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GUEST OBSERVATION
Self-managed super funds are, and have been, flavour of the month for some time now.
The opportunities SMSFs provide for people to control their retirement incomes can be attractive. Of course, running such a fund has its own costs and the person in control (the trustee) has the onus to ensure the fund performs at an acceptable level.
But there are many rules and regulations that govern SMSFs and they can be a trap for the unwary. A recent Federal Court decision shows what can go wrong.
In the case, the Federal Court imposed civil penalties of $13,000 (plus $5000 in costs) for each of three directors of the corporate trustee of an SMSF in relation to breaches of the superannuation laws involving short-term loans to a related business.
The first respondent, Early Sunshine, was the corporate trustee of the SMSF known as the George MacDonald &amp; Sons Superannuation Scheme No 2. The other three respondents are the directors of Early Sunshine Pty Ltd.
Over a four-year period from 2007 to 2011, the three directors caused the SMSF to make 71 loans to the freight trucking business George MacDonald &amp; Sons of which the respondents were employees, directors and shareholders. The freight trucking business lost its principal customer in 2001 and began to experience significant financial stress in 2007-08 amid the global financial crisis.
Typically, the loans were outstanding for only a few weeks at a time and used to cover the working capital of the business (primarily to pay salaries and wages). A total of $553,568 in loans was made by the SMSF to George MacDonald &amp; Sons.
Each of the 71 separate loans was less than $20,000 (with an average of $7,768). The loans were unsecured and did not bear interest but each loan was ultimately repaid in full. The SMSF also made a $2000 loan to a company controlled by one of the respondents. This loan was unsecured but was repaid on demand with 8.5% interest.
In August 2009, the SMSF's auditor lodged the first of several auditor contravention reports for the relevant years noting breaches of the superannuation law in relation to the loans. The reports recorded breaches of the sole purpose test, the in-house asset rules and the arm's length dealing requirement.
In October 2011, the Tax Office issued the SMSF with a notice of non-compliance. As a result, the SMSF lost its concessional tax treatment and was issued with an assessment of $63,254 for the 2008 year (which it paid in January 2012). In August 2011, the trustee resolved to wind up the SMSF and roll over the members' benefits to an industry fund.
The applicant, as Deputy Commissioner of Taxation (Superannuation), applied to the Federal Court to impose civil penalties. A statement of agreed facts indicated there was no dispute among the parties as to any aspect of the case.
While a maximum civil penalty of $220,000 could apply for each contravention under the relevant superannuation laws, the court imposed a penalty of $13,000 for each director of the trustee of the SMSF, together with $5000 (each) for the Commissioner's costs. The court agreed that the contraventions were "serious" from a regulatory perspective as they involved deliberate, repetitive breaches over a four-year period and put at risk the assets of the fund.
However, the court said it must be remembered that, in the end, the fund did not suffer any loss of capital. The foregone interest income was not significant. In addition, all of the respondents admitted all of the contraventions which were ultimately pressed by the Tax Commissioner and co-operated fully with the Commissioner both at the investigation stage and in the proceeding. Also, the fund has now been wound up and the members’ balances have now been transferred to a public fund which the court noted should ensure they are satisfactorily protected.
The court was also cognizant of the fact that each of the individual respondents had taken full responsibility for their involvement in the contraventions and had expressed remorse and contrition for their conduct.
In the case of multiple contraventions, the court said the pecuniary penalty should reflect the totality of the conduct. Although Early Sunshine was the primary contravener of the superannuation law, the court accepted there was no point imposing a civil penalty on the corporate trustee (which was now dormant). Instead, the court held that the three directors were each liable for a pecuniary penalty of $13,000.
The court initially considered that the penalties proposed by the parties were insufficient. However, after taking into account all of the circumstances, the court ultimately agreed that a penalty of $13,000 (plus $5,000 in costs) for each director was appropriate.
The court reached this conclusion after having regard to the relevant factors and applying the general principles for imposing civil penalties under the superannuation law, as set out in the established cases.
