What is market value for an SMSF?
Market value is the price a willing buyer and a willing seller would agree at arm's length, after proper marketing, each acting knowledgeably and prudentially. That is how the ATO's guide to valuing SMSF assets describes market value in super law.
The guide says a fund needs market values for its accounts and statements, for the in-house asset test, for related-party dealings and for the total super balance at 30 June, among other things. We value at the date the engagement sets: usually 30 June, or the date of a transfer or other event.
What evidence does the ATO point to for unlisted shares and units?
For unlisted securities and unit trusts, the ATO guide says to consider the value of the entity's assets and the consideration paid. Evidence can include an independent valuation of the entity's assets, a property valuation where property is the only asset, or the most recent arm's length sale of a share or unit.
Without that, the trustees need their own substantiation, with the method and assumptions. The guide says to consider a qualified independent valuer where the holding is complex or significant, and that signed audited statements carrying assets at cost are unlikely to be enough on their own. Listed securities are different: the closing price on 30 June is the value.
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How do we value an investment entity?
We value an investment entity from its net assets: what it owns at market value, less what it owes. This suits a unit trust or company that holds property, cash, term deposits or listed investments, because its value is the value of those assets.
- List every asset and liability at the valuation date, and value each asset at market value.
- Deduct the liabilities, such as loans, to reach net assets.
- Divide net assets by the units or shares on issue to reach a value per unit or share.
- Apply that to the fund's holding, and consider whether anything about the units or shares, such as the rights attached to them, changes the result.
Where a trust or company owns property, we value the units or shares. The property figure comes from a valuation by a registered or certified property valuer. We never sign a property figure ourselves. The report names that valuation as an input.
Whether a discount for a minority holding or limited marketability applies to units in a related unit trust depends on the trust deed and the facts, and the report sets out the reasoning. The sample report shows the arithmetic on a fictional example.
How do we value a trading business?
We value a trading business mainly on what it earns, then test the result against its net assets and, where it fits, a discounted cash flow. The report says which method carries the weight and why. We do not use rules of thumb, and the report states the rate we used and how we chose it.
Capitalisation of maintainable earnings
We start with past earnings and adjust them to what the business can sustain: remove one-off items and income or costs unrelated to the business, set the owners' pay at a market rate and bring dealings with related parties to market terms. We then capitalise those maintainable earnings at a rate that reflects the risk and growth of the business, add surplus assets and deduct debt to reach the value of the shares or units.
Net assets as a floor
We compare the result with the value of the net assets. If the earnings support less than the net assets are worth, we consider whether the assets, rather than the earnings, should carry the value.
Discounted cash flow
Where the future will differ from the past, for example because of a new contract or a defined growth plan, we forecast the cash flows and discount them at a rate that reflects the risk. Where we use more than one method, the report reconciles them. See business interest valuations for more.
How does the report meet the ATO's fair and reasonable test?
The ATO guide says a valuation must come from a fair and reasonable process. The table sets out each point and how the report meets it.
| What the guide asks for | How the report meets it |
|---|---|
| Objective and supportable data | Every input is tied to a document or an independent source, and the report lists what it relied on. |
| All relevant factors considered | The report sets out the factors weighed: the entity's assets and earnings, its deed or constitution, the rights attached to the units or shares, and any related-party dealings. |
| Good faith | The valuer is independent of the fund, and the fee is fixed so it does not depend on the value we reach. |
| Rational and logical | Each step runs in order from the data to the value, so the arithmetic can be checked. |
| Capable of explanation to a third party | The report is written in plain terms, with the method, assumptions and sources, so a trustee, accountant or auditor can follow it. |
How independent is the valuer?
The valuer is independent of your fund: never a member, trustee or related party of it. The ATO's guide describes independence as being neither a member of the fund nor a related party, and as being impartial, unbiased and not influenced. The work is done by a suitably qualified business valuer at Valuation Group.
We value assets. We do not provide legal, taxation, investment or financial product advice, and we never advise on whether to set up a fund, buy, hold, sell, contribute, roll over or start a pension.
What standard guides the work?
Guided by APES 225 Valuation Services. APES 225 is the standard Australia's accounting bodies set for valuation work. We are an independent valuation practice, not an accounting firm, and we hold every report we sign to it. The standard is theirs. The discipline is ours.
What is the representation letter?
Before the final report, the client signs a representation letter confirming the information supplied. We test what we receive for consistency, and the report states what we relied on. A valuation is not an audit of the entity.
How do we handle your documents?
Documents come only through the private upload link on your matter, never by email and never through this website. We can sign a confidentiality undertaking before sensitive documents are shared.
What we ask for depends on the holding. For a company or trust it is usually the latest financial statements, the constitution or trust deed, the share or unit register, loan agreements and any property valuation. For a trading business we also ask for several years of accounts and tax returns. We agree the list with you when we confirm the scope.
What does the report contain?
- The market value of the units or shares at the valuation date
- The method used and why it suits the holding
- The entity's assets and liabilities, and how each was valued
- The evidence relied on, so a third party can follow it
- Assumptions, limits and the information supplied
- A statement that the valuer is independent of the fund
The sample report walks through each section. A report for commercial purposes is not a court expert report. Court or tribunal work is a separate engagement with its own fee.
Questions
Do you value a business with a rule of thumb?
No. We capitalise maintainable earnings at a rate we explain, check the result against net assets and, where it fits, a discounted cash flow. The report shows the rate and why we chose it.
Is a discount applied to units in a related unit trust?
It depends on the trust deed and the facts of the holding. The report sets out whether a discount applies and the reasoning, rather than assuming one.
Do you use the property valuation we already hold?
Yes, if it is a valuation by a registered or certified property valuer. We value the units or shares, name that valuation as an input and never sign a property figure ourselves.
Is the valuation an audit of the entity?
No. We test the information supplied for consistency and state what we relied on, and the client signs a representation letter before the final report. We do not audit the entity's accounts.
When does an earlier valuation stop being enough?
The ATO guide says a previous independent valuation can be relied on if it is still appropriate, but not if it is materially inaccurate or the value has changed significantly. A significant event such as a disaster, a pandemic, market volatility or a change in the asset's character calls for a new valuation or other evidence.