Guide to SMSF asset valuations


1 July 2017 was a major date when it comes to SMSF changes and accurate valuations are key to compliance with many of the changes. Unsure of what the valuation guidelines are for your self-managed superannuation fund (SMSF)? I have compiled a guide on what you need to know about asset valuation as SMSFs are now required to use market value reporting for all their financial accounts and statements. For Financial Year 2016/17, getting the value right is more important than ever, especially with the impact of the new super changes. Getting it wrong may impact on the fund’s compliance and whether you can make non-concessional contributions or commence a pension.

What is the market value of an asset?

“Market value” 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:

•   the buyer and the seller dealt with each other at arm’s length in relation to the sale
•   the sale occurred after proper marketing of the asset, and
•   the buyer and the seller acted knowledgeably and prudentially in relation to the sale.

How do I go about determining market value?

For assets such as cash, term deposits, widely-held managed funds, ETFs and listed securities, these can be valued easily each year and should be valued at the end of each financial year. It is typically easy for trustees to value shares, managed funds and other listed investments because they can obtain daily valuations online. Here are a few links that may be helpful for historic share  prices or for companies that have been delisted from the exchange.

Yahoo Finance Australia – Historic Tab

Just always remember to add .ax to the share code e.g. TLS.AX

Delisted Historical share prices

DeListed carries historical share prices for many listed and delisted companies at this website, including prices for the former names of such companies. The prices go back as far as 1986 in some cases and include to mid-year 2009.

SMSFs with real estate, exotic assets or investments in private companies or trusts will require additional work from auditors. from an appropriately qualified person, such as an independent registered valuer or real estate agent.

The following guide provides an outline of what is required to help in valuing fund investments where market values are not readily available.

Real estate / Property valuations

Property needs to be valued at market value every year at 30 June, but the ATO does not require SMSF trustees to undertake an external valuation for all assets each year but is recommended at least every 3 years. For instance, assets such as real property may not need an annual valuation unless a significant event (i.e. natural disaster, market volatility, macroeconomic events or changes to the character of the asset) occurred that has created the need to review the most recent valuation.. Valuation of real estate can be undertaken by anyone, including the trustee(s), if suitably qualified, as long as it is based on objective and supportable data.

The following would generally be considered adequate audit evidence:

  • Real estate agent valuation (appraisal letter which they back up with comparable sales or listed properties)
  • Formal valuation from a qualified and independent valuer (compulsory if for commercial properties leased to related parties)
  • Valuation from trustees (with evidence of market valuation such as recent sales or online valuations). We recommend at least a comparison with values of 4-6 comparable properties if doing it yourself.
  • The latest cost-effective option is valuations from online real estate services like RPData can be used so ask your Administrator if they have access to this service.

Is the rent at commercial terms?

The fund’s auditor may also request evidence to show the rental income received by the fund is paid on commercial terms, such as

  • Annual Rental Income & Expenses Schedule from your real estate management agent covering the lease of the property during the year. Some charge $30-$50 for this but if you say it is offered free on your other properties you can squeeze them!
  • Lease agreement organised via a real estate agent or other written lease agreement (see Is your SMSF leasing commercial property: Tips and traps).
  • Rental appraisal by an independent real estate agent (for related party transactions)
  • Supporting evidence such as For Rent listing or tenants notice to end contract and an explanation from the trustees if no rental income was received during the year

Units in unlisted trusts or shares in unlisted companies

It can sometimes be tricky to obtain reliable audit evidence to support the value of unlisted investments. The company or trust may not be required to value their assets at market value and trustees must consider the value of the assets held by the entity.   For example, where the trust or company holds property, any value should be based on the guidelines for real estate outlined above. Sometimes the other owners (individuals. companies or family trusts) in the trust do not require the same degree of scrutiny and can refuse to incur the extra costs to to suit the SMSF requirements. You will need to work around this issue with your fund sometimes picking up the expense.

Another consideration is that unlisted entities may not be required to get their financial statements independently audited, which make them less reliable from an audit perspective.

