Private company shares in an SMSF

Is it an investment holding company or a trading company?

The answer sets the method and the fee. An investment holding company owns cash, term deposits, listed shares, property or loans. A trading company sells goods or services to customers. Each is valued differently.

A company that trades and also holds surplus cash or investments is valued as a trading company, with the surplus assets valued separately and added. Our guide to business interests explains the earnings method. We confirm the fee in writing before we start. No hourly billing.

Does the size of the fund's holding change the value?

It can. The value of a holding depends on the rights attached to the shares as well as on the value of the company, so a controlling holding and a small minority holding in the same company are not always worth the same share of that value.

The valuer reads the constitution and any shareholders agreement to see what the holding allows: voting rights, board appointments, dividend decisions, transfer restrictions, pre-emption rights and different classes of share. Who holds the rest of the shares matters too, including whether other members of the fund or their family hold them.

There is no standard percentage. Whether any adjustment is appropriate depends on those rights and the facts of the company, and the report explains the reasoning.

What does the valuer look at?

• What the company owns and owes at the valuation date, with each asset at market value rather than cost.
• What it does: whether it holds investments or runs a business, and how reliable its earnings are.
• The rights attached to the shares: the constitution, any shareholders agreement and the share register.
• Loans between the company and its shareholders or other related parties.
• Share transactions: any recent arm's length sale, issue or buy-back of shares in the company.
• Previous valuations of the company or its assets, and whether they are still appropriate.

The valuer is a suitably qualified business valuer at Valuation Group and is independent of your fund.

Why are accounts at cost not enough?

The ATO's guide to valuing SMSF assets says signed audited financial statements with assets at cost are unlikely to be sufficient on their own for unlisted shares. Market value is what a willing buyer would pay a willing seller at arm's length. Cost records what was paid, perhaps years ago, and not what the assets would fetch at 30 June.

The guide tells trustees to consider the value of the company's assets and the price paid for the shares. The ATO has also been checking funds that report unlisted assets at the same value year after year. Accountants Daily reported in March 2024 that about 16,500 funds had held property, unlisted companies or unlisted trusts at the same value for three years or more. See the ATO letter.

What if the shares come from a related party?

The ATO's guide says acquisitions from related parties are prohibited unless an exception applies, with exceptions such as listed securities, business real property and certain in-house assets, and that permitted assets must be acquired at market value. A valuation at the date of the transfer is the evidence of that value. For related-party sales and in-specie transfers of shares, see related-party transfers.

What evidence will the auditor look for?

The auditor checks that sufficient appropriate evidence supports the market value reported for the shares, and may ask for the documents behind it. The auditor does not set the value. Under the ATO's guide, evidence for unlisted shares may include:

• an independent valuation of the company's assets;
• a property valuation, where property is the company's only asset;
• the most recent arm's length sale of a share in the company; or
• otherwise, a statement by the directors or trustees setting out their method and assumptions.

The ATO says to consider a qualified independent valuer when the holding is significant or complex. Our report sets out the valuation date, the basis of value, the information relied on, the method and the assumptions, so the trustees and the auditor can see how the figure was reached. Whether the evidence is sufficient is the auditor's decision.