The case is a salutary reminder of the penalties that can apply when SMSFs contravene the laws that govern them. The penalties in this case were significantly lower than the statutory maximum and SMSF trustees can take a lesson from the reasons why the court considered that appropriate.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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thayes-XhNcNKLNWa

Making loans from SMSFs – court imposes $40,000 in penalties: Terry Hayes

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Last year brought the usual proverbial "truckload" of tax and superannuation changes either passed by Federal Parliament or proposed to commence this year. It's difficult to keep up with it all, but below I set out some of the changes that might be of interest to small and medium-sized businesses, including property businesses.
This year's federal election is sure to bring more changes promised.
Significantly, January 1 brought something of a changing of the guard in that a new Tax Commissioner, Chris Jordan, took up his role, and a new chairwoman of the Board of Taxation, Teresa Dyson, commenced. They both have a very busy year ahead of them.
The following tax changes commence, or are expected to commence, during 2013.
<ul>
<li>Medical expenses rebate: legislation still before Parliament proposes that an income test will apply to the rebate for medical expenses from July 1, 2012 i.e. for 2012-13 tax returns. For taxpayers with adjusted taxable income above the Medicare Levy Surcharge thresholds ($84,000 for singles or $168,000 for couples or families in 2012-13), the threshold above which they may claim the net medical expenses tax offset will increase from the current $2,120 to $5,000 and the rate of reimbursement will be reduced from 20% to 10%. The claim threshold will be indexed annually to the CPI. Tax returns for the 2012-13 year (i.e. ending on June 30, 2013) will first reflect the changes.</li>
<li>Mature age worker tax offset: the mature age worker tax offset has been phased out from July 1, 2012 for taxpayers born on or after July 1, 1957. Again, tax returns for the 2012-13 year will first reflect the changes.</li>
</ul>
<h3>Superannuation</h3>
There are lots of changes here, particularly for small and medium-sized businesses that have self-managed super funds (SMSFs) – and it seems from stats just released that SMSFs continue to grow strongly and are now a major component of the superannuation sector holding over 30% of total superannuation assets. SMEs should particularly take note of the following.
<ul>
<li>All employers should note that the compulsory super contribution rate will rise by 0.25% to 9.25% from 1 July 2013 i.e. for the 2013-14 year. This is first phase of the scheduled increase from 9% to reach 12% from 2019-20. There will be increments of 0.25% in the first two years and 0.5% thereafter (i.e. from 2015-16) until the rate reaches 12% (from 2019-20).</li>
<li>SMSFs and related party asset acquisitions and disposals: Draft legislation proposes new rules requiring that a trustee or investment manager of an SMSF could acquire an asset from a related party if the asset is business real property acquired at market value, as determined by a qualified independent valuer. The valuer must also be independent and therefore cannot be a member of the fund or a related party of the fund. It will still be possible to acquire business real property and certain in-house assets (not exceeding 5%) from a related party, provided that the asset is acquired at market value as determined by a qualified independent valuer. However, it will only be possible for an SMSF to acquire a "listed security" from a related party in a way prescribed by regulations (yet to be released as at January 1, 2013). The changes are intended to apply from July 1, 2013.</li>
<li>A new registration regime for approved SMSF auditors applies from January 31, 2013. SMSF auditors are required to apply to ASIC for registration as an "approved SMSF auditor". Auditors can apply for registration from January 31, 2013. All auditors will be required to be registered with ASIC by July 1, 2013 to audit SMSFs after that time. All SMEs that have self-managed super funds should be aware of this requirement concerning auditors of their funds.</li>
<li>SMSF approved auditors: From July 1, 2013, draft regulations propose to require SMSF trustees to appoint an approved auditor no later than 45 days before the due date for lodgment of the fund's annual return. The draft regulations (yet to be finalised) also provide that the prescribed period for which an audit report in respect of an SMSF must be given is 28 days after the trustee of the fund has provided all documents relevant to the preparation of the report to the auditor.</li>