The following would generally be considered adequate audit evidence:

  • Audited financial statements of the entity
  • A share/unit price based on recent sales or purchases of the shares or units
  • Financial statements of the entity, with evidence that the underlying asset is valued at market value recently.
  • Independent valuation of the underlying assets of the entity

Loans to related and non-related parties

Firstly your fund is not meant to lend money to a fund member or relative of the member under any circumstances. Read here for more detail. Is your SMSF lending money to someone?

When your fund makes a loan to another entity or individual  not related to a member then the loan agreement will specify the terms and conditions of the loan, including payment terms, interest on the loan and whether the loan it is secured or unsecured.

The market value of a loan is determined by its recoverability which could be:

  • Evidence of repayment of the loan (if applicable)
  • Details on the financial position of the borrower confirming their ability to repay (e.g. net asset position, sources of cash)
  • Details and value of security held as collateral for the loan (if applicable)

Collectables and personal use assets

In the case of collectables and personal use assets, the valuer should be a current member of a relevant professional body or trade association such as the Australian Antique and Art Dealers Association, the Auctioneers and Valuers Association of Australia and the National Council of Jewellery Valuers. Collectable and personal use assets cover items such as artwork, memorabilia, collectable coins and bank notes, wine and vintage cars. Metals such as gold and silver are only considered collectable items if their value exceeds the value of the metal based on its weight.

Bullion

If a trustee holds bullion at a storage facility or at the mint the documentation provided by these places will act as proof of the holding to the auditor.
If trustees choose to store their bullion at home or their business premises the auditor will require a resolution as at 30 June of each year which confirms the following;
• Inventory listing of the type(s) and quantities of metal held.
• Confirmation the asset is stored securely and not available for personal use by the members.
• Confirmation that the metal(s) are insured for the correct value.
Valuation in this format is less costly than holding in the form of a collectible. The market value can easily be verified to live spot prices which are readily available on a number of Bullion dealers’ websites.

Who needs this information

Your administrator or accountants needs this information to complete the annual accounts. Apart from preparing your annual accounts, you will also need to value assets:

  • if your fund has investment dealings with, or sells assets to, a related party
  • if you need to determine the percentage of in-house assets in your fund
  • on the commencement day of a pension
  • if your fund transfers a collectable or personal use asset to a related party – in this case the valuation must be done by a qualified independent valuer.

So who’s watching me?

Your fund’s independent auditor (your accountant may hide this person fairly well in the background but you should make yourself know to them and make it a team relationship not an adversary one). It is their responsibility to be making checks as to whether the annual financial statements properly reflect the market value based on objective and supportable evidence. they may request you get further evidence if not satisfied and they can issue a qualified audit opinion. Any qualified opinion will be reported by the auditor to the ATO.

On assessing the auditor’s report if the ATO is not satisfied that the assets are not recorded at market value in the fund’s financial accounts a fine of 10 penalty units (currently $2,100) per trustee can be imposed.

ATO Valuation guidelines for self-managed superannuation funds

The ATO provides guidelines here on their website to assist SMSF trustees when valuing assets for superannuation purposes.

For SMSF members affected by the $1.6m transfer balance cap, an appropriate valuation is also essential for FY 2016/17 to determine whether the member’s pension balance(s) may exceed the cap and for purposes of the CGT cost base reset.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Trusts 101 – A Guide to What They are and How They Work in Australia


With all the talk about Total Super Balance caps and where people will invest money going forward if they can’t get it in to superannuation, the spotlight is being shone on “trusts” at present. This has also brought with it the claims of tax avoidance or tax minimisation, so what exactly are trusts and are there differences between Family Trusts, Units Trusts, Discretionary Trusts and Testamentary Trusts to name a few.

Trusts are a common strategy and this article aims to aid a better understanding of how a trust works, the role and obligations of a trustee, the accounting and income tax implications and some of the advantages and pitfalls. Of course, there is no substitute for specialist legal, tax and accounting advice when a specific trust issue arises and the general information in this article needs to be understood within that context.

