Below is a structured breakdown of the rules, obligations, risks, and common audit issues.

1. What Counts as a Collectable?

Under SIS Reg 13.18AA, the following are treated as collectables/personal‑use assets:

• Artwork
• Jewellery
• Antiques
• Artefacts
• Coins, medallions, banknotes
• Postage stamps, first day covers
• Rare folios, manuscripts, books
• Memorabilia
• Wine or spirits
• Motor vehicles
• Recreational boats
• Memberships of sporting or social clubs
  
  Additional clarifications: [classic.au…lii.edu.au]
• Coins/banknotes = collectable if valued above face value
• Bullion coins = collectable if traded above metal spot price [audits.com.au]

2. Core Compliance Rules for Collectables

ATO rules impose strict conditions:

A. No Leasing to Related Parties

Collectables cannot be leased, rented, used, or otherwise made available to a related party under any circumstances. [classic.au…lii.edu.au]

B. No Storage at a Private Residence

Collectables must not be stored in or at the private residence of any related party.

• This includes garages, sheds, or any part of a home.
• ATO even prohibits displaying an artwork at the business premises of a related party.

C. Storage Decisions Must Be Documented

Trustees must prepare a written record explaining:

• Why the storage location was chosen
• Where the asset is kept
• Record must be kept for 10 years [classic.au…lii.edu.au]

D. Insurance Requirement

Collectables must be insured in the name of the SMSF within 7 days of acquisition.
[classic.au…lii.edu.au]

E. No Use by Related Parties

Members, relatives, or related entities cannot use or enjoy the asset — even briefly or incidentally.

• E.g., you cannot “drive a classic car once”, even for maintenance.
  

F. Sale to Related Parties Requires Independent Valuation

If sold or transferred to a related party, an independent valuation is mandatory. [smsfaustralia.com.au]

3. Investment Strategy & Sole Purpose Test

The SMSF must document why purchasing the collectable is consistent with:

• The investment strategy (risk, liquidity, diversification)
• The sole purpose test (benefit for retirement only)
  [smsfaustralia.com.au]

4. Audit & Valuation Requirements

The ATO expects trustees to:

• Provide market‑based valuations for collectables
• Maintain objective evidence of the item’s existence
• Ensure values are reliable at each reporting period
  Collectables are a common audit contravention area, with 240 breaches reported for the 2022 audit year alone.

5. In‑House Asset Intersection

Collectables may also breach in‑house asset rules if:

• They are leased to related parties (automatically non‑compliant)
• They involve trust structures or arrangements indirectly benefiting related parties
  Under SIS Act Section 71, assets leased to related parties are treated as in‑house assets.
  [ato.gov.au]

6. Practical Risks and Considerations

A. High Cost of Compliance

Insurance, secure storage facilities, and valuation fees may reduce returns.

B. Liquidity Risk

Collectables may be illiquid, affecting pension obligations or minimum drawdowns.

C. High ATO Scrutiny

Collectables are frequent causes of:

• Contraventions
• Penalties
• Loss of complying fund status (worst case)

7. Summary: Compliance Checklist for Trustees

All items above drawn from SIS Reg 13.18AA and ATO‑aligned guidance. [classic.au…lii.edu.au],

Please contact us for;

A trustee‑friendly compliance checklist
Sample SMSF minute wording for storage decisions
An audit‑ready evidence pack template for collectables

Valuation evidence for unlisted investments, challenges, and Audit Requirements for adequate, appropriate audit evidence.

1) Core law SMSF Auditor auditing against

• Reg 8.02B SISR: all SMSF assets must be carried at market value each income year in the financial statements. “Market value” is defined in s10(1) SISA (willing buyer/seller, arm’s‑length, proper marketing, knowledgeable parties). [classic.au…lii.edu.au]
• ATO’s valuation framework: trustees must determine market value annually, and provide objective and supportable evidence; auditors must verify that basis and obtain sufficient appropriate evidence under ASA 500. [ato.gov.au], [ato.gov.au]
• Auditor’s obligations (GS 009 & ATO): obtain sufficient appropriate evidence; document judgments; modify the IAR and lodge an ACR where criteria are met if evidence is insufficient. [auasb.gov.au], [ato.gov.au]