<li>The MySuper application and authorisation process commenced from January 1, 2013. Authorised superannuation entities will be able to offer a MySuper product from July 1, 2013. Employers will be required to make superannuation guarantee contributions (for employees that do not have a chosen fund) to a default fund that offers a MySuper product from January 1, 2014.</li>
<li>A trans-Tasman portability scheme will permit transfers between certain Australian superannuation funds and New Zealand KiwiSaver schemes from July 1, 2013. The proposed scheme will enable Australians and New Zealanders to consolidate their retirement savings in their country of residence when they emigrate and intend to stay indefinitely or permanently in the host country. Currently, Australians and New Zealanders working in Australia cannot take their superannuation with them when they permanently leave Australia. Note that New Zealand-sourced retirement savings from KiwiSaver schemes held in Australian superannuation funds will not be able to be transferred to or held in a self-managed superannuation fund.</li>
</ul>
<h3>Other changes</h3>
<ul>
<li>Private health insurance rebate: From July 1, 2013, the private health insurance rebate will no longer be paid on any lifetime health cover loading applied to the cost of a private health insurance policy for lifetime health cover. Legislation to implement this is still before Parliament, but is expected to pass before June 30, 2013.</li>
<li>The education tax refund has been abolished and replaced by the Schoolkids Bonus from January 1, 2013. For those eligible, the first instalment of the Bonus ($205 per primary student and $410 per secondary student) will be paid by Centrelink or the Department of Veterans' Affairs, directly into their bank accounts between January 9 and 22, 2013 to help with back-to-school expenses. Eligibility requirements for the Bonus are that the student must be undertaking primary or secondary studies and be under 20 years of age, and the parent or carer must be receiving one of several government payments, including Family Tax Benefit Part A or Youth Allowance or Disability Support Pension.</li>
<li>Social Security benefits: From January 1, 2013, the length of time many payments and concession cards can continue while a recipient is temporarily overseas was reduced from 13 weeks to 6 weeks. Payments affected include Pension Supplement, Disability Support Pension, Carer Payment, Wife Pension, or if a person is a Commonwealth Seniors Health Card Holder.</li>
</ul>
This article originally appeared on <a href="https://www.smartcompany.com.au/index.php" target="_blank">SmartCompany</a>. 
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A truckload of superannuation reforms coming for property owners in 2013

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Self-managed super funds (SMSFs), also known as DIY super funds, have been in the news lately regarding their alleged propensity for borrowing to invest in property.
Proponents of both sides of the argument have put forward their case and, needless to say, the sector will continue to come under scrutiny from the regulators, including the ATO and ASIC.
For its part, as the main regulator of SMSFs, the Tax Office says it tries to help super fund trustees and the professionals who assist them to <a href="https://www.smartcompany.com.au/big-money/057730-big-money-the-reason-our-superannuation-system-doesn-t-work">understand their obligations</a>(and there are plenty of those!) and comply with these voluntarily.
While the ATO considers that SMSFs “generally operate in a well-run market”, ATO assistant deputy commissioner in charge of superannuation Stuart Forsyth says there are however a number of risk areas it is keeping an eye on. These include:
<ul>
<li>
Trustees and SMSF professionals who fail to understand SMSF obligations
</li>
<li>
Trustees who fail to voluntarily comply with their SMSF obligations, including lodgement of returns
</li>
<li>
Approved SMSF auditors who fail to undertake audits appropriately or fail to report contraventions of the rules to the ATO
</li>
<li>
Trustees who intentionally take inappropriate actions with their SMSFs, such as setting them up for illegal early release or down the track obtaining early access to money in the fund without meeting a condition of release
</li>
<li>
Professionals who promote and assist in the establishment of SMSFs for inappropriate reasons
</li>
</ul>
SMSFs have a myriad of rules to comply with. These include reporting of payments of fund member benefits, appointing an approved auditor, and maintaining the appropriate records. In the current environment, perhaps the most notable requirement is complying with the numerous investment restrictions that the law imposes, for example:
<ul>
<li>
The ‘sole purpose test’ – the law requires an SMSF to be maintained solely for at least one of the legislated core purposes, i.e. the provision of benefits upon retirement, attaining age 65 or death.
