How to Value Complex SMSF Assets

SMSF advisers and trustees face a significant challenge in ensuring complex assets are valued at market value, which means aligning the valuation with the ATO's valuation methodology.

The issue is that confusion persists in the SMSF industry, despite the numerous market valuation presentations over the last few years.

One reason is that the ATO continues to move the valuation goalposts, sometimes without notice.

A proper understanding of what constitutes objective and supportable evidence can be the difference between a compliance breach and/or triggering the non-arm's length income (NALI) provisions.

What is "Market Value"

Section 10(1) of SIS defines market value as the amount a willing buyer could reasonably be expected to pay a willing seller, assuming an arm's-length transaction, proper marketing has occurred, and knowledgeable and prudent parties are involved.

In practice, trustees should adopt a valuation process that is:

(1) based on a clear methodology,

(2) anchored in reliable data, and

(3) able to be explained to a third party in plain language.

The annual valuation requirement is not optional under Reg 8.02B because the fund must report assets at market value in the accounts prepared for each year of income.

The hard part is not the rule itself.

It is assembling evidence that is current, independent, and specific enough to support the valuation.

Valuing SMSF Complex Assets

A useful way to frame market valuations is to start with the market value definition under section 10(1) SIS, apply the auditing standards, and then use the ATO's guidance to understand how the regulator will assess whether those obligations have been met.

The ATO's guidance at QC 26343 broadly aligns with this approach: valuations should follow a fair and reasonable process, be undertaken in good faith, use a rational methodology, and be capable of being explained to an independent third party.

While obtaining an independent, qualified valuation is not required under the SIS rules, the auditing standards, or by the ATO, the valuation must be supported by evidence documenting the methodology used.

Related Party Acquisitions

Market value becomes critical when an SMSF acquires assets from related parties under the section 66 exceptions (for example, listed shares or business real property).

When the market valuation is incorrect, what would otherwise be a permitted acquisition can become a breach.

From there, the consequences can multiply: audit qualifications, potential ACR reporting, the possibility of the ATO requiring rectification/disposal, and tax impacts where NALI is triggered.

One trap is the timing and documentation of in specie transfers. Using an old market price on paperwork signed at a later date means the acquisition was not at market value, raising section 66 and NALI risks.

A recently emerging issue is when an SMSF purchases an asset under a contract at a price below market value.

In line with LCR 2021/2, if an SMSF is named as the purchaser under a contract (e.g., for property), paying less than the contract amount can trigger general expense NALI, even where the parties intended to treat the shortfall as a contribution.

The safer path is to clearly document the contribution component in a contemporaneous trustee minute/resolution, and in contract terms that reflect the split (if possible).

Market Value of Real Property

When valuing real property, the ATO lists a series of relevant factors and considerations that trustees can use, which may include:

• The value of similar properties and recent comparable sales results

• The amount that was paid for the property in an arm's length market, if the purchase was recent and no events have materially affected its value since the purchase

• An appraisal from an independent real estate agent

• Whether the property has undergone improvements since it was last valued

• Net income yields for commercial properties (not sufficient evidence on their own and only appropriate where tenants are unrelated).

  
  

The ATO also doubles down on this list (which is not exhaustive) by saying that, unless the fund has recently purchased the property, it is generally insufficient to base valuations on only one item from this list.

How recent "recent " is will most likely be up to the SMSF auditor to decide in the first instance, in line with using their professional judgment.

A valuation undertaken by an online service provider or a real estate agent is acceptable. It can be relied upon as the source of truth, provided it specifies the supporting data.

For example, in a real estate agent's appraisal or online report, the valuation should list the comparable sales it relied on.

Market rent should not be overlooked either.

Business real property leased to a related party should always have a current lease on commercial terms with evidence to support that the rent is consistent with market conditions.

Market Value of Unlisted Entities

Once again, the ATO expects SMSF trustees to consider several factors that may affect the value of unlisted entities. It could include BOTH the value of the assets in the entity and the consideration paid for the acquisition of the unlisted security.

Other evidence may include:

• An independent expert valuation of assets held in the company or unit trust

• A property valuation, where property is the only asset of the company or unit trust

• The date and price of the most recent sale and purchase of a share or unit between unrelated parties.

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Interestingly, the ATO has now removed "the cost price of an unlisted security recently purchased" from its list as evidence.

And where it notes "the most recent sale and purchase of securities between unrelated parties", there is no mention of how recent the transaction should be.

Once again, the SMSF auditor will undertake an assessment and include it in their professional judgment.

The ATO also says that company or unit trust financial statements that are signed and audited and value assets at cost are unlikely to be sufficient evidence on their own.

Conclusion

Market valuations for complex SMSF assets are less about finding a perfect number and more about demonstrating a defensible process.

SMSF trustees should be able to show that each year's value reflects the SIS market value assumptions, is grounded in objective and supportable data, and is documented clearly enough for an independent reviewer to follow.

That way, audits run more smoothly, and risk is reduced, especially when complex assets or transactions involving related parties are valued in line with ATO requirements.

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