Exercise caution when valuing unlisted assets held in SMSFs
If your SMSF has invested in unlisted assets such as an unlisted unit trust, it has now become more important than ever to ensure that these assets are adequately valued at their market values for financial reporting purposes.
Getting this wrong can place your SMSF at a higher risk of being deemed to be in breach of superannuation law and getting audited by the ATO. Additionally, given the recent introduction of the transfer balance cap and total superannuation balance rules, making incorrect valuations can adversely affect your ability to commence a pension and/or make non-concessional contributions into super.
Recent court decisions have held auditors liable for not adequately investigating and determining the market value of unlisted investments held in SMSFs. This has focused industry attention on the obligation of SMSF auditors to verify that all assets held in an SMSF are recorded at their market values. If the auditors are not reasonably satisfied that an SMSF asset has been appropriately valued in the financial statements, they may issue a qualified audit opinion and, in some cases, even report the breach to the ATO by lodging an Audit Contravention Report (ACR).
It is also important to remember that it is not the auditor’s responsibility to undertake the valuation themselves – their role is to evaluate the evidence presented to them and assess whether the value recorded in the SMSF’s accounts is reasonable. As trustees of your SMSF, it is ultimately your responsibility to make sure that the assets of your fund are valued accurately.
This can be challenging for SMSF trustees especially when it comes to valuing unlisted assets such as unlisted unit trusts as it can sometimes be tricky obtaining sufficient and appropriate evidence of the market value of these assets for audit purposes. The unit trust may not be required to have its assets valued at market value or have its financial statements audited every year. Therefore, simply relying on the reported values on the financial statements of the unit trust may not be adequate from an audit perspective.
When valuing unlisted investments such as unlisted unit trusts, some relevant factors or considerations that may provide more reliable evidence of the market value of the asset may include the following:
financial statements including evidence that the underlying assets are valued at market value
independent valuations of the underlying assets of the unit trust by a qualified valuer, e.g. independent property valuations
a unit price based on recent sales or purchases of units in the unit trust between unrelated parties
written verification from a director or trustee of the trust who is not a related party of the SMSF and
any valuation and distribution statements which may supply objective information.
As market valuations of unlisted assets such as unlisted unit trusts are now considered a higher risk area for SMSF auditors, you can expect your auditors to be more cautious when reviewing market value evidence for such assets going forward. To avoid breaches, it is important to ensure that sufficient and reliable evidence of the market value has been gathered from a number of sources and that they have been properly documented.