</li>
<li>
Trustees of an SMSF are prohibited from intentionally acquiring assets from fund members or a related party (although some limited exceptions apply).
</li>
<li>
An SMSF is generally restricted from having more than 5% of its total assets invested in so-called ‘in-house’ assets – these include a loan to a related party, an investment in a related trust of the fund, and an asset of the fund subject to a lease with a related party.
</li>
</ul>
The law generally prohibits funds from borrowing money, but there is an exception for so-called limited recourse borrowing arrangements (e.g. instalment warrants). Assets acquired with these borrowings must be kept separate from other assets of the fund. Money borrowed under these rules can be used in maintaining or repairing an asset. An SMSF trustee looking to acquire property via a limited recourse borrowing arrangement should obtain independent advice in relation to the borrowing agreement and the establishment of the holding trust structure.
Forsyth said the ATO is planning more comprehensive audits and closer scrutiny of annual returns and auditor contravention reports. He said the annual independent SMSF audit is a critical factor in the ongoing tax concessional treatment of SMSFs, satisfying the government and the community that SMSFs are meeting their obligations.
Forsyth said SMSF trustees should comply, lodge on time and (reflecting the comments made above) ensure that transactions such as limited recourse borrowing arrangements are undertaken with care. Limited recourse borrowing is an area where there are risks of breaches which can be very expensive and may not be easily rectified if professional advice had not been sought, he said.
SMSF fund trustees should check and understand the deed of the fund to ensure they are clear in what it allows and does not allow.
The ATO will review breaches of trustee obligations reported to it by approved SMSF auditors.
Other issues for SMSF trustees to be aware of are that they are now are required to value their fund’s assets at market value. They must also regularly review the fund’s investment strategy, and should consider the needs of insurance for members. The ATO is sure to be checking on these requirements.
One of the main changes affecting SMSF trustees this year has been that, from July 1, 2013, auditors have had to be registered with ASIC to undertake an SMSF audit. Forsyth said that from now on, when an SMSF annual return is lodged with the ATO, the ATO will check that the return has an SMSF auditor number (SAN) on it and that the number has been registered by ASIC. If there is no SAN or the number is not recognised as a registered auditor, the ATO will not accept the lodgment. SMSF trustees need to be particularly careful about this requirement.
From July 1, 2014, large and medium employers (those with more than 20 employees) will start paying super contributions using the new superannuation data and payment standard. SMSFs receiving contributions from these employers will need to receive them using the new standard. This requires being able to receive electronic contribution payments (paid to a nominated bank account) and messages (sent to a nominated electronic address). The ATO intends to publish more detailed information explaining the standard, how it applies to SMSFs and what trustees need to do to comply.
The attractions of SMSFs mean we are seeing continuing strong growth in these types of super funds. The many rules and regulations surrounding the running of these funds however should not be overlooked or underestimated.

<hr>
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/" rel="nofollow">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article originally appeared on <a href="https://www.smartcompany.com.au/" target="_parent" rel="nofollow">SmartCompany</a>.
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Beware of the risk areas surrounding self-managed super funds: Terry Hayes

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As it does around this time of year, the ATO recently released its 2012-13 Compliance Program outlining those it intends to target in the coming year. Small and medium-sized enterprises (SMEs) figure prominently.

While much has already been written about the program, it is worth exploring a little more deeply what the ATO will be looking at. It's something of a roadmap for SMEs in the tax compliance cut and thrust.
There are around three million so-called micro enterprises i.e. businesses with an annual turnover of under $2 million or superannuation funds with less than $2 million in assets. They represent a significant part of the taxpaying population, employing 1 in 5 Australian workers.
