All self-managed super funds should expect trouble if they are not re-valuing each asset every June 30 – and sometimes more frequently in between.
There was certainly a time when the annual financial accounts prepared for an SMSF could be a curious mixture of assets valued at their most recent worth (for example, shares listed on the Australian Securities Exchange) and others where the value was last updated several years ago or was even just the original purchase price (for example, property).
But more recently, the Australian Taxation Office (and therefore auditors) has been more active in looking under the bonnet of a fund’s investments and demanding that everything is revalued properly at June 30.
So why is it so important to go to a lot of work to place the “right” value on a fund’s assets? It’s obviously vital for large funds – where members join and leave all the time – because they need to make sure the spoils are fairly divided.
But in a family fund, where the same (generally two) members belong to the fund for its entire existence and the money is shared anyway, why does it matter so much? Why does anyone care what, say, a property is worth unless it’s being sold?
At one level, it matters because so many tax rules depend on reporting a fair value of a member’s superannuation balance, which forces the trustee to place a true value on all the assets of the fund.
For example, the exact amount a member has in super can dictate how much they can contribute to super, the amount they might have to withdraw from their pension each year, how much of their fund can be converted into a “retirement phase” pension and more.
Not surprisingly, the ATO is always very focused on making sure SMSFs can’t extract more tax concessions than they are supposed to from the superannuation tax rules. So the ATO cares deeply about making sure SMSFs are not understating their members’ account balances.
While many of the rules forcing SMSF trustees to place a current-day value on their assets have been around for a while, some funds have been slow to respond.
Longstanding practice
Not so long ago, it was reasonably common to see property investments revalued only every three years. Even then, there was no specific rule stipulating that three-yearly valuations were acceptable. There was simply a longstanding industry practice of assuming that property values don’t change quickly and hence getting a new valuation every three years was “probably close enough”. These days, that argument is rarely accepted by auditors and certainly not by the ATO. (In fact, anyone trying to buy their first property in any of our major cities would probably laugh at the very idea.)
In the case of assets that don’t have a readily available value, trustees are technically allowed to determine the value themselves if they feel they have the expertise to do so. Property is again a good example. In the past, an auditor may have simply accepted a statement from the trustee stating the value of the property or that the value hadn’t changed in the past 12 months. These days, they would expect those statements to be supported with external evidence.
Similarly, there is much greater pressure on other professionals such as real estate agents to support their appraisals with evidence – for example, data about comparable property sales, a well-argued position as to why this particular property might be considered different, et cetera.
Auditors are also looking more closely at fund investments such as private companies or unit trusts that own something else – for example, cases where the SMSF owns units in a unit trust but the trust owns property.
Gone are the days when an auditor simply accepted the signed accounts of the unit trust, which quite possibly just valued the property at its purchase price.
This might be the case because there is no legal or tax requirement for a private unit trust to update its asset values every year; that’s something that is peculiar to superannuation funds.
Genuinely valued
Now, an auditor would expect the trustee to confirm that the underlying assets of the trust are genuinely valued at market levels and, if not, to supply an alternative valuation.
Finally, this is not purely a June 30 issue, even though preparing the end-of-year financial accounts is often a driver for getting updated values. It’s also highly relevant when important events occur within a year – such as starting pensions or paying out a lump sum from a member’s “accumulation account” (an account that hasn’t yet been turned into a pension). In both cases, there are tax rules that make it important to calculate the value of the member’s account accurately. This will result in scrutiny on the values placed on fund assets at the time.
So don’t be surprised if auditors pay far more attention to asset values than they used to. They have a good reason and it’s far better to have the argument with the auditor than to wait for the ATO to come knocking.
This article was first published in the Australian Financial Review 4th August 2021.