Valuations for Division 296 and SMSFs

The approach to valuation may differ depending on the advice being provided. In some cases, guidance is provided by the relevant department, or that department may undertake the valuation at its own expense.

In this paper, we explore common areas of advice and the valuation considerations.

Division 296 taxation

The Division 296 tax, enacted as Division 296 of the Income Tax Assessment Act 1997 (Cth) through the Treasury Laws Amendment (Building a Stronger and Fairer Super System) Act 2026, has passed both Houses of Parliament. The tax will apply from 1 July 2026, with the first balance test date 30 June 2027.

Division 296 introduces new mechanisms for valuing assets and calculating member level earnings for individuals with a total super balance (TSB) above $3 million, with an additional tier above $10 million.

TSB requirements

TSB will be assessed at the start and end of the financial year when determining a Division 296 liability, except in the first year, where 30 June 2027 only will be used.

TSB must incorporate contributions, withdrawals, market movements and fund reported values.

Funds must record accurate market valuations of all assets at 30 June each year, including:

•   listed assets, marked to market, and

•   unlisted assets, to be revalued in accordance with the Australian Taxation Office (ATO) and the Australian Prudential Regulation Authority (APRA) valuation standards (already required for existing TSB calculations).

Special requirements for self-managed super funds (SMSFs)

SMSFs are required to apply a formula to attribute fund earnings to in-scope members. This will require small funds to determine the fund's average total net asset value and the average value of their members' superannuation interests, over the course of the year.

An actuarial certificate is required to perform the relevant calculations and provide the attribution share. SMSFs with in-scope members who have members in accumulation phase only will need to engage an actuary for the first time. Those with existing pensions will already be using actuaries to calculate exempt current pension income each year.

Capital gains tax (CGT) relief for SMSFs

SMSFs may opt in for CGT relief by determining the cost base for all assets at 30 June 2026 (for Division 296 purposes only). This will exclude capital gains accrued on fund assets prior to 30 June 2026 from Division 296 tax. The opt-in is at the fund level-not asset or member level. This means the cost base of all assets is reset when making the election.

The reduced (adjusted) capital gain is also eligible for the one-third CGT discount.

The relief is not automatic. SMSFs will need to submit the approved form by the due date of the fund's 2026/27 annual tax return. To enable this, funds will need to revalue all assets effective 30 June 2026. Given the high anticipated demand for valuation services, it is recommended that fund trustees consider booking in the valuation as soon as possible.

Even SMSFs without in-scope members may consider making this election for Division 296 purposes as their members may become in-scope members in the future.

Special rules for defined benefit pensions

Division 296 requires a different valuation basis for defined benefit (DB) pensions than the one used for standard TSB purposes. This method is to take into account the pension amount, expected life expectancy and actuarial assumptions.

SMSFs

This section outlines the general asset valuation rules that apply to SMSFs. Some specific requirements that relate to Division 296 assessments are outlined above.

Trustees of SMSFs need to ensure that assets of the fund are valued at market value for a number of purposes including:

•   Division 296, subject to certain relief (as mentioned above)

•   financial statements and annual reports

•   an in-specie transfer of asset (either to or from the SMSF)

•   acquisition or sale of an asset to a related party

•   determining the value of an individual member's interest (for example, TSB)

•   determining the value when reporting transfer balance cap events including the commencement of the pension

•   valuation of collectable and personal use assets (see below) when sold to a related party, and

•   ensuring the value of in-house assets remain below the 5% threshold, on an ongoing basis.

The valuation requirements or evidence, as well as the revaluation frequency, can vary depending on the specific purpose.

However, regulation 8.02B of the Superannuation Industry (Supervision) Regulations 1994 requires assets to be reported at market value in financial accounts and statements on an annual basis.

In some cases, the valuation must be supported by a professional valuation but, in other circumstances, the valuation can be based on objective and supportable data.

For a trustee to have objective and supporting data, the trustee must document the value of the asset with an explanation on the basis or reasoning for the value, as well as the steps taken to calculating.

Trustees should consider the appropriate steps to take as evidence of how values have been determined, which must be provided to the fund's auditor.

Some examples of situations and valuation requirements from the ATO are set out in the attached PDF.

In specific cases the ATO requires a professional valuation such as where the:

•   value of the asset represents a significant portion of the fund's value, and

•   nature of the asset makes the valuation challenging or complex.

The ATO's guidance is contained in its Valuation guidelines for self-managed super funds.

SMSF auditors

SMSF auditors must verify that assets in an SMSF are valued to market value. The approach taken by an auditor is governed by legislation, auditing standards and ATO guidance.