2) ATO’s specific guidance for unlisted shares and units (what counts as evidence)

Appropriate audit evidence to support the trustee’s market value for unlisted companies or unit trusts may include:

• Qualified independent valuation of the underlying assets held by the company/trust (e.g., business or property valuation). [ato.gov.au]
• Directors’/trustee’s substantiation: written explanation of the method, assumptions, and objective data relied upon (not just a price assertion). [ato.gov.au]
• Property valuation where the single (or dominant) underlying asset is property. [ato.gov.au]
• Recent arm’s‑length transactions (date/price of latest share or unit trade, or recent capital raise). [ato.gov.au]

The ATO also stresses that signed financial statements alone (especially at historical cost) are unlikely to be sufficient evidence of market value. [ato.gov.au]

3) Practical evidence hierarchy for unlisted investments (apply professional scepticism)

Highest weight (often sufficient on its own):

• Independent expert valuation report of the security (or of the business/underlying assets), current at or near 30 June, prepared by a suitably qualified valuer. [ato.gov.au], [ato.gov.au]

Strong weight (typically combine ≥2):

• Recent arm’s‑length trade in the same class of security (date, quantity, consideration, counterparties unrelated). [ato.gov.au]
• Recent capital raising terms to unrelated investors (offer docs, price, timetable), adjusted for rights/preferences if different classes. [ato.gov.au]
• Look‑through asset valuation (e.g., NTA/NAV rebuilt at market for investment/property vehicles), with working papers and external source data. [ato.gov.au]

Supplementary (rarely sufficient alone):

• Director/manager valuation memo detailing methodology, assumptions, cash‑flow forecasts, discounts, and external benchmarks; board minutes. [ato.gov.au]
• Audited company/trust accounts only where assets are already at fair value and disclosures support the valuation basis. [ato.gov.au]

4) Scenario‑based evidence matrix (what to request and file)

A. Unlisted property unit trust (single asset — real property)

• Independent property valuation (or agent appraisal with comparable sales listed) dated close to 30 June; trust accounts; unit register; any recent arm’s‑length unit trades. Rebuild NTA at market. [ato.gov.au], [ato.gov.au]

B. Operating private company (no active market)

• Business valuation (DCF/market multiples) or recent arm’s‑length share issue/sale; management accounts; board paper on valuation method; cap table; rights of the class; check for subsequent events post‑year‑end. [ato.gov.au], [ato.gov.au]

C. Early‑stage/start‑up (recent raise)

• Latest term sheet/offer docs and allotment journal; confirm investors were unrelated; reconcile price to ordinary share class held by SMSF; adjust for liquidation preferences if applicable; management deck supporting key assumptions. [ato.gov.au]

D. Fund‑of‑funds / unlisted managed vehicle

• Manager NAV at valuation date and methodology; look‑through where practical; cross‑reference to independent pricing or exit events; confirm any gating/side‑pocket impacts on fair value. [ato.gov.au]

E. Related‑party unit trust/company

• As above plus explicit evidence the valuation is arm’s‑length (independent property/business valuation; market rent; loan terms; lease evidence if a related tenant), to satisfy s109 SISA and valuation integrity for in‑house asset tests. [ato.gov.au]

ATO reminders: where the only underlying asset is property, obtain a property valuation; where there have been recent unrelated trades or capital raisings, those prices are persuasive if terms are comparable. [ato.gov.au]

5) Evidence quality, dating, and frequency

• The ATO expects current‑year evidence and will scrutinise funds that repeat the same values across years; lack of evidence has driven a rise in Reg 8.02B breach reports. [ato.gov.au]
• An independent valuer is not mandatory every year, but if you rely on a prior valuation you (and the trustee) should document why it remains appropriate, and consider significant events that would trigger refresh (e.g., new raise, loss of key contract, market dislocation). [ato.gov.au]

6) When to modify the IAR and lodge an ACR

• If you cannot obtain sufficient appropriate evidence that unlisted investments are at market value, modify the IAR (qualified/disclaimer per ASA 705) and lodge an ACR when reporting criteria are met. It’s not your role to perform the valuation. [ato.gov.au]
• The ATO’s auditor reviews emphasise documentation of your risk assessment, procedures, and conclusions; keep your audit file standards‑ready. [ato.gov.au], [ato.gov.au]

