The Australian Taxation Office (ATO) has provided valuation guidelines for SMSFs to comply with since the introduction of the market valuation requirements in SIS Reg. 8.02B from the 2012-13 financial year.
When trustees follow the guidance provided within the ATO framework for market valuations, the Regulator will generally accept the valuation provided. However, they may review a valuation as part of any compliance processes undertaken and may require evidence of the valuation method that has been used to allow the ATO to decide whether to accept the valuation or not. This evidence would include documentation of the valuation method used.
Retirement Phase Super Income Streams
With the introduction of the transfer balance cap and the concept of retirement phase that allows for exempt current pension income (ECPI) within a super fund, the ATO has recently updated the valuation requirements for when:
- determining the value of assets that support a member’s super pension;
- determining the value of new retirement income streams on or after 1 July 2017, when they are counted towards the transfer balance cap (TBC); and
- determining the market value of assets supporting members’ retirement phase and accumulation accounts for the purposes of calculating the members’ total super balances (TSB).
The following information summarises the valuation requirements for the above:
|Determining the value of assets that support a super pension.
This includes for calculating amounts that count towards the transfer balance cap.
|The market value of the account balance needs to be determined on the day the pension commences or moves into retirement phase or, for ongoing pensions, on 1 July of the financial year in which the pension is paid.
The valuation should be based on objective and supportable data. In some circumstances, a reasonable estimate may need to be made.
|Determining the market value of assets supporting members’ retirement phase and accumulation accounts for the purposes of calculating the members’ total super balances||The value of these accounts needs to be determined on 30 June each financial year, as the total super balance is calculated at this time for a number of purposes.|
|The valuation should be based on objective and supportable data.|
What you need to consider in determining an asset’s market value
The concept of ‘objective and supportable data’ for the purposes of determining a fair and reasonable valuation requires the trustee to demonstrate that:
- it has taken in account all relevant factors and considerations likely to affect the value of the asset;
- it has been undertaken in good faith;
- it uses a rational and reasoned process; and
- it is capable of explanation to a third party
Where the fund has a heavy asset concentration in a particular asset class or the nature of the asset indicates that the valuation is likely to be complex, the ATO recommends the user of a qualified independent valuer to determine the market value. Importantly, where an external valuation is required for the financial reports, it is not expected that the trustees obtain an external valuation each year, rather the obligation is on the trustee to consider the value of the asset in the fund each year. An example of where an updated external valuation would be required is where a significant event may occur since last valued such as:
- market volatility;
- a natural disaster (e.g. floods);
- changes to the character of the asset (e.g. improvements)
- macro-economic events (e.g. policy changes)
Determining the value of the assets that support a pension
The market value of the assets that support a pension as indicated in the table above needs to be determined on either:
- the commencement day of a pension
- for on-going pensions, 1 July of the financial year in which the pension is paid.
Similar to valuing assets for the purpose of financial reports, the valuation of fund assets at this time can be undertaken by anyone as long as it is based on objective and supportable data. Where the nature of the asset indicates that the valuation is likely to be complex, the ATO suggests considering the use of a qualified independent valuer.
It is expected that trustees would know the value of the assets in your fund. This does not mean that an external valuation needs to be performed for all assets each year. However, an external valuation of an asset such as real property may be prudent if it is expected that the valuation is now materially inaccurate or a significant event has occurred since it was last valued.
Other assets including cash, managed funds and listed securities are easily valued and should therefore be valued at the end of each financial year. It is accepted that a reasonable estimate of the value of the account balance can be used when a pension is commenced part way through the year. It is also accepted that a reasonable estimate value of the account balance can be used when calculating the value of a pension for transfer balance cap purposes and:
- the pension commenced on 1 July;
- you need to report this event to the ATO by 28 October;
- a full valuation of the assets supporting the pension is not possible by this date (for example, they include private company shares).
It is important to note that although a reasonable estimate of the value of a pension can be used in the circumstances described above, you cannot rely on this reasonable estimate when preparing the SMSF’s financial accounts and calculating the fund’s entitlement to claim exempt current pension income (ECPI) for an income year.
You can visit the ATO website for more information regarding the valuation guidelines for self-managed super funds.