If you hold artwork, antiques, coins, or other collectibles within your self-managed super fund, then you need to be aware of new rules that came into effect from July 2011.
Effective from 1 July 2011, collectibles and ‘personal-use’ assets owned by SMSFs must be stored according to new guidelines, must be covered by insurance, and the collectible asset must be independently valued. The storage requirement has been introduced to prevent SMSF trustees receiving a personal benefit from the SMSF investment. I explain what assets fall within the collectibles (collectables) and personal use assets definition later in the article.
Note: The new rules apply to all new SMSF investments purchased on or after 1 July 2011. Collectibles and person use assets held by a SMSF as at 30 June 2011 do not have to comply with the new rules until 30 June 2016 (a five-year transition period).
Why were the new rules introduced?
The relatively recent flurry of activity relating to SMSF collectibles was initially triggered by the Cooper Review’s recommendation (released in May 2010) that SMSFs be forbidden from investing in collectibles and personal-use assets; such as, art, jewellery, exotic cars, yachts, antiques, race horses and wine.
Fortunately for collectors, the federal government and all political parties confirmed that collectibles were suitable investments for SMSFs, subject to some guidelines regarding storage and valuation of the assets.
According to a federal government media release (30 July 2010): “SMSFs can continue to invest in personal use and collectable assets provided they are held according to these new legislative standards that will ensure the assets do not give rise to a personal benefit and are held for the purposes of providing retirement bene?ts. Existing assets that cannot meet these rules must be sold within five years.”
What types of assets are covered by the new guidelines?
Section 62A of the Superannuation Industry (Supervision) Act 1993 provides for regulations to be made in relation to collectibles (collectables) and personal use assets. Regulation 13.18AA (1) lists the assets that are considered collectibles and personal use assets for the purpose of the new guidelines:
- artwork (as per the meaning contained in the Income Tax Assessment Act 1997). In the ITAA artwork is defined as a painting, sculpture, drawing, engraving or photograph, or a reproduction on of these items, or property of a similar description or use
- coins, medallions or bank notes
- postage stamps or first day covers
- rare folios, manuscripts or books
- wine or spirits
- motor vehicles
- recreational boats
- memberships of sporting or social clubs.
The ATO provides a useful summary of the SIS regulations relating to collectibles (see this link). I have paraphrased the main rules from the document as set out below:
- NOT LEASED TO RELATED PARTY. Collectibles (collectables) and personal use assets must NOT be leased to any related party of the SMSF
- NOT STORED IN PRIVATE RESIDENCE. Collectible and personal use assets (PUAs) must NOT be stored or displayed in the private residence of any related party of the SMSF (although it can be stored, but not displayed, in business premises)
- REASONS FOR STORAGE IN WRITING. SMSF trustees must record in writing the reasons for the decision on where to store the collectible or PUA, and keep that record for 10 years.
- MAINTAIN INSURANCE. SMSF trustees must ensure the asset is insured in the name of the fund within 7 days of acquisition (according to the ATO it is possible to take out a collective policy for all collectibles held by a SMSF provided the insurance policy is still in the name of the fund)
- NOT USED BY RELATED PARTY. Collectible and PUAs are NOT to be used by any related party of the SMSF (which means you can’t hang your fund’s art work in your business premises, according to the ATO).
- VALUATION BY QUALIFIED INDEPENDENT VALUER. Transfer of ownership of collectables and PUAs to a related party of a SMSF must be done at a market price determined by a qualified independent valuer.
Note: A ‘related party of the fund’ includes the SMSF members, relatives of the SMSF members, and any partnerships, partners of partnerships (if a member is in partnership with them), and trusts and companies that SMSF members control. A relative of a SMSF member covers the following:
- a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or of the member’s spouse
- the spouse of the member or the spouse of any individual listed above.
Storage and custodian risk
Now that the new rules for collectibles have been in place for nearly a year, you can expect new companies to pop up offering specialised services to SMSFs. I hope the federal government is also intending to monitor the storage facilities and custodians offering services to SMSFs because history has shown that storage companies and investment companies, such as wine investment or art investment companies, can fail investors.
A relatively recent example of such a collapse is the Sydney art gallery, Smith & Hall, that sold artwork to investors but also provided a market for those investors to rent out the artwork for a regular income. In October 2010, Smith & Hall was put into administration owing more than $1 million.
What happens to the artwork such a gallery holds in its storage facility, and the artwork it leases, when the gallery/custodian falls over?
According to industry reports, Smith &Hall had control over 800 items of art worth more than $4 million, owned by about 500 investors. Many of these investors were SMSF trustees.
Sydney-based art consultant, Jane Raffan wrote in the October 2010 edition of the Australian Arts Sale Digest, that Smith and Hall: “specifically targeted investors of Self Managed Super Funds (SMSFs). Various company marketing spiels indicate that their investment model was “particularly popular with owners of self-managed super funds…”, and provided “…a healthy income from the asset, while it is potentially appreciating in value”.”
Valuations confirm long-term investment
Ms Raffan’s article also provides some particularly enlightening comments on the topic of art investment. For example, she says art is often sold to SMSF investors at retail prices and the record of prices on the secondary market suggests that: “five years is the absolute minimum, in most cases, that one should expect to hold works of art purchased retail before seeing any return on the secondary market; 10 years is a more realistic assessment and that’s without the gamble of buying works by artists who don’t perform.”
“Investing in works by contemporary artist for capital gain is a gamble by nature, and this applies to Aboriginal art as much as non Indigenous art. And the Aboriginal art sector has great complexity due to the vast array of practising artists and diversity of styles, in addition to the volume of work available from a large number and variety of sources,” says Raffan, who runs ArtiFacts, an art services consultancy, with a specialist focus in the field of Aboriginal and Torres Strait Islander Art.
Whatever happens on the broader art market, the administration and compliance responsibilities have increased for SMSF trustees who choose to invest in art or other collectibles.