will result in a compliance breach.

The next logical step is to use the market value definition in section 10(1) of SIS. It refers to the amount that a willing buyer could reasonably be expected to acquire the asset from a willing seller given the following assumptions:

1. Both parties dealt with each other at arm’s length in relation to the sale

2. The sale occurred after proper marketing of the asset

3. The buyer and seller acted knowledgeably and prudentially in relation to the sale.

For clarity, the definition covers all types of property, including money. It essentially expects SMSF trustees to make valuation decisions using careful consideration and sound judgment, resulting in a fair and reasonable sale.

What Do the Auditing Standards Say?

SMSF auditors are equally responsible for meeting their professional obligations under the auditing standards as the SIS legislation.

ASA 500: Audit Evidence is relevant for market valuations as it requires auditors to design appropriate procedures to obtain sufficient audit evidence.

ASA 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures, requires auditors to assess whether the trustee’s estimates are reasonable and whether there is a risk of material misstatement in the financial statements.

SMSF trustees are not typically experts or independent valuers. To that extent, auditors must ensure that trustee estimates have been prepared appropriately by reviewing factors such as whether they have used a reputable data source, their assumptions, trustee bias and subsequent events that can affect values.

In short, auditors need to understand how trustees came to a valuation by evaluating the logic, information and evidence of how they got there.

The auditing standards do not require SMSF auditors to obtain an independent annual valuation. They need sufficient appropriate audit evidence on file that substantiates the methodology used by trustees to value assets.

ATO General Valuation Principles

The ATO is aligned with the auditing standards because it also says an annual independent valuation is not required.

A valuation is fair and reasonable if it considers all the relevant factors and considerations that are likely to affect the value of an asset while using a fair and reasoned process.

Trustees, however, must provide objective and supportable data as evidence to support the reasons for their valuations. They must be able to explain the valuation in terms of the methodology and evidence to an independent third party.

It means that trustees are obliged to document what value has been adopted and how that value has been determined.

It is not the SMSF auditor’s job to value the asset.

The ATO has said that if trustees follow its guidelines, the valuation will generally be accepted if:

1. It does not conflict with its general valuation guidelines or market valuation for tax purposes guide.
2. There is no evidence that a different value was used for the corresponding capital gains tax event.
3. It is based on objective and supportable data

Trustee decisions & market values

SMSF trustees must decide whether to pay for an independent qualified market valuation report. If they do, the Fund will be ready for audit.

Alternatively, they must provide objective and supportable data annually for SMSF auditors to confirm compliance with r8.02B SISR.

Trustees (or their SMSF advisers) need to allocate time and effort to obtain sufficient appropriate audit evidence for the audit.

Where trustees cannot provide evidence, the SMSF auditor may be unable to confirm compliance, and the Fund may breach r8.02B.

Most importantly, if the ATO disagrees with a trustee valuation, it will apply an appropriate method to an amended value, which can impact transfer balance caps, non-arm’s length income (“NALI”), a member’s total superannuation balance and the potential Div 296 tax impost.

It means that the true impact of an incorrect market valuation can make an SMSF worse off where there are potential tax or compliance issues.

Admin penalties

A breach of r8.02B comes with administrative penalties. While not explicitly mentioned in r8.02B, it is a breach of the operating standards, attracting 20 penalty units currently worth $6,260 per trustee.

Where a fund has a corporate trustee, the penalty applies once, whereas it applies separately to each individual trustee. Yet another reason to have a corporate trustee.

Through its market valuation campaign earlier this year, the ATO identified a high-risk category of 16,500 SMSFs that reported the same market value of assets for at least three (3) income years.

The ATO reminded SMSFs with more complex assets, such as residential and commercial properties and unlisted investments in companies and trusts, to report assets at market value every year. Otherwise, they may be subject to additional tax and administrative penalties.

In the second part of our series, we review the compliance breaches that can contribute to the true impact of incorrect market valuations.