Over the coming year, the ATO says it will focus particularly on the following compliance risks:
<ul>
<li>unrecorded and unreported cash transactions;</li>
<li>employer obligations eg. super;</li>
<li>GST refund integrity and GST evasion;</li>
<li>ensuring businesses are correctly registered in the tax system;</li>
<li>supporting businesses in meeting their lodgment obligations; and</li>
<li>incorrect fuel tax credit claims following implementation of the clean energy measure.</li>
</ul>
The ATO said profiling is used to identify potential tax risks such as businesses operating outside industry or economic benchmarks.
Information matching forms a key part of the ATO's arsenal. It matches information in tax returns and business activity statements (BASs) with details of transactions reported to it by a wide range of third parties, including:
<ul>
<li>payments and grants by other government agencies;</li>
<li>payments by businesses to contractors especially the new building and construction industry reporting system;</li>
<li>income from investments and partnership and trust distributions;</li>
<li>property and share transactions;</li>
<li>cross-border transactions and international funds transfer.</li>
</ul>
<h3>Unrecorded and unreported cash transactions</h3>
The ATO said the plastering and cafe sectors have been selected for more intensive activity for 2012-13. In relation to the plastering sector, the use of cash along with historical weaknesses in tax compliance and high number of information referrals from the public has prompted the increase in ATO activity.
The ATO said it will review both business-to-business and business-to-consumer transactions, comparing information from hardware store accounts against their customers' purchasing records to detect cases where businesses are skimming cash or are outside the system.
In relation to cafes, the ATO said it is expanding its compliance program of comparing information from coffee-supplier trade accounts against their customers' purchasing records to detect cases where cafe businesses are skimming cash or are outside the system.
<h3>Employee vs contractor</h3>
The ATO will continue the compliance program on contractor arrangements. Trying to present an employment relationship as a contract between two businesses by, for example, forcing the worker to supply invoices and quote an ABN, does not in the ATO's view override an underlying relationship of employment. The ATO is concerned this threatens the welfare and entitlements of workers and creates unfair competition for honest employers.
The statistics paint their own picture on this issue. In 2011-12, the ATO conducted approximately 1,100 audits on businesses where it suspected that the business may have incorrectly treated employees as contractors. From the resultant audits, the ATO collected details of approximately 51,000 payments made to around 41,000 contractors, about 18,000 of which were individuals. It found that 48% of businesses that engaged contractors were wrongly treating individuals as contractors.
This is an ongoing major issue for the ATO, and SMEs should also be aware that Fair Work Australia also looks closely at this issue of employee vs contractor.
<h3>Small business benchmarks</h3>
The ATO has developed benchmarks for over 900,000 small businesses in over 100 industries. According to the ATO, approximately 90% of businesses in benchmarked industries fall within a benchmark range.
The benchmarks can be a two-way street. While they are a valuable tool for the ATO to check tax compliance, they can be useful for SMEs too. For example, where a business is reporting significantly more net income than its industry peers, this can alert the business to consider if it has forgotten to claim all of its business tax deductions. It isn't always that simple, but the potential exists for these benchmarks to actually help some SMEs.
On the flip side, where a business is reporting significantly less income than the benchmark range for its industry, the ATO may ask a few questions. However, if the business had good evidence to explain all its income and expenses, the ATO says it will not be subject to tax adjustments.
<h3>Employer obligations</h3>
For the 2012-13 year, the ATO expects to:
<ul>
<li>review the tax affairs of more than 20,000 businesses across all markets to ensure they are reporting the correct amounts of PAYG withholding;</li>
<li>conduct a range of education and assistance activities regarding reporting of payments to contractors in the building and construction industry;</li>
<li>use third-party data to income match taxable government grants and payments with reported amounts in tax returns;</li>
<li>conduct an outbound phone campaign and 500 enterprise reviews with the aim of ensuring that businesses register for PAYG withholding when they take on staff for the first time and register for GST when their turnover exceeds the $75,000 threshold.</li>
</ul>
<h3>GST refund integrity and GST evasion</h3>
With the recent passage of new laws that give the Commissioner a discretion to retain high risk refunds, the ATO may stop a small percentage of BASs for verification where anomalies, discrepancies, unusual behaviour, or change in patterns occurs. It said to minimise the number of businesses having refunds delayed, it may also check some refunds after they have been paid.
