Preamble
No. For the purposes of determining the market value ratio of a self managed superannuation fund's (SMSF's) in-house assets under section 75 of the Superannuation Industry (Supervision) Act 1993 (SISA), [1] trustees of an SMSF must value all of the SMSF's assets, including, for example, shares in a related company or units in a related unit trust, at market value.
This Determination applies to SMSFs [2] and former SMSFs. [3] References in the Determination to SMSFs include former SMSFs unless otherwise indicated.
This Determination applies both before and after its date of issue. However, the Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination.
Appendix 1 - Explanation
Assets held by an SMSF may be in-house assets of the SMSF under subsection 71(1). [4] For example, shares in a related company or units in a related unit trust held by an SMSF are in-house assets of the SMSF unless an exception applies to exclude the shares or units from being in-house assets of the SMSF. [5]
The valuation of in-house assets is relevant to determining whether an SMSF complies with the in-house asset acquisition rules in section 83. An SMSF must not acquire an in-house asset if the market value ratio of the SMSF's in-house assets exceeds 5% (see subsection 83(2)), or would exceed 5% if the asset was acquired (see subsection 83(3)). The valuation of in-house assets is also relevant to section 82, which requires trustees to dispose of in-house assets if, at the end of a year of income, the market value ratio of the SMSF's in-house assets exceeds the 5% limit.
The general formula for working out an SMSF's market value ratio of in-house assets is set out in subsection 75(1): Number of whole dollars in value of in-house assets of the fund Number of whole dollars in value of all the assets of the fund x 100
Subsection 10(1) defines 'value' to mean market value. An SMSF is therefore required to value all assets of the SMSF at market value (denominator) whether in-house assets or not. A subset of all assets valued at market value is those assets that are in-house assets of the SMSF (numerator).
The term 'market value' is in turn defined in subsection 10(1) to mean, in relation to an asset, the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller [6] if the following assumptions were made: (a) the buyer and the seller dealt with each other at arm's length in relation to the sale; (b) the sale occurred after proper marketing of the asset; and (c) the buyer and the seller acted knowledgeably and prudentially in relation to the sale.
If, for example, an SMSF held shares in a related company or units in a related unit trust, those assets are in-house assets of the SMSF (assuming that no exception applies to exclude the shares or units from being in-house assets). The SMSF is required to value the shares and units (along with all other assets held by the SMSF) at market value.
At the time of acquiring such shares or units, the cost of the shares or units will typically be equivalent to the market value of the shares or units. [7] At some later point in time the market value of the shares or units is less likely to be equivalent to the historical cost (purchase price) of the shares or units. In any case, it is nonetheless necessary to undertake a market valuation of the shares or units.
To determine the market value of assets held by an SMSF, a trustee of an SMSF can choose to obtain a valuation from a qualified valuer or compute their own valuation based on reasonably objective and supportable data. [8]
Compendium
The ATO published responses to 3 submissions on this ruling in SMSFD 2008/2EC. Outcome labels are heuristic — read the ATO response for the detail.
1Paragraph 9 - reasonable person test Para 9 - "own valuation based on reasonably objective and supportable data" - would this involve the application of a "reasonable person" test?rejected
Raised by Entity 1
ATO response
No change The phrase in paragraph 11 of the Determination requires that the data relied upon by a person in making a valuation is reasonably objective and supportable. In demonstrating that data did, or did not, meet this standard it would be appropriate to have regard to whether a reasonable person looking at all the circumstances would come to the conclusion that the data is objective and supportable. However, in determining the market value of assets, such as units in a unit trust, SMSF trustees need to take into account general valuation principles. The Determination refers the reader (see footnote 8) to ATO Superannuation Circular 2003/1 Self Managed Superannuation Funds (the Circular) where these are set out. Paragraph 16 of the Circular requires that 'trustees must be able to demonstrate that the valuation has been arrived at using a reasonable process'. Generally, a valuation can be considered as such where it: • takes into account all relevant factors and considerations likely to affect the value of the asset; • has been undertaken in good faith; • results from a rational and reasoned process; and • is capable of explanation to a third party. Paragraph 17 of the Circular gives examples of relevant factors and considerations when valuing property assets. In addition, by way of further guidance to determine market value for tax purposes generally, the Tax Office is developing a market valuation guide.
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