Determining the value of unlisted shares and units in an SMSF is a critical trustee responsibility. The ATO requires that the valuation must be supported by reliable, objective evidence, which is consistent with ASA 500 from an SMSF audit perspective. This may include an independent expert valuation, a property valuation if the company/trust holds real estate, or the price of a recent arm’s-length transaction. For compliance and audit purposes, the most appropriate approach is a formal, up-to-date valuation report prepared by a qualified professional.
The market value needs to be supported by evidence each year; it’s legislated to apply from the 2012-2013 financial year.
The ATO expects valuations use a “fair and reasonable” process:
- It is based on objective and supportable data.
- It considers 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 logical process.
- It is capable of explanation to a third party.
Material assets without a market value is a reportable Part B breach of Reg 8.02B.
Why Valuation Matters
- Valuation impacts member balances, contribution limits, pension calculations, in-house asset tests, and overall regulatory compliance.
- The ATO has treated valuation as a compliance focus.
- Through data-matching, the ATO has the ability to flag certain investments that are valued the same over multiple years.
- Trustees are obligated to understand and monitor the performance of their investments to ensure they continue to align with the fund’s investment strategy.
Primary Evidence
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- Independent expert valuation of the shares or units by a qualified professional
- Property valuation where real estate is the only asset of the company or unit trust
- Most recent sale and purchase of shares or units between unrelated parties
A formal, up-to-date valuation report prepared by a qualified valuer should be considered if the nature of the asset indicates the valuation is likely to be complex or the value of the asset represents a significant proportion of the fund’s value.
Secondary Evidence
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- Evidence of how the market valuation was substantiated by the directors of the company or the trustee company, including objective and supportable data on which they relied, the valuation method they used, and any assumptions made. (An email from the directors with a market price only is not sufficient.)
Signed audited financial statements of the company or unit trust are unlikely to be sufficient evidence on their own for the purposes of establishing whether the fund’s investment is reported at market value if the assets have been valued at cost in those financial statements.
For a breakdown of valuation terminology used as audit evidence in practice — such as market value, fair value, NAV and NTA — see our article on valuation terminology in SMSF.
Best Practice Tips for Trustees
- Reassess the valuation each financial year, and set clear expectations with the investment manager or entity in which the SMSF holds shares or units to provide updated valuation information.
- Consider the ongoing compliance implications before entering into an investment that is difficult to value.
- Maintain a clear paper trail of valuation reports, correspondence and supporting data to demonstrate how the market value was determined each year.