In addition, the ATO said it will review 35,000 GST registration applications to ensure that new registrants are legitimate. It will review around 500 serious cases of fraud involving identity theft and groups of entities established with no intention of undertaking an enterprise.
The ATO will monitor and investigate taxpayers who dispose of real property and fail to report the transaction on their BASs or misclassify the transaction for GST purposes.
The ATO said it has recently identified cases of fraud involving groups of entities established with no intention of undertaking an enterprise. Stolen identities were used to falsely register ABNs and make fraudulent refund claims on 1,670 activity statements totalling more than $17.5 million. An additional 600 entities associated with this fraud were detected before lodgement and subjected to enhanced registration check processes preventing additional claims being lodged. The ATO expects to review around 500 of these more serious cases in 2012-13.
<h3>Fuel tax credit claims</h3>
While this does not affect all SMEs, the ATO said incorrect or ineligible fuel tax credit claims continue to be made as a result of taxpayers misunderstanding their entitlements or poor record keeping.
In 2012-13, it will continue to provide claimants with information and assistance. However, in cases of serious breaches, it said it will consider cancellation of registration, prosecution and debt recovery.
Terry Hayes is the editor-in-chief of tax news reporting at <a rel="nofollow" href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.SmartCompany.com.au">SmartCompany</a>. 
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Small businesses under ATO compliance microscope: Terry Hayes

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Property valuations (and valuations of equipment and other assets for that matter) are relevant in many tax contexts, including capital gains tax (CGT) and GST. Getting a valuation wrong can mean more tax to pay.
A disagreement with the Tax Office on a valuation can materially alter the tax consequences of a transaction. Indeed, a recent decision by the Administrative Appeals Tribunal saw a taxpayer fail the CGT maximum net asset value test (so the CGT small business concessions could not be accessed) because of a valuation issue. My recent article <a href="https://www.smartcompany.com.au/tax/20111215-another-year-and-capital-gains-still-causes-problems?utm_source=SmartCompany&amp;utm_campaign=b8d9118ba4-Monday_12_December_201112_12_2011&amp;utm_medium=email">Another year and capital gains still cause problems</a> discussed this case further.
Hand in hand with the need for valuations is the corresponding need to keep good records. In the CGT context for example, an asset that may be subject to CGT when it is later sold, needs to have records kept about its purchase price, any improvements to the asset, etc. If an asset is inherited, it is highly prudent to obtain a valuation of it, in case tax consequences later arise.
The Tax Office has released a paper highlighting what it says are recurring issues it has found concerning valuations of property in relation to the application of the GST margin scheme provisions. The margin scheme essentially allows less GST to be paid where sales of land or strata units are involved, provided certain conditions are met.
The Tax Office does not automatically accept every valuation submitted to it. Many valuations it receives are referred to the Australian Valuation Office (AVO) for evaluation, particularly as to whether or not the valuation specifies a value that is within a range that is reasonable.
Often, when certain elements of a valuation are outside an acceptable range, the Tax Office says the ultimate valuation is higher than it should be resulting in a lower margin and less GST payable.
The paper sets outs the main issues regarding what the ATO considers are non-complying valuations it has identified and its position when those issues occur. Some issues include the following.
<table style="width: 470px;" border="1" cellpadding="0">
<thead><tr>
<td valign="top">
Issue
</td>
<td valign="top">
ATO position
</td>
</tr></thead>
<tbody>
<tr>
<td valign="top">
Profit and risk ratios: When valuing a property on the basis of a hypothetical development approach, the anticipated profit and risk margins are determined after consideration of the level of risk associated with a project as at the date of valuation. In many cases, the ATO says profit and risk ratios are not supported in the valuation report and appear to be well below what could reasonably be expected.
</td>
<td valign="top">
Valuers need to determine profit and risk ratios that are reflective of the characteristics and condition of the subject property at the valuation date. The ATO says these ratios need to reflect realistic profit expectations with appropriate and reasonable weightings for risks apparent at the date the property is required to be valued.