7) Audit file — minimum workpapers I’d expect to see

• Risk assessment for valuation assertions (existence, rights, valuation, presentation), materiality, reliance on management experts. [auasb.gov.au]
• Evidence pack: copies of valuation reports (or capital raise docs), look‑through NTA/NAV builds with source data, property valuations/appraisals (with comps), unit/share registers, cap table, any arm’s‑length trade confirmations. [ato.gov.au]
• Trustee representation (GS 009 exemplars) acknowledging responsibility for fair presentation and compliance; your conclusion memo linking evidence to the asserted value. [auasb.gov.au], [ato.gov.au]

8) Common red flags (heighten procedures)

• Same value 3 years running for property or unlisted trusts; post‑balance‑date fund‑raising at a materially different price; reliance on unaudited cost accounts; missing support for related‑party leases/terms. [ato.gov.au]
• Evidence supplied is a director email with a number only; no method/assumptions; or property appraisal without comparables. [ato.gov.au]

9) Interactions with other rules (quick pointers)

• Arm’s‑length terms & NALI: For LRBAs with related‑party loans, ensure PCG 2016/5 (safe harbours) is met or that you have evidence terms mirror a commercial loan; otherwise NALI risk can arise (taxed at top rate). [ato.gov.au]
• In‑house asset %: Robust market values are critical to testing the 5% cap; valuations that are stale or unsupported can distort IHA calculations. [ato.gov.au]

Quick audit checklist you can lift the ease audit process

1. Identify each unlisted holding → classify (property trust, operating company, fund‑of‑funds, related party). [ato.gov.au]
2. Set materiality & risk for valuation; determine if expert work is needed (GS 009; ASA 500/620). [auasb.gov.au]
3. Request evidence tailored to class (see matrix): independent valuation or recent arm’s‑length price or look‑through NTA@market with external data, plus method/assumptions memo. [ato.gov.au]
4. Evaluate sufficiency/appropriateness: date proximity to 30 June, independence, method suitability, sensitivity to key assumptions, subsequent events. [ato.gov.au]
5. Conclude & document: tie evidence to ledger value; if insufficient → escalate, seek more, or modify IAR/ACR. [ato.gov.au]

Want templates?

Please contact us for these templates;

•  trustee valuation pack request (by asset class),
• a look‑through NTA/NAV workbook (with source‑link checklist), and
• a 1‑page audit conclusion memo for unlisted investments.

Given your background in valuations and complex SMSF audits, I can tailor them to start‑ups, unlisted property vehicles, and related‑party structures so they line up neatly with GS 009 and the ATO’s “Verifying market value” page. [auasb.gov.au], [ato.gov.au]

References (primary):

• ATO: Verifying the market value of fund assets (unlisted shares/units evidence; auditor actions). [ato.gov.au]
• ATO: Guide to valuing SMSF assets (trustee obligations; asset‑class notes). [ato.gov.au]
• SISR reg 8.02B: annual market value requirement. [classic.au…lii.edu.au]
• AUASB GS 009: SMSF audit guidance (evidence, documentation, using experts). [auasb.gov.au]
• ATO: Understanding market valuations for your SMSF (compliance focus; increases in 8.02B breaches). [ato.gov.au]
• ATO: What we look for when auditing an SMSF auditor (audit file expectations/checklist). [ato.gov.au]
• ATO: PCG 2016/5 (LRBA safe harbours; NALI risk). [ato.gov.au]

We have experienced many times that valuation information from unlisted entities is not very forthcoming, transparent or provides a reasonable basis of valuation. Which is why, more often than not, as an auditor, we don’t have a choice but to qualify Part A and Part B of the Audit Report.

Disclaimer: Please note that the above article must not be relied upon in part or in entirety. This writing is only a brief guidance, and may not reflect the actual nature of your SMSF Investments valuation. Which will be looked at, at the time of audit in detail and we will provide further audit guidance specific to your SMSF audit.

Please contact us to discuss your requirements.

