ATO Updates Market Valuation Guidelines
The ATO has released updated market valuation guidelines providing a new approach for SMSF trustees and auditors.
There is a renewed emphasis on anyone being able to undertake a valuation if it is based on objective and supportable data.
The updated guidance aims to put the onus of providing evidence to support an asset’s market valuation directly onto the SMSF trustee’s shoulders.
And as always, SMSF auditors must use their professional judgement and review whether trustees have provided sufficient appropriate audit evidence.
Frequency of Valuations
The ATO has updated its lexicon, replacing “external valuation” with “valuation by a qualified independent valuer”.
Using this as a preferred term enables the ATO to clarify how frequently a valuation from a qualified independent valuer is required.
Where trustees obtain a valuation by a qualified independent valuer during the year, they are not required to have a valuation undertaken each year unless a significant event has affected an asset’s value.
These events include a natural disaster, global pandemic, macroeconomic event, market volatility or changes to the character of the asset.
And at this point, the ATO heads into fresh territory by making SMSF trustees take more responsibility for their market valuations.
SMSF Trustee New Responsibilities
SMSF trustees now have new responsibilities when they rely on a qualified independent valuation from the prior year. The guidelines now state they need to:
- Assess whether it is still appropriate to use
- Document how they came to this conclusion
The ATO has introduced a new risk paradigm for SMSF trustees, requiring them to verify that the asset is accurately recorded in the fund’s financial statements before the SMSF auditor.
Property Valuations
The ATO now states that a valuation undertaken by a property valuation service provider, including online services or a real estate agent, is acceptable.
Additionally, if this valuation is the sole source of evidence being relied upon to substantiate the real property valuation, the valuation should specify the supportable data.
For example, in the case of a real estate agent’s appraisal or online report, the valuation should list the comparable sales it relied on if it references that methodology.
Under these circumstances, SMSF Trustees need to ensure that the kerbside valuation includes comparable sales, with best practice indicating that at least three must be sourced.
Where a different methodology is used, the accompanying evidence must use that objective and supportable data with the valuation.
Realistically, the ATO’s market valuation guidelines only support what the auditing standards already require SMSF auditors to do under their professional obligations.
SMSF Auditor Responsibilities
SMSF auditors are responsible for the final risk assessment of a valuation. While the auditor’s role is not to value fund assets, they must check the market valuation of the asset and the objective and supportable data.
An SMSF auditor uses their professional judgement to ensure they have sufficient appropriate audit evidence on which to rely, that the fund’s financials are fairly stated.
The situation is a catch-22 because if the trustee fails to do their job correctly, SMSF auditors cannot meet their professional obligations under the auditing standards.
Risk Management
SMSF auditors must still exercise their professional judgement to confirm compliance with r8.02B SISR, which could result in an audit query to ensure they meet their obligations.
As ACR (Auditor Contravention Report) reporting has recently changed due to the new independence requirements, there may be further developments if SMSF auditors do not receive sufficient appropriate audit evidence to substantiate market values.
One way of risk managing this situation could be through s35C SIS, which requires SMSF trustees to provide information to their auditor within 14 days of a request being made.
Where the information is not forthcoming, and there is a breach of r8.02B, an SMSF auditor may choose to mitigate risk and potential future litigation by proving they have requested the evidence that supports the valuation.
A lack of audit evidence for market valuations is the primary reason the ATO refers SMSF auditors to ASIC.
Including a breach of s35C SIS might be an option for those risk-averse SMSF auditors who prefer to have concrete evidence when (potentially) facing the ATO.
Investments Without a Ready Market
The ATO considers it the trustee’s responsibility to know the value of the asset, its potential for capital growth, and its capacity to produce income.
An asset that has no known value or potential for growth or income would not be a prudent investment.
The reason is that it will not be able to support the member’s retirement goals and may not comply with the sole purpose test.
Where a fund held this type of asset, it may be interpreted as a breach of s62 SIS.
Conclusion
The ATO has provided a subtle and welcome shift to risk-managing market valuations. SMSF trustees must now document why they accepted a qualified independent market valuation in a subsequent year.
While the ATO has updated its market valuation guidelines, SMSF auditors will continue to apply their professional judgement and ensure that sufficient appropriate audit evidence is available on their audit file.
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