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

Under the reforms, SG contributions must be received by the employee’s fund within 7 business days of payday, a move intended to curb unpaid super and improve retirement outcomes via earlier compounding.
The base for calculating SG also shifts to qualifying earnings (QE)—a new term that consolidates ordinary time earnings with certain other amounts—while the SG rate remains 12%. [treasury.gov.au], [ato.gov.au] [ato.gov.au]

The Superannuation Guarantee Charge (SGC) framework has been redesigned to suit payday frequency, with a new administrative uplift that can default to 60% of the shortfall (subject to reductions for good compliance history and prompt voluntary disclosure).
This replaces the old flat administration fee and heightens the cost of late payments where issues aren’t identified and fixed early. There are practical timing exceptions, including an extended window for the first contribution for new employees (up to 20 business days), recognising onboarding realities and system cutovers.
Super funds must also allocate or reject contributions within 3 business days, streamlining flows so money reaches members faster; these details sit in the 2026 regulations supporting the Act. [fairwork.gov.au], [superannua…ion.asn.au]

Importantly, the ATO’s Small Business Superannuation Clearing House (SBSCH) will be retired from 1 July 2026 (closed to new users since 1 October 2025), so employers should transition to alternative clearing arrangements well before go‑live.
The government and regulators expect the shift to make non‑payment visible earlier by matching Single Touch Payroll data with fund reporting. [csc.gov.au]

To smooth implementation, the ATO has signalled a first‑year, risk‑based compliance approach (PCG 2026/1), focusing enforcement on high‑risk non‑payers while recognising employers making genuine efforts to comply.
Employers can access ATO checklists and fact sheets on QE, SuperStream updates and SBSCH transition to prepare and test processes ahead of July 2026. [ato.gov.au] [ato.gov.au]

For payroll, finance and HR, the implications are immediate: upgrade systems to calculate SG on every pay run, ensure remittances clear to funds within 7 business days, and adjust cash‑flow to reflect more frequent outflows.
You should also review STP configurations to report QE and liabilities accurately, verify fund details to reduce rejects, and update governance and controls to detect variances quickly. [ato.gov.au], [csc.gov.au] [ato.gov.au], [csc.gov.au]

The policy rationale is clear: billions in unpaid or late super each year undermine retirement balances, especially for vulnerable workers; paying super at the same time as wages tackles this gap and boosts compounding sooner. [ministers….ury.gov.au].

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