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One of the advantages of having your own self-managed super fund (SMSF) is that you can invest in art and other collectables within your fund.
That doesn’t mean you can buy an original Brett Whiteley for your living room wall or a case of Penfolds Grange for your cellar with SMSF funds.
As with everything to do with super, there are strict rules governing collectable investments, from what they are to how they are stored.
What are collectables and personal use assets?
Collectables and personal use assets include any of the following:
- Artwork (such as paintings and sculptures)
- Jewellery
- Antiques
- Cultural or historical artefacts
- Motor vehicles and motorcycles
- Recreational boats
- Memberships of sporting clubs or social clubs
- Coins, medallions and bank notes if their market value exceeds their face value
- Rare books, manuscripts and folios
- Memorabilia
- Wine or spirits
- Postage stamps and first-day covers
According to the latest figures from the Australian Taxation Office (ATO), at the end of June 2023 Australian SMSFs held a total of $566 million in collectable and personal use assets. This represents less than 0.1% of total SMSF assets of $876.4 billion.
What are the rules around SMSFs investing in collectables and personal use assets?
You can invest in collectables and personal assets if your Trust Deed and Investment Strategy allow it. Further to that, collectables and personal use assets must not:
- Provide any present-day benefit for SMSF members or related parties. In other words, they cannot be used by SMSF members or related parties. Instead, these types of investments must be for the benefit of members in their retirement (or to pass onto their dependants or beneficiaries when they die). This ensures that they comply with the sole purpose test on which the Australian superannuation system is based.
- Be leased to an SMSF member or a related party
- Be stored or displayed in the private residence of an SMSF member or related party. The decision on where these items are stored must be documented and kept as a record.
Say, for example, your SMSF owns a painting. You could lease it out to a gallery provided the gallery is not owned by a related party and the lease is on arm’s length terms. Or if your SMSF owns a vintage car, you or a related party can’t drive it even for maintenance or restoration work, but a non-related party could.
In addition, collectable and personal use assets must:
- Be insured in the SMSF’s trustees name within seven days of being acquired
- Be valued at market value when preparing your fund’s annual accounts and financial statements
- Be valued by an independent expert if transferred or sold to a member of your SMSF or a related party.
Renewed focus on asset valuations
The ATO has signalled it will be intensifying its focus on SMSF asset valuations following a review that uncovered a high proportion of unchanged valuations over a two-year period. While property valuations are understood to be the main target, collectables could also be caught up in the review.
The ATO suggests trustees should consider using a qualified, independent valuer if:
- The value of the asset represents a significant proportion of the fund’s value, or
- The nature of the asset makes valuation complex or difficult.
As many collectables are rare and/or rarely traded, this can make them difficult to value.
Asset valuations are also in the spotlight ahead of the government’s proposed tax increase, from 15% to 30%, on investment earnings on the portion of an individual’s total super balance above $3 million. This additional tax will also apply to unrealised capital gains.
There are concerns the proposed legislation, due to begin on 1 July 2025, could cause cash flow problems for affected SMSFs with collectables that can be difficult to value, or where there is significant volatility in the asset’s value. Not only that, but some collectables can take a long time to sell, creating a sense of urgency for trustees hoping to sell before 1 July 2025.
Take motor vehicles as an example of a commonly held collectable asset inside many SMSFs. On average, the used car market experienced a 65% increase on pre COVID-19 prices between early 2020 and May 2022 according to Moody’s Analytics. However, the value of many older and more classic cars increased significantly more over this period.
These increases may result in headaches for certain SMSF trustees, including:
- Making sure that the actual market value of the asset as at 30 June of the financial year has been obtained and used by the SMSF trustees
- The recent market volatility could warrant the use of an independent expert to arrive at the market value
- An increased focus by SMSF auditors into the valuation methods and processes that were used to arrive at the market value
- How the post 1 July 2025 proposed tax changes will result in many SMSF members having to pay tax on these ‘unrealised’ capital gains. Where will the cash come from to meet this increase in tax when the asset has not been sold?
The last point to note is that there could very easily have been a decrease in market value of these kind of assets in the last 12-month period. Hence again why the ATO constantly reminds SMSF trustees of the need to update the market value of fund assets each year and consider using experts where there has been significant volatility.
Penalties for non-compliance
The ATO can impose a range of penalties on SMSF trustees who breach their compliance obligations in relation to collectables and personal use assets in their fund.
The extent of the penalty will depend on the seriousness of the breach. More serious breaches can result in trustee fines or even imprisonment.
The bottom line
SMSF trustees have specific legal compliance obligations for any collectable or personal use assets in their fund. The most important of these obligations is that you, other members of your fund or related parties can’t derive any present-day benefit from these assets.
For many people, this will take the fun out of owning that Whiteley or bottle of fine red in the first place. So think carefully about investing in collectables via your SMSF and consider seeking independent professional advice about the rules so you are not caught out.
The information contained in this article is general in nature.
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