</td>
</tr>
<tr>
<td valign="top">
Market interest rates: Valuations need to reflect an open market interest rate. The ATO considers the use of negotiated commercial rates, "in-house" finance rates or special discounted rates may not be appropriate as these rates are not reflective of open market rates but, rather, are specific to a particular entity or a set of circumstances.
</td>
<td valign="top">
Valuers need to apply appropriate interest rates at the date the property is to be valued. The ATO says these rates should reflect commercially available rates supported by evidence from within the industry at that point in time or alternatively based on the rates published by the Reserve Bank of Australia.
</td>
</tr>
<tr>
<td valign="top">
Comparable sales: These are often unavailable at valuation date and pre and post valuation date sales are used as a reference point for a valuation. Also, there are instances where purported comparable sales from a geographically different area or different market segment to that of the subject property are referenced in a valuation. Often, supporting sales data in property valuations is provided to the ATO without any explanation as to why the data is comparable.
</td>
<td valign="top">
Comparable sales must withstand objective scrutiny of their comparability. If post valuation date sales or remote area sales are to be used, the ATO says these must have commentary as to why the valuer considers it reasonable to use these sales to establish the subject property value.
</td>
</tr>
<tr>
<td valign="top">
Development costs: Many valuers undertaking hypothetical development valuations have completed these valuations with the exclusion of important development costs such as acquisition costs, legal costs and holding costs.
</td>
<td valign="top">
The ATO says all relevant costs with appropriate weighting should be included in a hypothetical development valuation.
</td>
</tr>
</tbody>
</table>
The Tax Office says that valuations also need to reflect reasonable allowances for commencement and completion dates as well as selling timeframes, etc as these factors will affect holding costs, financing costs and overall project risk. In examining valuations, the AVO found that in a number of cases, lead times for example were unrealistic given the size and the peculiar characteristics of the property development. The ATO view is that project lead times, selling timeframes and completion timeframes must reflect the commercial, market and planning reality of a project.
Many valuations reflect a value of the real property interest that is being sold rather than the interest that existed at the valuation date. In these situations, the ATO considers that if the valuer is asked to value a real property interest that did not exist at the valuation date but was derived from another interest that existed at that date, the valuation must be made as follows:
<ul style="list-style-type: none;">
<li>
a valuation of the interest in existence at the valuation date must be made;
</li>
<li>
the valuation of that interest must be apportioned on a fair and reasonable basis, to ascertain the part of the valuation that relates to the interest that is being sold. The ATO requires all factors taken into account in the apportionment to be explained to show why the apportionment is fair and reasonable.
</li>
</ul>
The ATO said it accepts that valuations can, by their very nature, be a subjective assessment of a property's value and in many cases there are interpretive assessments of impacts on the property value. However, it said that regardless of this subjectivity, it still has an expectation that values will fall within a "reasonable range".
Where the AVO opinions are supported by evidence, and also align with the ATO's perception of reasonableness, the ATO said these will be referred to the relevant valuer to enable those noted elements of the valuation to be reviewed. If there is sufficient merit in the valuer's adopted assumptions and conclusions, such that these can be considered reasonable, the ATO said the valuation can be accepted as a complying valuation.
Where the valuer's assumptions and conclusions are not sustainable based on evidence, or are not reasonable, the ATO said the valuation cannot be considered a complying professional valuation. This, in turn, can have tax flow-on implications.
Getting valuations is important in a tax context. But not every valuation will necessarily be acceptable to the Tax Office.
Terry Hayes is the senior tax writer at <a href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article originally appeared on <a target="_blank" href="https://www.smartcompany.com.au/">SmartCompany.</a>
 
 
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How to get property valuations right: Terry Hayes

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The regulation of self-managed super funds (DIY funds) shows no signs of easing. Given their importance in terms of the total superannuation sector, perhaps that is not surprising. But regulation changes may catch some DIY fund trustees out if they are not aware of what's coming.