Keywords for SMSF Valuations

• SMSF Valuations
• SMSF Unlisted Investments
• SMSF Market Value
• SMSF Valuation Evidence
• SMSF Independent Valuation
• SMSF Asset Valuation
• SMSF Trustee Documentation
• SMSF Arm’s-Length Transactions
• SMSF Property Valuation
• SMSF Business Valuation
• SMSF Capital Raising
• SMSF NTA/NAV Rebuilding
• SMSF Fair Value Reporting
• SMSF Audit Evidence Hierarchy
• SMSF Objective Data
• SMSF External Benchmarks
• SMSF Valuation Memo
• SMSF Financial Statements Support
• SMSF Recent Transactions
• SMSF Asset Disclosures

Non‑arm’s length income (NALI) and non‑arm’s length expenditure (NALE) are integrity rules that can materially change the tax outcome for a self‑managed superannuation fund (SMSF). Where income or expenditure is found to arise from non‑arm’s length arrangements, the ATO can treat affected income as NALI and tax it at the top marginal rate rather than the concessional superannuation rates. The rules have been the subject of legislative change, extensive ATO guidance and active litigation and tribunal review, and trustees must understand both the legal tests and the practical evidence required to withstand scrutiny.

Legislative and regulatory framework

Core statutory provision

The principal statutory vehicle is section 295‑550 of the Income Tax Assessment Act 1997 (ITAA 1997), which sets out the NALI tests. Those tests capture income derived under schemes where parties are not dealing at arm’s length and where the income is greater than would have been expected under arm’s‑length terms. The provision also contemplates situations where non‑arm’s length expenditure gives rise to NALI.

Interaction with NALE

NALE operates as the expenditure side of the integrity rule: if an SMSF incurs expenditure that is not on arm’s‑length terms (for example, discounted acquisition price, free or discounted services from related parties, or other non‑commercial terms), that expenditure can be linked to the fund’s income and cause that income to be treated as NALI. Legislative amendments and explanatory materials have clarified and, in some respects, broadened the ATO’s reach to include general fund expenses as well as expenditure tied to specific assets.

ATO guidance and rulings to know

LCR 2021/2 (finalised) and compendium

The ATO finalised Law Companion Ruling LCR 2021/2 (and associated compendium LCR 2021/2EC2) to explain how the NALI rules apply where non‑arm’s length expenditure is incurred. The finalised ruling, released in September 2025, sets out the ATO’s view on the connection between NALE and income, examples of arm’s‑length and non‑arm’s‑length arrangements, and the ATO’s compliance approach. The compendium records submissions on the draft ruling and the ATO’s responses. The ruling takes effect from 1 July 2018, consistent with the retrospective application of earlier legislative amendments.

Key interpretive points in ATO guidance

• Connection test — The ATO treats NALE as capable of tainting income where there is a causal or sufficient connection between the non‑arm’s length expenditure and the income derived by the fund. The ATO’s examples show both direct connections (e.g., discounted purchase of an income‑producing asset) and broader scenarios (e.g., general fund expenses that reduce the fund’s outgoings).
• Scope of “general expenses” — The ATO’s position in the final ruling confirms that general expenses can be relevant to NALE analysis, a point that attracted significant industry comment during the draft stage.
• Burden of evidence — While the ATO sets out its interpretive approach, the practical outcome in disputes often turns on the quality of contemporaneous documentation, independent valuations, and expert evidence.

How the tests operate in practice

Four NALI tests (practical summary)

The NALI rules are commonly explained as four tests that capture different factual patterns:

• Test 1 — Income derived from a scheme where parties are not dealing at arm’s length and the income is greater than would be expected under arm’s‑length terms.
• Test 2 — Income (including dividends) from private companies where the amount is inconsistent with arm’s‑length dealings.
• Test 3 — Income from trusts where distributions to the SMSF are inconsistent with arm’s‑length expectations.
• Test 4 — Income that is greater because the SMSF incurred NALE.

Practical examples that trigger NALI

• Discounted asset acquisition from a related party that produces income or capital gains.
• Private lending to related parties where interest rates, security or terms are not commercial.
• Services provided free or at a discount by related parties (for example, accounting or management services).
• General fund expenses that are non‑arm’s length and materially reduce the fund’s outgoings.

