Does a trustee need to revalue assets every year?

Regulation 8.02B of the SIS Act required all assets of a self-managed superannuation fund to be reported at market value each year.  The first point of that statement is to ascertain what is "market value".  That statement is defined within SISA s.10(1), where it states that:

"market value", in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

(a)  that the buyer and the seller dealt with each other at arm's length in relation to the sale;

(b)  that the sale occurred after proper marketing of the asset;

(c)  that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.

Except in limited circumstances, such as the selling of a collectible or personal use asset to a related party, the SISA does not specify how market value is to be ascertained.  The ATO has indicated they they would expect trustees to obtain sufficient evidence to make a decision as to the value of each asset and then to maintain a written record, such as a trustee minute, as to how that decision was made.  As auditor, we would need to sight copies of the evidence obtained and the written record.  Failure to do so may lead to a qualified audit opinion..  It should be noted that a breach of SISR 8.02B is a reportable contravention of the Act.

While there are no specific requirements for determing market value, these will be considered as reasonable by an auditor:

• For real property, a valuation by a licenced valuer is the safest option. It is costly but should be considered every three years.  In the interim, a land agent may be able to give an indication of value.  If using a rental agent, they may do this at no cost.  Alternatives could include a review of similar local sales, or reports from on-line services such as RP Data or onthehouse.com.  Where commercial property is leased to a related party, I recommend a valuation by a licenced valuer every 2 to 3 years to protect against a conflict of interest.

• For unlisted companies and trusts, the market value of underlying assets may not reflect the market value of the shares or units, as the availability of buyers may be limited, so the value may be reduced.  It must also be noted that unless the financial accounts of the entity is audited by a registered auditor, the SMSF auditor is likely to qualify the audit as the financial account of the entity cannot be verified.

• For loans, the ability of the borrower to repay the loan should be reviewed regularly and at least annually.  In addition, if the loan is for a longer term, what ability does the trustee have in selling the loan if funds are required by the SMSF?  If the interest rate is fixed and market rates have changed, can the loan be sold for its face value?

• For collectibles and artwork, how easy is it to sell the asset?  What is the demand for work by that artist?  Information from an appropriate dealer may be required.

Trustees should also be consistant when using value ranges.  If they choose to use the lower or upper end of a range, do so with all assets and the same method each year.