Most recently, the federal government has released draft regulations proposing to require trustees of self-managed superannuation funds (SMSFs) to:
<ul>
<li>value the assets of the fund at "net market value" for reporting purposes;</li>
<li>consider whether to hold a contract of insurance for one or more of their members;</li>
<li>"review regularly" and document the investment strategy; and</li>
<li>keep money or other assets of an SMSF separate from money and assets held by a trustee personally or by a standard employer-sponsor (or an associate).</li>
</ul>
These are important changes and once the regulations are finalised they would apply from July 1, 2012, only a few weeks away. So what do the changes mean?
<h3>Net market value</h3>
The draft regulations propose to require trustees of SMSFs to value the assets of the fund at "net market value" for reporting purposes from the 2012-13 year of income i.e. from July 1, 2012.
"Net market value" will be defined to mean the amount that could be expected to be received from the disposal of an asset, in an orderly market, after deducting the costs expected to be incurred in realising the proceeds of such a disposal. This definition of "net market value" is the same as that used in Australian Accounting Standard AAS 25 which requires large APRA-regulated superannuation funds, as reporting entities, to value their assets at net market value as at the reporting date.
Currently, SMSFs are generally able to choose either historical cost or market valuation accounting methods to value their assets when preparing a statement of financial position and an operating statement in respect of each year of income. SMSFs in pension phase (and in-house assets) are already required to value assets at "market value" (defined in s 10(1) of the SIS Act) each year. Note that a person commits an offence if they contravene the laws regarding preparing a statement of financial position and an operating statement with a maximum penalty of $11,000.
<h3>Separation of assets</h3>
A proposed new operating standard in the super regulations will require a trustee to keep money and other assets of an SMSF separate from any money or assets held by a trustee personally or by a standard employer-sponsor (or an associate).
This requirement is currently established by way of a covenant under the law which is deemed to be incorporated into the governing rules of the fund. However, the Tax Office is currently unable to enforce compliance with covenants and relies on voluntary compliance by trustees.
The proposal to make this requirement an operating standard will mean that a person who intentionally or recklessly contravenes the new regulation will be guilty of an offence punishable on conviction by a fine up to $11,000.
<h3>Investment strategy review</h3>
SMSF trustees will also be required to "review regularly" the fund's investment strategy. Trustees will be able to substantiate compliance of this requirement to "review regularly" by documenting decisions in the minutes of trustee meetings that are held during the income year.
Many SMSFs may only have what could be described as a very "loose" investment strategy that is not even documented. They will need to be aware of the changes and the need to have a properly documented strategy that is reviewed regularly and documented in the minutes of trustee meetings.
Other funds may already be properly documenting their investment strategy reviews, so the changes may have less impact on them.
Either way, from July 1, 2012, there will be no choice in the matter. Funds must have an investment strategy and it must be reviewed and documented regularly.
<h3>Insurance strategy</h3>
The draft regulations also propose to amend the investment strategy operating standard in the superannuation regulations to require SMSF trustees to consider whether to hold a contract of insurance that provides insurance cover for one or more of their members. SMSF trustees will be required to consider whether to hold insurance for their members when they formulate, regularly review and give effect to the fund's investment strategy.
The government expects trustees of SMSFs to be self-reliant in determining the type and level of insurance cover their funds' members might require whether within or outside their SMSFs.
As the investment strategy requirement is a prescribed operating standard, a person who intentionally or recklessly contravenes this standard is guilty of an offence punishable on conviction by a fine up to $11,000.
SMSFs are facing increasing regulation. The days are gone when someone could set up such a fund almost on the back of an envelope. The SMSF sector now holds growing billions of dollars in funds, so it's not surprising the government is keen to see those funds properly managed. SMSF trustees will have to get used to that.
Terry Hayes is the senior tax writer at <a href="https://www.thomsonreuters.com.au/" rel="nofollow">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article originally appeared on <a target="_blank" href="https://www.smartcompany.com.au/index.php">SmartCompany</a>
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Terry Hayes

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