Introduction

Trusts are a fundamental element in the planning of business, investment and family financial affairs. There are many examples of how trusts figure in everyday transactions:

  • Cash management trusts and property trusts are used by many people for investment purposes
  • Joint ventures are frequently conducted via unit trusts
  • Money held in accounts for children may involve trust arrangements
  • Superannuation funds are trusts
  • Many businesses are operated through a trust structure
  • Executors of deceased estates act as trustees
  • There are charitable trusts, research trusts and trusts for animal welfare
  • Solicitors, real estate agents and accountants operate trust accounts
  • There are trustees in bankruptcy and trustees for debenture holders
  • Trusts are frequently used in family situations to protect assets and assist in tax planning.

Although trusts are common, they are often poorly understood.

What is a trust?

A frequently held, but erroneous view, is that a trust is a legal entity or person, like a company or an individual. But this is not true and is possibly the most misunderstood aspect of trusts.

A trust is not a separate legal entity. It is essentially a relationship that is recognised and enforced by the courts in the context of their “equitable” jurisdiction. Not all countries recognise the concept of a trust, which is an English invention. While the trust concept can trace its roots back centuries in England, many European countries have no natural concept of a trust, however, as a result of trade with countries which do recognise trusts their legal systems have had to devise ways of recognising them.

The nature of the relationship is critical to an understanding of the trust concept. In English law the common law courts recognised only the legal owner and their property, however, the equity courts were willing to recognise the rights of persons for whose benefit the legal holder may be holding the property.

Put simply, then, a trust is a relationship which exists where A holds property for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.

The courts will very strictly enforce the nature of the trustee’s obligations to the beneficiaries so that, while the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries. Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously.

The nature of the trustee’s duty is often misunderstood in the context of family trusts where the trustees and beneficiaries are not at arm’s length. For instance, one or more of the parents may be trustees and the children beneficiaries. The children have rights under the trust which can be enforced at law, although it is rare for this to occur.

 

Types of trusts

In general terms the following types of trusts are most frequently encountered in asset protection and investment contexts:

  • Fixed trusts
  • Unit trusts
  • Discretionary trusts – Family Trusts
  • Bare trusts
  • Hybrid trusts
  • Testamentary trusts
  • Superannuation trusts
  • Special Disability Trusts
  • Charitable Trusts
  • Trusts for Accommodation – Life Interests and Rights of Residence

A common issue with all trusts is access to income and capital. Depending on the type of trust that is used, a beneficiary may have different rights to income and capital. In a discretionary trust the rights to income and capital are usually completely at the discretion of the trustee who may decide to give one beneficiary capital and another income. This means that the beneficiary of such a trust cannot simply demand payment of income or capital. In a fixed trust the beneficiary may have fixed rights to income, capital or both.

Fixed trusts

In essence these are trusts where the trustee holds the trust assets for the benefit of specific beneficiaries in certain fixed proportions. In such a case the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.

Unit trusts

These are generally fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company.

The beneficiaries are usually called unitholders. It is common for property, investment trusts (eg managed funds) and joint ventures to be structured as unit trusts. Beneficiaries can transfer their interests in the trust by transferring their units to a buyer.

There are no limits in terms of trust law on the number of units/unitholders, however, for tax purposes the tax treatment can vary depending on the size and activities of the trust.

Discretionary trusts – Family Trusts

These are often called “family trusts” because they are usually associated with tax planning and asset protection for a family group. In a discretionary trust the beneficiaries do not have any fixed interests in the trust income or its property but the trustee has a discretion to decide whether anyone will receive income and/or capital and, if so, how much.

For the purposes of trust law, a trustee of a discretionary trust could theoretically decide not to distribute any income or capital to a beneficiary, however, there are tax reasons why this course of action is usually not taken.

The attraction of a discretionary trust is that the trustee has greater control and flexibility over the disposition of assets and income since the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.

Bare trusts

A bare trust exists when there is only one trustee, one legally competent beneficiary, no specified obligations and the beneficiary has complete control of the trustee (or “nominee”). A common example of a bare trust is used within a self-managed fund to hold assets under a limited recourse borrowing arrangement.

Hybrid trusts

These are trusts which have both discretionary and fixed characteristics. The fixed entitlements to capital or income are dealt with via “special units” which the trustee has power to issue.

Testamentary trusts

As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often used when the testator wishes to provide for their children who have yet to reach adulthood or are handicapped.