It is not the auditor's responsibility to obtain or value the assets. However, the auditor does need to make an assessment based on external information and the evidence provided by the trustee as to how the valuation was determined.

If there is insufficient evidence to support the value of the assets, the auditor may lodge a contravention report. An auditor that does not take appropriate steps in assessing the evidence in relation to valuation of assets may be referred to the Australian Securities and Investments Commission (ASIC).

Requirements for collectables

Some unique valuation requirements apply when collectables are disposed of to a related party. The most common collectables held in SMSFs are artwork, jewellery, alcohol and motor vehicles.

If a collectable is to be acquired by a related party, the trustee must obtain a valuation from a qualified independent valuer. The super fund must then not dispose of the collectable for less than the price in the valuation.

A valuer will be qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community. This may be demonstrated by being a current member of a relevant professional body or trade association.

The valuer must also be independent. This means that the valuer must not be a member of the fund or a related party of the SMSF. They should be impartial and unbiased and not be influenced or appear to be influenced by others. Depending on the nature of the collectable, it may prove difficult to find a qualified independent valuer.

Taxation

For tax purposes, there are several situations where the market value of assets may be needed including:

•   gifting of CGT assets

•   unlisted assets

•   non-arm's length transactions, and

•   ascertaining the net asset value of a small business to determine eligibility for small business CGT concessions.

Market value is not defined in the tax legislation and takes on its ordinary meaning unless a specific legislative provision defines its meaning which must be applied (for example, superannuation legislation).

The ATO website indicates that it considers the market value is the estimated value on the open

market which considers the:

•   best use of the asset, which may be different to current use (for example, development opportunity), and

•   amount that a willing buyer and seller would reach at arm's length.

Market value substitution rule

In some situations, the market substitution rule applies. The market substitution rule applies to the disposal of a CGT asset if the:

•   amount received is more or less than the market value, and

•   seller and buyer are not dealing with each other at arm's length.

If the market substitution rule applies, the substituted value is used to determine the assessable capital gain or loss for tax purposes. As many elements of the tax system, such as submitting a tax return, are based on self-assessment, clients are expected to take reasonable care when dealing with their tax affairs.

Reasonable care relating to the managing of tax affairs considers what a reasonable person would do. However, in relation to market value and disclosure in a tax return, the obligation is on whether the client is in a reasonably arguable position.

Reasonably arguable is defined in the legislation which is an application of an objective standard, as well as the application of the law (and is considered a higher standard by the ATO compared to 'reasonable care').

Generally, the following are approaches to establishing the market value:

•   engaging a professional valuer

•   seeking a private binding ruling to provide a valuation or valid a valuation obtained, or

•   working with the ATO (joint valuation) to appoint and instruct an appropriate professional valuer.

ATO guidance on valuations

If a taxpayer uses a market value, the onus is on that person to provide a replicable and defensible valuation, even in situations where a professional valuer has been engaged.

Replicable and defensible is supported by:

•   retaining all relevant records

•   thoroughly documenting the valuation process, and

•   choosing the appropriate inputs and methodology.

If a professional valuer is employed, the taxpayer is responsible to ensure the valuer:

•   is suitably knowledgeable and experienced

•   receives appropriate instructions

•   is objective

•   does not experience any obstacles or limitations when undertaking the valuation, and

•   provides a valuation that is supported by a recognised valuation methodology.

Penalties may apply if the client does not have a reasonably arguable position, even if a professional valuer has been engaged, if:

•   the taxpayer has not provided correct information to the valuer to assist in the valuation

•   it was reasonable that the client knew the valuation was incorrect, and/or

•   the methodology used was based on unclear facts or an unresolved interpretation of legislation (either super or tax).

The following examples are taken from the ATO.

Administrative penalties

Miscellaneous Taxation Ruling MT 2008/2 outlines administrative penalties where the taxpayer is not in a reasonably arguable position.

Payments and penalties that may apply are:

•   administrative penalty

•   paying the underpaid tax

•   interest on the unpaid tax

•   General Interest Charge, if payment of underpaid tax and interest is late (however discretion can apply depending on individual circumstances as to why there is a delay in paying the tax)

•   Shortfall Interest Charge, if the client's tax return is amended resulting in additional tax payable.

Objections

If the ATO amends a client's tax return, the client can object to the reassessment by submitting the objection in writing within 60 days of the amendment or up to four years (depending on the individual's circumstances).

If a tax bill results from the reassessment, clients should pay the tax by the due date, even if an objection has or will be lodged. An objection does not generally extend the payment due date.

While the ATO will not seek repayment of the debt until after the objection is finalised, penalties may still apply for payments once the due date has passed, so clients should consider whether it is appropriate to make the payment.