Selected tribunal and court decisions

AAT decision on arm’s‑length private lending (2023)

A notable Administrative Appeals Tribunal (AAT) decision in 2023 involved an SMSF that made private loans to related parties. The AAT overturned the ATO’s amended assessments where the SMSF produced independent expert evidence showing the loan terms were commercially reasonable, and where the fund’s documentation and processes supported the commerciality of the arrangement. The decision highlights that robust contemporaneous evidence and independent valuation or expert reports can be decisive in contesting an ATO NALI determination.

BPFN v FTC and challenges to the ATO’s breadth

Industry commentary and seminars have discussed litigation and challenges (for example, matters referenced as BPFN v FTC) that question whether the ATO’s broad approach to general expenses and NALE is legally sustainable. These challenges focus on whether general fund expenses should taint all fund income and whether the ATO’s causal tests are too expansive. While some matters remain at early stages or are discussed in professional forums rather than reported judgments, they illustrate ongoing legal tension and the potential for further judicial clarification.

Broader jurisprudential themes

Cases that survive ATO scrutiny typically share features: independent valuations, contemporaneous commercial rationale, consistent trustee conduct, and evidence that transactions were negotiated on commercial terms. Conversely, arrangements lacking documentation, with informal or family‑style terms, are more likely to be characterised as non‑arm’s length.

Practical compliance steps for SMSF trustees

Documentation and process

• Valuations — Obtain independent market valuations for acquisitions or disposals involving related parties.
• Written agreements — Use formal loan agreements, service contracts and security documents when dealing with related parties.
• Market comparators — Keep evidence of comparable market rates (e.g., bank loan rates, market management fees).
• Contemporaneous records — Minutes, trustee resolutions and professional advice should be recorded at the time of the transaction.

Avoiding common pitfalls

• Do not accept or provide free or heavily discounted services without clear commercial justification.
• Avoid informal family loans without formal documentation and independent evidence of commercial terms.
• Treat general fund expenses with care: ensure fees for audit, accounting and investment management are market‑based and supported by quotes or contracts.

Responding to an ATO review

When the ATO raises NALI/NALE concerns, trustees should assemble: independent valuations, expert reports (where appropriate), contemporaneous documentation and a clear commercial narrative explaining why terms were arm’s length. The 2023 AAT outcome shows that well‑prepared evidence can overturn ATO positions.

Practical consequences and tax outcomes

Tax treatment

If income is characterised as NALI, the tax consequences are significant: affected income may be taxed at the top marginal rate rather than the concessional rates that typically apply to SMSF income. Penalties and interest can also follow where the ATO amends assessments. The potential for retrospective application (from 1 July 2018 in the ATO’s ruling) increases the compliance risk for prior years.

Risk management trade‑offs

Trustees must balance the desire to use related‑party arrangements (which can be efficient) against the compliance risk and evidentiary burden. Using independent third‑party providers for key services or ensuring formal market‑based contracts can reduce the risk of an adverse NALI finding.

Key takeaways

• NALI and NALE are high‑risk areas for SMSFs and can lead to top‑rate taxation of affected income.
• ATO’s LCR 2021/2 sets out a broad interpretive approach and applies from 1 July 2018; trustees should familiarise themselves with the ruling and compendium.
• Evidence matters: independent valuations, formal agreements and contemporaneous records are often decisive in tribunal and court reviews.
• General expenses are in scope of the NALE analysis under the ATO’s view, so routine fund costs should be demonstrably market‑based.

*https://www.ato.gov.au/law/view/pdf/pbr/lcr2021-cp002.pdf

Setting up SMSF Investment Strategy

The trustees of an SMSF are required to prepare and implement an investment strategy for the superannuation fund. The strategy must reflect the purpose and circumstances of the fund and take into account:

• How to maximise member returns while having regard to the risk
• Appropriate diversification in a long term investment strategy; and
• The ability of the fund to pay benefits as members reach retirement, and other costs incurred by the superannuation fund.

Trustees must make sure all investment decisions are made in accordance with the documented investment strategy of the fund and should seek investment advice or appoint an investment manager in writing if in any doubt.

To Read More Click Link Below

Create your SMSF investment strategy | Australian Taxation Office

SMSF independent auditor’s report 2011

The  Self-managed superannuation fund independent auditor’s report  (NAT 11466, RTF 345KB) are instructions and a form that you should use if you:

–          are an approved auditor, and

–          have been appointed by a trustee of self managed superannuation (SMSF) to give a report on the operation of that fund for each income year.

