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Challenges in valuing SMSF Assets

Valuation of funds' assets on 30th June financial statements for most administrators and trustees is an unimportant issue. The significance is to update member balance on balance sheet date with un-realized gain or loss, unless the fund is paying a pension to a member where member balance on 30th June is important as it determines minimum pension payment in the following year.

However for 30th June 2017 financial statements and for all future years, correct asset valuation has grown in meaning as it is not only about minimum pension payments to pension members but a whole lot of other things as well which depend on asset values.

These other issues being;

Total superannuation balance: The value of all of an individual's superannuation interests for non-concessional contribution purposes. If total superannuation balance is above $1.6M an SMSF cannot accept any further non-concessional contributions for the member.

Transfer Balance Cap: The maximum amount of capital that can be transferred into the tax-free retirement phase of super. This is not only for members who were on pension on 30th June 2017 but also those members who will be retiring in future.

CGT Relief: Tax Provisions that provide transitional relief from the tax consequences for capital gains accumulated before 1 July 2017, where they would have been exempt if realised prior to a fund taking action to comply with the transfer balance cap or changes to the treatment of transition-to-retirement income streams that take effect from 1 July 2017.

Any asset valuation to fit the member balance under any cap amount may attract ATO's attention. While the valuations of cash products and listed securities are fairly straightforward, assigning a value to assets such as property, unlisted property trusts etc can be more complex.

Valuation of Property

For preparing SMSF financial reports, an external valuation of real property is not required each year. A change in valuation of property usually from year to year happens due to an event that has occurred that may affect the value of the property since it was last valued. This may be due to a change in market conditions or a natural disaster or for any other reason.

Market conditions such as demand and supply of property have changed quite drastically in most capital cities and any fund showing market valuation of a property at 30th June 2017 at cost price may not be a correct reflection of true market value even if the property was purchased less than 12 months earlier.

When valuing real property, relevant factors and considerations may include:

• the value of similar properties
• the amount that was paid for the property in an arm's length market
• independent appraisals
• whether the property has undergone improvements since it was last valued
• for commercial properties, net income yields.

When valuing real property assets for SMSF financial report, valuation may be undertaken by anyone (including trustees) as long as it is based on objective and supportable data.

A valuation undertaken by a property valuation service provider, including online services or real estate agent should be acceptable to the SMSF auditor. Where the nature of the asset indicates that the valuation is likely to be complex, SMSF auditors may request the trustees to use a qualified independent valuer.

Valuation of Assets where a member is on Pension on 30th June 2017

Where a fund owns a property and if any member is on pension or on a TRIS on 30th June 2017 and wants to continue the TRIS beyond 1st July 2017 and the member balance is much below the $1.6M balance transfer cap amount, SMSF auditors have a low audit risk in accepting trustees version of market valuation of all funds assets.

However, if member balance is closer or greater than $1.6M, an SMSF auditor will have to be more vigilant and report any reduction in market value of any property as the ATO has clearly indicated that they will be monitoring trustee behaviour.

Property valuation by a real estate agent usually have a price range and if the trustees have relied on these valuations, it is quite likely that a lower value of the range will be used to circumvent any member breaching the balance transfer cap amount. For CGT relief concerns, some trustees may use higher value of the asset if the fund is planning to sell the asset in near future as $1.6M worth of pension assets can be moved to retirement phase from 1st July 2017. The fund will pay tax on any gain from the reset cost base of the asset if CGT relief is chosen by trustees.

Which valuation - Lower or Upper should be used by trustees

It can be very difficult to determine true real market value of any property, unless it is a unit and there have been recent similar unit sales in the building. Each property is unique as improvements (e.g. house built on them) on each property are unique.

Also valuing each property at its selling price and crediting the members balances with the unrealized gain is also incorrect as other factors and big ticket costs on sale of property have to be factored into these calculations. Tax expense at possible 15% or 10% (if sold after 12 months of acquisition) on gain to be paid on the sale transaction must be factored in before member balances are inflated with net increase in market value. Other big cost such as real estate agents commission can have an impact on realized value of an asset and subsequently on member balances.