Superannuation trusts

All superannuation funds in Australia operate as trusts. This includes self-managed superannuation funds.

The deed (or in some cases, specific acts of Parliament) establishes the basis of calculating each member’s entitlement, while the trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary.

The Federal Government has legislated to establish certain standards that all complying superannuation funds must meet. For instance, the “preservation” conditions, under which a member’s benefit cannot be paid until a certain qualification has been reached (such as reaching age 65), are a notable example.

Special Disability Trusts

Special Disability Trusts allow a person to plan for the future care and accommodation needs of a loved one with a severe disability. Find out more in this Q & A about Special Disability Trusts.

Charitable Trusts

You may wish to provide long term income benefit to a charity by providing tax free income from your estate, rather than giving an immediate gift. This type of trust is effective if large amounts of money are involved and the purpose of the gift suits a long term benefit e.g. scholarships or medical research.

Trusts for Accommodation – Life Interests and Right of Residence

A Life Interest or Right of Residence can be set up to provide for accommodation for your beneficiary. They are often used so that a family member can have the right to live in the family home for as long as they wish. These trusts can be restrictive so it is particularly important to get professional advice in deciding whether such a trust is right for your situation.

Establishing a trust

Although a trust can be established without a written document, it is preferable to have a formal deed known as a declaration of trust or a deed of settlement. The declaration of trust involves an owner of property declaring themselves as trustee of that property for the benefit of the beneficiaries. The deed of settlement involves an owner of property transferring that property to a third person on condition that they hold the property on trust for the beneficiaries.

The person who transfers the property in a settlement is said to “settle” the property on the trustee and is called the “settlor”.

In practical terms, the original amount used to establish the trust is relatively small, often only $10 or so. More substantial assets or amounts of money are transferred or loaned to the trust after it has been established. The reason for this is to minimise stamp duty which is usually payable on the value of the property initially affected by the establishing deed.

The identity of the settlor is critical from a tax point of view and it should not generally be a person who is able to benefit under the trust, nor be a parent of a young beneficiary. Special rules in the tax law can affect such situations.

Also critical to the efficient operation of a trust is the role of the “appointor”. This role allows the named person or entity to appoint (and usually remove) the trustee, and for that reason, they are seen as the real controller of the trust. This role is generally unnecessary for small superannuation funds (those with fewer than five members) since legislation generally ensures that all members have to be trustees.

The trust fund

In principle, the trust fund can include any property at all – from cash to a huge factory, from shares to one contract, from operating a business to a single debt. Trust deeds usually have wide powers of investment, however, some deeds may prohibit certain forms of investment.

The critical point is that whatever the nature of the underlying assets, the trustee must deal with the assets having regard to the best interests of the beneficiaries. Failure to act in the best interests of the beneficiaries would result in a breach of trust which can give rise to an award of damages against the trustee.

A trustee must keep trust assets separate from the trustee’s own assets.

The trustee’s liabilities

A trustee is personally liable for the debts of the trust as the trust assets and liabilities are legally those of the trustee. For this reason if there are significant liabilities that could arise a limited liability (private) company is often used as trustee.

However, the trustee is entitled to use the trust assets to satisfy those liabilities as the trustee has a right of indemnity and a lien over them for this purpose.

This explains why the balance sheet of a corporate trustee will show the trust liabilities on the credit side and the right of indemnity as a company asset on the debit side. In the case of a discretionary trust it is usually thought that the trust liabilities cannot generally be pursued against the beneficiaries’ personal assets, but this may not be the case with a fixed or unit trust.

Powers and duties of a trustee

A trustee must act in the best interests of beneficiaries and must avoid conflicts of interest. The trustee deed will set out in detail what the trustee can invest in, the businesses the trustee can carry on and so on. The trustee must exercise powers in accordance with the deed and this is why deeds tend to be lengthy and complex so that the trustee has maximum flexibility.

Who can be a trustee?

Any legally competent person, including a company, can act as a trustee. Two or more entities can be trustees of the same trust.

