Q. I would like to diversify my Self-Managed Super Fund (SMSF) by investing in jewellery. Is this possible and what are the rules I would need to follow?

A. Jewellery is defined as a Collectible under Superannuation law. The definition of “Collectibles”  includes the following; artwork, jewellery (including gemstones), antiques, artefacts, coins, postage stamps, manuscripts or books, memorabilia, wine or spirits, automobiles and boats.

There are important restrictions that apply to ownership via a SMSF. 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 an 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 your Fund’s Investment Strategy and an independent valuation is obtained (at least every 3 years or when the asset is sold or transferred).

This is a complex area of investment for SMSF Trustees and the penalties for making a mistake are severe.  Given the complexity, Trustees should seek expert advice and expect careful scrutiny by both SMSF Auditors and the Australian Tax Office.   

Q. I am interested in investing in Pink Diamonds, possibly via my Self-Managed Super Fund (SMSF).  Would this be a good investment?

A. Pink Diamonds have received considerable media attention due to the record prices being attained for some stones at auction.  As an investment asset class, the annual rate of return for the past 15 years has been reportedly in excess of 13% p.a. The key drivers of the price increase has been a combination of the demand for Pink Diamonds and the scarcity of supply.

Western Australia’s Argyle Diamond mine produces 90% of the world production of Pink Diamonds.  Less than 1% of the Diamonds mined from Argyle are Pink, demonstrating the rarity of these Diamonds and the scarcity of current supply.  With the Argyle mine foreshadowed to close in 2021, both investors and speculators are driving up the price of available Diamond stock. 

Pink Diamonds can be bought from a dealer or at auction.  An entry level investment grade Pink Diamond will cost in the vicinity of $20,000.  Like any collectible, the challenge is understanding if you are paying fair value for the Diamond. Whether it be from a dealer or an Auction house, you should insist that the Diamond is independently certified and valued.

The Auction or Dealer fees to trade Diamonds will range up to 10% for both the buyer and the seller.  Ongoing management costs may include secure storage, insurance and regular valuation.

Diamonds and collectibles are characterised as an “alternative investment”.  For diversification and risk management purposes, they should represent a relatively small portion of your investment portfolio.

Like any investment, there are risks; Prices may fall if buyer interest wanes or new sources of Pink Diamonds are found.  You could lose or have your Diamonds stolen. 

Be wary of any advertising promising vast returns or focussing on past performance.  Be wary of those promoting Pink Diamonds as being suitable for all investment portfolios or as a substitute for mainstream asset classes such as shares, property or bonds.  They are not easily traded as there is no centralised Diamond exchange or market to trade.  They are an illiquid niche investment that should only be considered by those who can afford to take the risk and have the time to wait to sell.

The pleasure in owning collectibles is to appreciate and enjoy the asset; whether it be a painting on a wall or a wearing a beautiful gemstone.  The rules of ownership of collectibles inside a SMSF specifically prohibit you from doing this.

I personally don’t think Pink Diamonds or any other collectibles should be bought inside a SMSF.