Unless the fund prepares financial statements with tax effective accounting principles (not done by many accountants), market value of property can show mixed results specially when some members are in pension phase up to 30th June 2017, as 100% of all pension assets are exempt from tax irrespective of pension member balances.

Hence market valuation of any SMSF property on 30th June 2017 will never be accurate, unless there is an auction of the property on 30th June 2017 and the selling price is the market price which the auditor can rely on. It will be safe to say that all financial statements of with property will have an inherent margin of error and if that error is material, it should be reported by the SMSF auditor to the regulator (ATO).

Since any market valuation, even by a qualified valuer is just a mere estimation, SMSF auditors must be tolerant with their material assessment of member balances on balance date and allow only those valuations which are based on detailed objective and supportable data.

Conclusion

Trustee valuation of property on 30th June 2017 may either be influenced by balance transfer cap amount for one or all members or by CGT relief provisions - or - in other words, property valuations may be either lower or higher depending on likely future trustee intentions.

Secondly, the ATO will be monitoring changes in behaviour in relation to SMSF asset valuations and any significant reduction in asset valuations in SMSFs, particularly coincidentally putting a member below balance transfer cap amount will certainly attract scrutiny.

Any trustee naughtiness will eventually reflect on SMSF auditors capability and skills, who will need to objectively demonstrate in their working papers, that a particular valuation for an asset is relevant in the funds financials.

Auditors have a safer option, that is, to lodge a contravention report for all funds with property assets on 30th June 2017 and let the ATO deal with the trustees directly, this way, they get to keep their licence.

 The Online SMSF Audit system is a big improvement on the manual system, as streamlined as it was. After a few audits it became quite easy to use, and have continued using it since early in the year. It is reassuring to know the check list is up to date with compliance, and all the questions that need to be asked. Setup a client and roll into the audit. Finalise the audit, get work papers and reports, easily save a copy, email or allow a download, all paperless. Working on the cloud is no problem and the backups are happening in real time. The help desk really is helpful. Highly recommended. 

Ralph GreenSMSF Auditor Number 100131860 ,Business Systems Pty Ltd

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Workshop : 4 hours from 11.00 am to 3.00 PM

When:

29th August  2017 - Baulkham Hills - Sold Out

14th September  2017 - Stamford Plaza - Melbourne - 8 Seats Left

19th September 2017 -Baulkham Hills - 15 Seats Left

Where: Suite 3.04, Level 3, 29-31 Solent Circuit Baulkham Hills, NSW- 2153

Cost: $165 incl. GST 

(Includes working Lunch / Coffee + 10 online audits worth $187 + 4 CPD Hours From FPA)

How to Register: Visit  https://www.onlinesmsfaudit.com.au/SeminarBooking.aspx

Benefits/learning outcomes

Recommended For

All SMSF ASIC approved auditors.

 

CPD Hours

4 CPD hours under self assessment method under RG 243.88 - 90 for Audit of SMSF.

This activity has been accredited for continuing professional development by the Financial Planning Association of Australia but does not constitute FPA’s endorsement of the activity.

Accreditation number 008743 for 4 hours. Professional Dimensions Capability 2 Hours Professional Conduct 2 Hours - Knowledge Areas;  4 Hours SMSF

 

Attendee Requirements

Attendees may bring their own Laptops / Ipads for a better understanding - although some attendees may get more from the workshop by looking at the facilitators screen. 

 

Speaker

Mr Manoj Abichandani

ASIC approved SMSF Auditor, B.Bus(UTS), SMSF Specialist (UNSW) CTA FIPA LREA

Manoj has worked in SMSF space for over 25 years, first as an SMSF specialist advising over 600 funds with a CPA firm and later as an SMSF auditor. He develops and lectures on strategies which are practical and enhances retirement benefits of trustees. He has been working for the last 6 years in writing and developing online SMSF audit software- Australia's first SMSF auditing tool.

 

DEED DOT COM DOT AU PTY LTD ABN: 32 123 929 984
Suite 3.04, Level 3, 29-31 Solent Circuit , Baulkham Hills NSW 2153  Phone: (02) 9684 4199