Many families in business use the unique tax benefits of SMSFs.  And this guide is to help SMSF trustees understand their obligations to getting a valuation.

Getting a valuation

If you are running a SMSF you have obligations as a trustee to do a range of tasks.  And while we effectively manage a lot of those tasks one that we cannot “do internally” is to value the assets in the fund each year.

For many assets, like cash or shares listed on the Stock Exchange the revaluation process for the SMSF is relatively easy.  However if you hold real estate (either commercial, industrial or residential) or shares in an unlisted company the SMSF valuation is more difficult.

How often is a valuation needed

Traditionally trustees would undertake a revaluation every 3 years.  This was on the basis that asset valuations, especially for real estate, do not move significantly every year and the cost, and effort, is significant.

However SMSF trustee need to give consideration to the asset valuation yearly.  This is important for assets, like Perth residential real estate, that might be experiencing a phase of significant short term growth.

Who should do the valuation?

While this task can be daunting it is important to note that a valuation of the trustee’s assets do not need to be done by a registered valuer.  A valuation for real estate could be done by a real estate agent’s appraisal or even by the SMSF trustee’s.

In the event of an ATO review the focus is not on the signatory of the valuation – but on the evidence used to support the valuation.  Naturally a registered valuer would give better support for their valuation but it is not automatic that the registered valuer will be correct.  The scope of the valuation for a registered valuer might be something other than market value which is why the Tax Office will look beyond the letterhead and go to the substance of the document supporting the valuation.

Some valuations, like collectables, should be done by an independent valuer.  However it is also fair to say that most SMSF trustee’s no longer hold collectable assets given the cost of tax advice on the ongoing management.

What is market value?

The market value of an asset is the amount that a willing, but not anxious buyer, could reasonably expect to pay for an asset from a will, but not anxious seller assuming:

  • The buyer and seller are independent.
  • The sale occurs in an orderly fashion, with proper marketing and public information.
  • The buyer and seller are acting prudently.

So, the impact of a forced sale, highest and best use or market maker are not relevant to the valuation multiple.

When is a valuation important?

For many SMSF trustee’s the valuation of the asset is relatively insignificant.  The asset value does not change the fundamental fact that it is owned by the SMSF members – the capital growth is irrelevant.

However at certain key events the asset value impacts the tax profile of the fund.  These key time events include:

  1. The fund is commencing a pension.
  2. The fund is ceasing a pension.
  3. SMSF fund members are considering “catch up” super contributions.
  4. SMSF fund members want to make non concessional contributions.
  5. A fund member has died.
  6. A fund member is exiting the fund.
  7. The SMSF is using the “in house asset” rule.

An example of this position can be seen in Tax Determination TD 2000/29.

What is important is that tax advice should be a primary driver of your SMSF strategy, structuring and engagement with the SMSF regulator.  And the engaged use of valuations, together with written tax advice, have allowed some of our clients to leverage the benefits of a SMSF to their best advantage.

Of course, the choice of asset to value is important.   And this is where other advisors like lawyers, real estate agents, investment advisors and stockbrokers can help with the careful asset recommendations. 

At Westcourt we offer independent, impartial and unbiased SMSF tax advice.  We are not connected to a bank, like insurance company or investment group offering subsidized services.