SMSF valuations are a critical component of administering an SMSF. Getting valuations wrong can lead to significant problems, from failing to meet superannuation regulations to making improper investment decisions. As the trustees of an SMSF, it is your responsibility to ensure valuations are done properly. This article will explore some of the common pitfalls with SMSF valuations and provide tips on how to avoid them.
Failing to Get Regular Valuations
One of the most common mistakes with SMSF valuations is failing to get them done regularly. SMSF Valuations need to be conducted at least once per year to ensure the fund’s financial statements are accurate. Additionally, certain events like acquiring new assets, disposing of assets, or updating investment strategy require an updated valuation.
Getting valuations done annually as a matter of course is the best way to avoid issues. Trying to scramble for a valuation only when needed can lead to delays, extra costs, and non-compliance if deadlines are missed. Make valuations a part of your regular SMSF administrative schedule.
Using Unqualified Valuers
Securing qualified, independent valuers is critical for SMSF Valuations. Using someone without proper qualifications or experience can lead to significant problems with inaccurate valuations. All valuers should be licensed and comply with industry standards.
Some common mistakes include using real estate agents to value property or accountants to provide general valuations beyond their expertise. Make sure any valuers used have specific credentials to value the particular asset classes held by your SMSF.
You should also avoid using valuers with close ties to the fund, like business partners or family members, as it can compromise their independence.
Not Keeping Records of Valuation Methods
All valuation reports should clearly outline the methodology used to determine value. This includes things like comparable sales for property, discounted cash flows for businesses, etc.
Failing to keep proper records of the valuation methods makes it difficult to verify the accuracy of valuations. It also poses issues if you need to undertake subsequent valuations of the same assets.
Ensure you keep copies of all valuation reports and their methodologies for at least 5 years. This provides important documentation in the event of an audit.
Relying on Informal Valuations
Some trustees try to cut costs by using informal valuations, such as a quick estimate from a real estate agent or accountant. However, this does not comply with [Superannuation Industry (Supervision) Act] requirements.
Even if informal, make sure you undertake formal, written SMSF Valuations at least annually. Verbal valuations or rough estimates do not provide sufficient documentation. Trying to rely on informal valuations can lead to significant problems and penalties if discovered during an audit.
Not Updating Values After Major Market Events
Significant events like changes in market conditions require updated valuations outside the normal schedule. This includes major upswings or crashes in asset prices.
For example, the collapse of the property and stock market in 2020 required urgent SMSF valuations to ensure that assets were properly accounted for. Failing to update valuations after such events means your fund’s financial statements will be inaccurate.
Make sure you monitor markets and get updated valuations when appropriate, even if an annual valuation has recently been done.
Mis-Categorising Assets
How an asset is categorised can impact the valuation approach. For example, collecting classic cars as an investment asset vs a personal use asset has different implications. Investments must be valued at market value, while personal use assets can be general estimates.
Make sure you properly categorise assets like collectibles, boats, and real estate before getting valuations. Incorrect categorization means the valuation methods may not be appropriate.
Not Updating Values for Insurance Purposes
The value of assets also impacts calculating appropriate insurance coverage. If valuations are out of date, your insurance levels may be insufficient.
Make sure to update insurance valuations in tandem with investment valuations so coverage remains adequate.
Tips for Avoiding SMSF Valuation Pitfalls
- Undertake valuations annually as standard procedure
- Only use qualified, independent valuers
- Keep detailed records of valuation methodologies
- Do not rely on informal or verbal valuations
- Update valuations after major market events
- Categorise assets correctly before valuation
- Align insurance value updates with investment valuations
Avoiding common SMSF valuation pitfalls comes down to being organised, using qualified professionals, and staying on top of recordkeeping. Get valuations done regularly and be vigilant in response to market changes. With the right diligence, you can feel confident your SMSF assets are properly valued.