Self-Managed Super Fund (SMSF) valuations have been on the radar of the Australian Taxation Office (ATO) and auditors in recent years.  They have emerged as a further risk area in light of the proposed tax on ‘earnings’ of super balances over $3 million (‘Division 296 tax’).

Why are valuations important?

The prime reason is the legal requirement for all assets to be valued at market value when preparing annual financial statements.

A flow on effect is that many of the regulatory obligations and concessions are dependent on market value, such as:

• Related party transfers
• Measurement of the in-house asset %
• Determining the value of a pension on commencement
• Determining the annual minimum pension payment amounts
• Determining the total super balances of members – this in turn, affects the ability to access:
• Carry-forward concessional contributions
• Non-concessional contributions cap and the bring-forward of non-concessional contributions
• Work test exemption
• Government co-contribution
• Spouse tax offset
• Segregated asset method for calculating exempt current pension income

Due to this, incorrect valuations, or those that the ATO does not agree with, can have an adverse financial and operational impact on SMSFs.

Proposed Division 296 tax from 1 July 2025

In March of this year, the ATO published an update, identifying and contacting a ‘high-risk’ category of 16,500 SMSFs that reported the same market value of assets for at least three income years.  This was seen as a targeted measure to prepare the SMSF community for the proposed new Division 296 tax, as this tax will be heavily reliant on the accuracy of fund values.  If, as proposed, the $3 million cap remains unindexed, valuations of many more SMSFs will be scrutinised by the ATO in coming years.

How to value SMSF assets and who can value them?

Strictly, the super provisions only require a valuation by a qualified independent valuer when collectables and personal use assets are disposed of to a related party.

The ATO recommends using a qualified independent valuer if:

• the value of the asset represents a significant proportion of the fund’s value, or
• the nature of the asset indicates that the valuation is likely to be complex or difficult.

The market value of listed securities is usually readily available via access to the approved stock exchange’s closing price.

For more unique or complex assets, SMSF trustees must make valuation decisions that are fair and reasonable, based on objective and supportable data.  Auditors will need sufficient evidence to substantiate the approach taken by SMSF trustees.

This is the case for both residential and commercial properties, and unlisted investments in companies and trusts, many of which hold real property.  A common arrangement for medical practitioners is to own their commercial premises either directly through their SMSFs, or indirectly where their SMSFs hold units in a trust that owns the premises, often with SMSFs of the practitioners they partner with.

Valuations undertaken by a property valuation service provider, including online services or a real estate agent, are acceptable. However, the valuations should stipulate the supportable data if it is the sole source of evidence being relied upon to substantiate the valuation. For example, in the case of a real estate agent appraisal or online report, the valuation should list the comparable sales it relied on.

How often is a valuation required and what are the challenges?

SMSF assets need to be recorded annually at market value on the last day of the income year.

While an external valuation is not strictly required every year, the SMSF trustees must consider whether the existing valuation can still be used to support the amount on the financial statements.

Qualified independent valuations can no longer be relied upon if:

• they have become materially inaccurate, or
• the asset’s value has changed significantly since it was last valued.

For example, if market conditions have changed or other factors such as the completion of renovations have affected the property’s value.

In recent years, we have had COVID-19 and fluctuating interest rates that have created a volatile property market.  If a high value property is being leased to a related party, the ATO may take a closer look at the year-end market values.  In many cases, it is good practice to get annual external valuations.

For commercial premises held by medical professionals, online valuations may not always be reliable given the need for the property to be inspected, so annual independent valuations can be costly.  In the absence of obtaining an updated independent valuation at year-end, the trustees must produce specific evidence of how the value was calculated.  For example, by using net yields and/or comparable sales.

Importantly, if the trustees decide that the value has not significantly changed since the previous valuation, they should document their considerations and rationale for reporting the same value.

Administrative penalties

Not reporting the fund at market value is a breach of the operating standards and can result in administrative penalties, attracting 20 penalty units currently equal to $6,260 per trustee.  Where a fund has individual trustees, the penalty applies separately to each trustee.

Summary

All trustees must ensure that SMSF assets are recorded at market value annually, valuations are fair and reasonable, and based on objective and supportable data. This will take on more significance for member balances that are close to $3 million, considering the proposed Division 296 tax.

Learn more

If you would like any assistance with any of the above, contact Kristy Baxter or Angela Stavropoulos on taxmed@pilotpartners.com.au or (07) 3023 1300.