Navigating SMSF Market Valuations

Shelley Banton
Shelley Banton
September 18, 2017
Market valuations for SMSF assets under scrutiny

The current market valuation of all SMSF assets, especially property and unlisted companies, has a significant impact on member’s $1.6 million transfer balance cap and $1.6 million total superannuation balance.

Market valuations will be under intense ATO scrutiny, who will be closely monitoring them to ensure compliance with the new legislation.

The risk is that SMSF trustees may deliberately undervalue assets to stay below the new caps and balances.

But they may also experience problems in obtaining up to date valuations when the fund has overseas property or property in assets such as a private trust, which has no statutory requirement to prepare their accounts on market basis.

Either way, there’s no doubt that the quality of some market valuations will be questionable.

SMSF professionals will have to rely on their judgment to ascertain whether the evidence provided supports a current market valuation.

Ensuring that market valuations constitute appropriate evidence means looking for relevant issues such as sources of data used, assumptions and methods used and their appropriateness, and consistency, with the prior period.

What will be the impact on the SMSF industry when a market valuation fails to use a fair and reasonable basis to value an asset?

SMSF Trustees

Trustees and directors of a corporate trustee who fail to value an SMSF asset as required are potentially liable to an administrative penalty of 10 penalty units, an equivalent of $2,100.

As the penalty is imposed per trustee, a fund with four individual trustees could currently face total penalties of $8,400, which must be paid personally and not from the fund.

This is in direct contrast to a fund with a corporate trustee, that’s fined $1,800 because it has one trustee regardless of the number of directors.

SMSF trustees should be aware that a change in accounting or valuation methodologies from the prior year (without sufficient justification) would raise additional scrutiny.

Also failing to keep accounting records – which includes records about market value – as required under s103 SIS is an offence of strict liability with a penalty of 50 penalty units, or $10,500 per trustee. 

 SMSF Administrators

With the high risk of an ATO audit, SMSF administrators may be risking their professional reputation by aligning themselves with SMSF auditors who shortcut their audit obligations.

If a fund was selected for an ATO audit and had an adverse outcome, an administrator might be at risk of a potential professional indemnity (PI) claim from the SMSF trustee.

Essentially, the trustee would have recourse to the accountant as they relied on the accountant’s advice to engage the SMSF auditor in the first place.

Actuaries

Actuaries may now find themselves under the SMSF spotlight with the new focus on market valuations.

Sometimes the average value of current pension liabilities and superannuation liabilities can simply be calculated as the arithmetic mean of the opening and closing values of the fund.

However often SMSF payments are not uniform: contributions in June are common, and pension payments are not made uniformly across a year. 

The average must be appropriately weighted to allow for any events that have a material and uneven impact on the relative size of these liabilities over the year or at times during the year.

Such events (which may not always be evident from the financial statements) may include

(a) contributions, rollovers or benefit payments (including pension payments) that occur at irregular times rather than regularly throughout the year

(b) the commencement or termination of a pension during the year

(c) changes in asset values with consequent changes in a significant part of the fund’s liabilities at a particular time during the year rather than throughout the year

Where an adjustment would affect both the average current pension liabilities and the average superannuation liabilities, but would not have a material impact on the ratio of the two, the actuary is not required to make any such adjustment to the liability amounts. 

But in some cases, the calculation of current pension liabilities and superannuation liabilities depends on the proportion of the fund’s income which is exempt from tax.

It is only when the calculations are iterative that the actuary may rely on draft financial statements, provided that doing so has no material impact on the proportion of income that is exempt from tax.

There is a risk that actuaries may use incorrect unaudited valuations of assets provided by SMSF trustees without reviewing the data and methodologies used.

In a situation where the ATO disallowed an SMSF trustee’s ECPI claim, actuaries may find themselves facing a PI claim from an SMSF trustee along with disciplinary action from their professional body.

SMSF Auditors

SMSF auditors need to be especially vigilant in reviewing valuations.

One of the ATO’s 2017/18 compliance targets for SMSF auditors is market valuations. SMSF auditors can expect to be held accountable for reviewing documented evidence demonstrating that a fund’s assets have been valued in accordance with those principles.

Also, where an SMSF auditor has a lack of evidence for a number of funds, and this coincides with a heavy reliance on fees generated for those funds through a single referral source, the ATO may consider auditor independence an issue and refer the auditor to ASIC for further investigation.

From a SIS perspective, SMSF auditors are required to qualify Part A of the financial report when insufficient audit evidence has been provided to support the value of a material asset, such as property.

Part B of the audit report is qualified on r8.02B where the value of the property is material. An auditor contravention report is also lodged with the ATO where the fund has failed the trustee behaviour test or the financial threshold test in relation to the market value of assets.

Conclusion

The complexities surrounding market valuations will mean more onerous obligations and responsibilities for SMSF professionals.

And while assets that require valuations remain sought-after investments by SMSF trustees, keeping on top of the legislation will be critical to ensure funds continue to operate in a compliant manner.

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