Short answer
How are private company shares in an SMSF valued?
The value starts with the company's own assets and earnings, then reflects the rights the fund's shares carry. The ATO's guide asks trustees to consider the company's assets and the price paid, and lists an independent expert valuation, a property valuation where property is the only asset, or a recent sale between unrelated parties as evidence.
Key takeaways
- Private company shares have no market price, so the value comes from the company's assets or earnings, depending on what the company does.
- An investment company is usually valued from its net assets at market value. A trading company is usually valued from its maintainable earnings or cash flows.
- A minority holding is valued for the rights it carries. Whether an adjustment applies depends on the constitution, any shareholders agreement and the facts, and the report sets out the reasoning.
- The ATO says private company shares are not listed securities and, on its investment restrictions page, that they cannot be acquired from a related party. Certain in-house assets can be acquired at market value within the 5% limit (s 66(2A)), so a particular purchase depends on the facts.
How are private company shares in an SMSF valued?
In two steps: value the company, then value the fund's holding in it. The ATO's guide to valuing SMSF assets asks trustees to consider the value of the assets in the company and the price paid when the shares were acquired. The result must rest on objective and supportable data and be capable of explanation to a third party. The price the fund paid is a relevant input, but it is not the value at 30 June.
Because there is no quoted price, the evidence has to be built. The guide lists an independent expert valuation of the assets held in the company, a property valuation where property is the company's only asset, and the date and price of the most recent sale and purchase of a share between unrelated parties.
What is the difference between an investment company and a trading company?
An investment company holds assets for a return, while a trading company runs a business. The distinction decides the method, because the first is worth what it owns and the second is worth what it earns.
| Company type | What drives value | Usual method | Evidence to gather |
|---|---|---|---|
| Investment company (holds property, cash, term deposits or listed shares) | The market value of its assets less its liabilities | Net assets at market value | Closing prices, a property valuation, bank statements, loan balances |
| Trading company (runs a business) | The business's maintainable earnings or cash flows, and its risk | Capitalisation of maintainable earnings, or discounted cash flow | Financial statements, normalisation of owners' pay and one-off items, forecasts |
Some companies are both: a trading business that also owns surplus property or cash. A valuer values the business on its earnings and adds the surplus assets separately.
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What methods do valuers use?
Three, chosen to suit the company, with the latest arm's length sale of the shares used as a cross-check where there is one.
- Net assets. Every asset is restated to market value and every liability deducted. It suits investment companies, and it is a cross-check for a trading company.
- Capitalisation of maintainable earnings. The company's normal annual earnings, adjusted for one-off items and owners' pay, are capitalised at a rate that reflects risk and growth.
- Discounted cash flow. Forecast cash flows are discounted to a present value. It suits a company whose earnings will change materially.
For a trading company, the first job is maintainable earnings. The accounts are adjusted for one-off items, for owners' pay that is above or below market, and for related-party rent or fees that are not at market rates. Errors there carry straight through to the value.
We do not publish numeric multiples or rules of thumb. The right figure comes from the company's own facts, and the report shows the working. Our page on how we value sets out the approach.
What changes if the SMSF holds a minority of the shares?
The value of a minority holding depends on the rights the shares carry and what the fund can do with them. A holding is not automatically worth its percentage of the whole company, and a discount is not automatic either.
- voting power, and whether the fund can block or force decisions
- a board seat, and the information the fund receives
- dividend policy and history
- the constitution and any shareholders agreement, including pre-emption, drag-along, tag-along and transfer restrictions
- the other shareholders, including whether they are related to the fund's members
Share classes matter as well. Different classes can carry different rights to votes, dividends and capital, and the register and constitution show which class the fund holds.
Whether any adjustment applies, and how large it is, comes from those facts. We do not publish standard percentages, and the report sets out its reasoning so the auditor can test it.
What evidence does the ATO list for unlisted shares?
Where there is no independent expert valuation, the trustee should show how the directors or trustees substantiated the value, with the objective and supportable data relied on, the method used and the assumptions made. The guide recommends considering a qualified independent valuer if the valuation is complex or the shares are a significant proportion of the fund.
Company financial statements that are signed and audited but carry assets at cost are unlikely to be sufficient on their own. The ATO's auditor guidance adds that statements are reliable evidence of market value only if signed, audited and showing assets at market value. After a significant event such as market volatility or a change in the character of the asset, the guide says to get a new valuation or alternative evidence.
If a fund starts a pension on 1 July and a full valuation of private company shares is not possible by 28 October, the ATO accepts a reasonable estimate for the transfer balance cap. It cannot be relied on for the accounts or exempt current pension income.
What changes the value from one 30 June to the next?
Anything that changes the company's assets, liabilities or earnings. The ATO says a previous valuation should no longer be relied on if it has become materially inaccurate or the value has changed significantly. For a private company, the usual triggers are:
- assets bought, sold or revalued, and new borrowings
- a material rise or fall in profit, or the loss of a major customer
- dividends paid, shares issued or shares bought back
- a change in related-party leases, loans or fees
Where nothing like that has happened, a trustee may be able to rely on a recent independent valuation if the trustee assesses that it still holds and records why.
What do we need to value private company shares?
- The constitution, share register and any shareholders agreement
- Financial statements for the last three years, and current management accounts
- For an investment company, a list of its assets at the valuation date and any property valuations you hold
- Details of loans, leases and other dealings with related parties
- Any recent sale, issue or offer for the shares
Documents come only through the private upload link on your matter, never by email. Investment company: $995 + GST. Trading company, turnover under $2 million: $1,495 + GST. Turnover $2 million to $10 million: $2,495 + GST. Turnover over $10 million: $3,495 + GST. We confirm the fee in writing before we start. No hourly billing. See private company shares valuation and pricing.
Questions
Can the trustees value the company's shares themselves?
For the accounts, yes, if the value rests on objective and supportable data. The ATO says a qualified independent valuer is not required for the accounts, but should be considered where the shares are complex to value or a significant proportion of the fund.
Is the net asset figure on the company's balance sheet enough?
Not if the assets are carried at cost. The ATO says signed, audited statements with assets at cost are unlikely to be sufficient on their own. The evidence needs to show the assets at market value.
Are private company shares a listed security?
No. The ATO says private company shares are not listed securities, so they fall outside the listed securities exception. On its investment restrictions page it also says they cannot be acquired from a related party, though the Act allows certain in-house assets to be acquired at market value within the 5% limit (s 66(2A)), so a particular purchase depends on the facts.
What if the company has failed and the shares have no value?
The ATO acknowledges that investments can fail, leaving neither a current value nor a ready market. In that case the asset may be held and recorded in the accounts at zero or a nominal amount.
How often must the shares be revalued?
The shares must be reported at market value each year. A previous independent valuation can be relied on if it is still appropriate and documented, but not if it is materially inaccurate or the value has changed significantly.
Short answers on this topic
- Does my SMSF need an independent valuation?Usually no. The ATO says trustees are not required to use a qualified independent valuer for the fund's accounts and statements. The law requires one...
- How often do SMSF assets need to be valued?Every year. SMSF trustees must value fund assets at market value for the accounts and statements, as at 30 June. The ATO has named valuing only every...
- Who can value SMSF assets?Trustees are responsible for valuing SMSF assets. Depending on the situation, the ATO says the valuer can be a registered valuer, a professional...
- What is a qualified independent valuer for an SMSF?In the ATO's guidance, a qualified independent valuer has formal qualifications or recognised knowledge and experience in their professional...
Sources
General information only, not advice about your circumstances. A valuation depends on the facts of the business and the purpose it is for.