There is currently a transition period in place for new rules that apply to any artwork or collectibles held by an SMSF, however this transition period is coming to an end at1 July 2016.
As a result of the Cooper in SMSFs review, rule changes have been implemented in relation to the requirements for the ownership of collectible and personal use assets by SMSFs. These rules will apply to any specified asset acquired after 1 July 2011 and will also apply to assets owned prior to this date with effect from 1 July 2016.
What assets are considered Collectibles and Personal Use Assets?
The types of assets that are covered by these requirements are outlined in the SIS Act and the rules pertaining to the ownership and usage are covered in SIS regulations. Collectibles and Personal Use Assets include the following:
- artwork (defined as painting, sculpture, drawing, engraving, photograph including reproductions)
- coins or medallions
- postage stamps or first day covers
- rare folios, manuscripts or books
- wine or spirits
- cars and motorbikes
- recreational boats
- memberships of sporting or social clubs
What are the new rules?
There are now a series of specific investment standards that are to be met by the SMSF in addition to the usual documentation and procedural requirements for standard assets purchased in a SMSF. These are:
- the asset cannot be leased to a related party
- the asset cannot be stored in a private residence of a related party
- there must be documented decision of asset storage
- the asset must be insured within 7 days of acquisition in the SMSF’s name (Note: must be a separate insurance policy – not your house / business insurance policy!)
- the asset cannot be used by a related party, and
- if the asset is disposed of to a related party, it must occur at market price assessed by a qualified independent valuer.
As part of the acquisition of a collectible or personal use asset, the aspects of storage, use and insurance will need to be verified and documented to satisfy the auditor.
For completeness, the usual documentation and procedural requirements are:
- proof of acquisition and recognition of ownership i.e. purchase documentation
- associated transaction aspects including income production or capital appreciation and costs of maintenance
- confirmation the asset or its acquisition does not breach the superannuation investment standards
- confirmation the asset conforms with the SMSF’s written investment strategy
- ongoing valuation of the asset for both accounting and member interest purposes (at least every 3 years or when the asset is sold / transferred)
What does this mean for my SMSF?
These rules will apply to any specified asset acquired after 1 July 2011 and will also apply to assets owned prior to this date with effect from 1 July 2016.
For those SMSFs with collectibles acquired prior to 1 July 2011 the trustees will need to consider whether or not the new conditions are being met or will be able to be met prior to 30 June 2016. If this is not the case then disposal of those collectibles will be the only course available to the SMSF if it wishes to maintain its complying status.
Failure to comply with the new rules will attract penalties. Each of these standards carries a separate strict liability penalty of up to $1,800. Multiple penalties can apply.
For some SMSF trustees, the most appropriate option may be for the SMSF to dispose of the relevant collectible or artwork. This can be done via obtaining an independent valuation and either selling the artwork / collectible to a third party of having a related party – i.e. the members of the SMSF buy the artwork. For members who are in pension phase, it is possible to transfer the artwork as an in-specie payment (lump sum payment following a partial commutation of a pension) provided an independent valuation is obtained first.
Getting insurance for your artwork and collectibles
One of the major changes from these new rules is the requirement to obtain insurance in the name of the SMSF for the artwork / collectibles purchased within 7 days of the transaction. This requirement applies even in scenarios where artwork is leased back to a gallery and the gallery has insurance covering the artwork it leases.
There are a limited number of specialist insurance businesses that can insure artwork and collectibles. One such business is Self Super Insurance. Find out more about their insurance solution in the video below:
Please note that information provided in regards to the Self Super Insurance product is general information only and does not constitute financial product advice and should not be relied upon as financial product advice. None of the information provided takes into account your personal objectives, financial situation or needs. You must determine whether the information is appropriate in terms of your particular circumstances.
How Superfund Partners can help
Superfund Partners have the expertise to assist you in regards to your artwork / collectibles investments including:
- Educating you in regards your obligations around the artwork and collectibles investments rules
- Assist in regards to obtaining appropriate insurance and valuations (from third parties – fees of course will apply)
- Assist with documenting your artwork / collectible storage decision
- Provide direction in regards to what is the best option for your SMSF – i.e. sell the assets, transfer them to the members, comply with the new regulations after the transition period
Although these changes only impact a small number of SMSF trustees, it is essential to comply with these new rules or face likely ATO audits and fines.
If you have any questions on any of the above please contact us.
Phone: 1300 889 282