Q. A friend of mine has a Self-Managed Super fund (SMSF) and he has invested in artwork in the fund. He mentioned that the rules have changed and he can no longer buy more artwork. Is this the case? I was hoping to set up a SMSF and build a collection myself.
A. The new rules that apply to “Collectibles and Personal Use Assets” owned by a SMSF became applicable to assets purchased on or after 1 July 2011. From 1 July 2016, these new rules apply to existing to “Collectibles and Personal Use Assets” acquired by a SMSF prior to 30 June 2011.
The new rules do not preclude a SMSF Trustee from investing in collectibles however it essential that Trustees who already own collectibles or propose to acquire collectibles ensure they understand the changes and their ongoing obligations to comply.
The types of assets that are covered are outlined in the Superannuation law. The definition of Collectibles and Personal Use Assets include the following; artwork, jewellery, antiques, artefacts, coins, postage stamps, manuscripts or books, memorabilia, wine or spirits, automobiles and boats.
There are a range of important restrictions that apply. These are; the asset cannot be leased to a related party. The asset cannot be stored in a private residence of a related party (a member of the fund or related party). The asset must be insured within 7 days of acquisition in the SMSF’s name. The asset cannot be used by a related party. If the asset is disposed of to a related party, it must occur at market price assessed by a qualified independent valuer.
The law applies a set of rules of how you document ownership, prove the purchase, seek independent valuation and proof/recognition of ownership. Should you lease the asset to a 3rd party, copies of lease arrangement when generating income and evidence of investment returns to the fund are obliged to be maintained. Likewise evidence of expenses incurred for the costs of maintaining the assets. You need to affirm that super laws are satisfied, the investment complies with the Fund’s Investment Strategy and an independent valuation is obtained (at least every 3 years or when the asset is sold or transferred).
If your friend has owned the artwork before 1 July 2011, he needs to consider whether he currently meets the new rules as at 30 June 2016. If he doesn’t, it becomes a matter of urgency. Evidence of compliance will be required by the Auditor of the fund. Not complying carries a separate strict liability penalty of up to $1,800 per breach. Multiple penalties can apply.
If he cannot meet the new rules, disposal of those collectibles may be the only course available to maintain the fund’s complying status. The need exists to obtain an independent valuation to either sell the artwork to a third party or a related party or member of the fund at market rate.
This is a complex area of advice along with the administration requirements, it might be worthwhile for your friend (or anyone who is looking to invest into Collectibles and Personal Use Assets) to seek advice. With the new rules coming into full effect from 1 July 2016, the Australian Tax Office will be scrutinising this area very carefully.