Looming plans to tax superannuation balances greater than $3 million, means it is more important than ever for people to know their total superannuation balance (TSB).
In the final story in a three-part series, McCullough Robertson Partner Hayley Mitchell looks at the role valuations will play in the context of div 296 tax.
Ms Mitchell, partner in Wills, Estates and Trusts at the law firm, said despite legislation yet to be put in place, the changes would be coming in some form, prompting the need to be informed.
In the first article she discussed the uncertainty around the legislation and said many clients were actively seeking advice and taking steps in response to the proposed tax, while the second feature looked at the broader considerations relating to the decision to withdraw funds from superannuation.
Why are valuations important for the purposes of div 296 tax?
Given recent comments from the Treasurer, the proposed div 296 tax appears highly likely to become law.
For members with balances over $3 million, an additional 15 percent tax will be applied to the value of their total superannuation balance (TSB) of over $3 million. This means that the value of the TSB will directly impact the amount of div 296 tax payable.
The most significant criticism levied on this tax is not the rate, it is the fact that the tax will be levied not just on earnings and capital gains on assets that are sold, but also on growth in capital assets. All of these elements, together with withdrawals from superannuation, go into the calculation of the TSB.
Because the TSB must be calculated annually, and the value of the TSB will directly impact the amount of div 296 tax payable, taxpayers should strongly consider obtaining annual valuations of their assets to ensure that their TSB is correctly valued.
What if the value of my assets has decreased?
The valuation of assets will be important even if the value has decreased. This is because negative superannuation earnings, where the TSB is greater than $3 million, may be carried forward to a future income year and offset against a future div 296 tax liability. They cannot, however, be carried backwards – which is another significant criticism.
When will I need to get a valuation?
The calculation of the TSB will be done annually on a comparison with the previous year’s TSB. The value of the TSB will need to be calculated prior to the income tax return for the year being lodged.
A number of other superannuation laws require the funds assets to be valued:
- Preparation of financials.
- Related party transactions.
- The arm’s-length requirements.
- Where the fund has inhouse assets.
- To determine pensions.
- Ensuring investments are in the members’ best financial interests (which is often overlooked).
Do I need a registered valuation and if so, do I need to get one every year?
It is a common misconception that the superannuation law only requires a valuation every three years. Instead, it is an annual requirement to ensure that the fund’s assets are recorded at their market value – and this will particularly be the case where division 296 tax is levied on unrealised growth in market value of assets.
However, it is not strictly legally necessary for SMSF’s to obtain valuations from registered valuers.
SMSF auditors play a critical role in this regard. Auditors strongly recommend, and even insist, that internal valuations be confirmed by an independent, registered valuer every three years. This does not avoid the requirement for trustees to make informed decisions about the true market value of fund assets in the intervening years.
We strongly suspect that this will be an area of significant ATO focus and disputes.
Can my valuation be audited by the ATO?
Given the importance of the value of the TSB to the calculation of div 296 tax discussed above, it is highly likely that the ATO will begin to more closely scrutinize the valuations and valuation methods used to value the TSB each income year.
The information released to date on div 296 tax also outlines that the government anticipates introducing regulations to prescribe valuation methods and factors. This information outlines that there will be alternative valuation methods for different assets to ensure that unique asset features are considered. If these regulations are introduced, in the event of an ATO audit, it will be necessary to demonstrate that the TSB valuation complied with these regulations.
Take outs
Valuations will be a crucial evidentiary tool, not only in calculating the tax on the growth in a SMSF’s TSB, but in the event of an ATO audit.
We are seeing increasing ATO activity, even involving unrelated parties, that shows the ATO is highly sceptical of valuations obtained after a transaction was completed, or to later justify a self-determined figure.
The ATO’s position on this is questionable, but it does highlight the critical role that the best contemporaneous evidence plays in a tax dispute.