A company can act as trustee (provided that its constitution allows it) and can therefore assist with limited liability, perpetual succession (the company does not “die”) and other advantages. The company’s directors control the activities of the trust. Trustees’ decisions should be the subject of formal minutes, especially in the case of important matters such as beneficiaries’ entitlements under a discretionary trust.

Trust legislation

All states and territories of Australia have their own legislation which provides for the basic powers and responsibilities of trustees. This legislation does not apply to complying superannuation funds (since the Federal legislation overrides state legislation in that area), nor will it apply to any other trust to the extent the trust deed is intended to exclude the operation of that legislation. It will usually apply to bare trusts, for example, since there is no trust deed, and it will apply where a trust deed is silent on specific matters which are relevant to the trust – for example, the legislation will prescribe certain investment powers and limits for the trustee if the deed does not exclude them.

Income tax and capital gains tax issues

Because a trust is not a person, its income is not taxed like that of an individual or company unless it is a corporate, public or trading trusts as defined in the Income Tax Assessment Act 1936. In essence the tax treatment of the trust income depends on who is and is not entitled to the income as at midnight on 30 June each year.

If all or part of the trust’s net income for tax purposes is paid or belongs to an ordinary beneficiary, it will be taxed in their hands like any other income. If a beneficiary who is entitled to the net income is under a “legal disability” (such as an infant), the income will be taxed to the trustee at the relevant individual rates.

Income to which no beneficiary is “presently entitled” will generally be taxed at highest marginal tax rate and for this reason it is important to ensure that the relevant decisions are made as soon as possible after 30 June each year and certainly within 2 months of the end of the year. The two month “period of grace” is particularly relevant for trusts which operate businesses as they will not have finalised their accounts by 30 June. In the case of discretionary trusts, if this is done the overall amount of tax can be minimised by allocating income to beneficiaries who pay a relatively low rate of tax.

The concept of “present entitlement” involves the idea that the beneficiary could demand immediate payment of their entitlement.

It is important to note that a company which is a trustee of a trust is not subject to company tax on the trust income it has responsibility for administering.

In relation to capital gains tax (CGT), a trust which holds an asset for at least 12 months is generally eligible for the 50% capital gains tax concession on capital gains that are made. This discount effectively “flows” through to beneficiaries who are individuals. A corporate beneficiary does not get the benefit of the 50% discount. Trusts that are used in a business rather than an investment context may also be entitled to additional tax concessions under the small business CGT concessions.

Since the late 1990s discretionary trusts and small unit trusts have been affected by a number of highly technical measures which affect the treatment of franking credits and tax losses. This is an area where specialist tax advice is essential.

Why a trust and which kind?

Apart from any tax benefits that might be associated with a trust, there are also benefits that can arise from the flexibility that a trust affords in responding to changed circumstances.

A trust can give some protection from creditors and is able to accommodate an employer/employee relationship. In family matters, the flexibility, control and limited liability aspects combined with potential tax savings, make discretionary trusts very popular.

In arm’s length commercial ventures, however, the parties prefer fixed proportions to flexibility and generally opt for a unit trust structure, but the possible loss of limited liability through this structure commonly warrants the use of a corporate entity as unitholder ie a company or a corporate trustee of a discretionary trust.

There are strengths and weaknesses associated with trusts and it is important for clients to understand what they are and how the trust will evolve with changed circumstances.

Trusts which incur losses

One of the most fundamental things to understand about trusts is that losses are “trapped” in the trust. This means that the trust cannot distribute the loss to a beneficiary to use at a personal level. This is an important issue for businesses operated through discretionary or unit trusts.

Establishment procedures

The following procedures apply to a trust established by settlement (the most common form of trust):

  • Decide on Appointors and back-up Appointors as they are the ultimate controllers of the trust. They appoint and change Trustees.
  • Settlor determined to establish a trust (should never be anyone who could become a beneficiary)
  • Select the trustee. If the trustee is a company, form the company.
  • Settlor makes a gift of money or other property to the trustee and executes the trust deed. (Pin $10 to the front of the register is the most common way of doing this)
  • Apply for ABN and TFN to allow you open a trust bank account

Establish books of account and statutory records and comply with relevant stamp duty requirements (Hint: Get your Accountant to do this)

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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