This report applies from 1 July 2011. For an annual audit, this means for audit periods commencing on or after 1 July 2010. You may use this report for audits completed for earlier periods. However, you must take care to comply with the auditing standards and legislation that applied to that period.

There are two new regulations included in the 2011 audit report that Auditor must now sign off . Regulation 1.06(9A) (which requires the minimum pension to be paid at least annually) and reglulation 5.03 (which requiest investment earnings to be allocated to members on a fair and reasonable basis.

What SMSFs can expect from the 2011-12 compliance program

ATO Commissioner Michael D’Ascenzo launched the ATO’s new SMSF compliance program on 30 June 2011. While ATO continue to work with SMSFs to fix genuine problems, ATO also take firm action, including making funds non-complying, if they commit serious breaches of the rules. This year, ATO SMSF compliance activity will focus on: 

• newly registered funds, to ensure they have not been established to provide illegal early release (IER) of super funds to their members
• funds lodging their first annual return to ensure they are entitled to receive their ‘notice of compliance’
• auditor contravention reports
• related-party investments, to ensure they are not contravening the 5% in-house asset limit or the prohibition of lending to members
• exempt current pension income and non-arm’s length income
• re-reporting of contributions and compliance with excess contributions tax release authorities.

Sections within What SMSFs can expect from the 2011-12 compliance program

• Illegal early release
• Approved auditors

Guide to self-managed superannuation funds

Setting up an SMSF

When you set up an SMSF you become a trustee (or the director of a company that is a trustee).

What it means to be a trustee

A trustee is responsible for running the fund and acting in the best interests of the members. As a trustee you need to manage the fund and its investments separately from your own affairs.

How your SMSF is regulated

We administer the relevant super laws for SMSFs, work with you to help you meet your obligations and verify compliance, but we don’t provide financial or investment advice.

Laws, rules and consequences

You’re also responsible for running the fund according to its trust deed and the super laws. If you don’t, the tax concessions that normally apply to your super may be affected and you may face penalties. Your fund must be run for the sole purpose of providing retirement benefits for the members.

Steps to setting up an SMSF

Your SMSF needs to be set up correctly so that it’s eligible for tax concessions, can pay benefits and is as easy as possible to administer. Here are the steps to setting up your fund:

1. Appoint an SMSF professional to help you set up and run your fund
2. Work out the structure of your fund
3. Make sure you (and the other members) are eligible to be a trustee
4. Check the residency of your fund
5. Create your trust and trust deed
6. Appoint your trustees
7. Record each member’s tax file number
8. Open a bank account for your fund
9. Register with the ATO
10. Prepare an investment strategy.

Self Managed Super funds why use Market Valuations

Australian Taxation Office Superannuation Circular 2003/1

Introduction1. The Australian Taxation Office (ATO) intends that self managed superannuation funds should use market values for all valuation purposes. This includes valuations for determining the purchase price of a pension and the use of market value accounting for all financial statements.2. The purpose of this Circular is to provide the basis for conducting these valuations.

Financial reporting

3. Australian Accounting Standard AAS 25 which applies to reporting entities requires superannuation funds to value their assets at their net market value as at the reporting date. However, most self managed superannuation funds can appropriately be classified as non-reporting entities and therefore not required to comply with this standard.

4. Regardless of this, the Tax Office’s position is that self managed superannuation funds should use market value reporting for their financial statements, even where the auditor has determined that the fund is a non-reporting entity.

5. This view is shared [BH1]by APRA and is set out in their Addendum to Circular No. IV.A.4.

Benefits of market value financial reporting

6. By using market value reporting, self managed superannuation funds will ensure that members’ benefits, as reported in the annual statements, will reflect all market value movements of the reporting period.

7. This consistent accounting approach by all superannuation funds will assist trustees with the investment decisions of the fund by allowing for the comparison of financial statements from subsequent periods and with other superannuation funds. It will also assist trustees to determine whether the mix of investments in the fund is in accordance with the investment strategy.

8. Market value reporting will also allow trustees to easily determine the resources that the fund has available for payment of benefits. For example, if a member was to leave the fund the trustees could easily determine the member’s account balance as at the reporting date.

To read more click here