SMSF Technical Education & Strategies

 

Can you invest in Art or other collectables in a SMSF ?

One of the key issues for people setting up a Self Managed Superannuation fund is the ability to control their own destiny with the investments inside the fund. While many stick to the traditional route of shares, property, and fixed interest, there are others who prefer an alternative route.

Collectively known as "collectables", one of the most significant of these alternative assets is investment in Art (and for the sake of this article, we'll refer mainly to Art). In fact, those who have a keen interest in Art argue that this type of investment for them is actually less risky. This is because it may be an area of relative expertise for them, as opposed to an asset like shares, where their knowledge may be limited. The key issue for these investors will be whether or not Art is allowed as an investment in a SMSF, and if so, what are the issues that you need to be aware of. Whilst we will foucs here on Art, you can use the same principals when considering other collectables such as rare coins etc.

 

Is Art allowed in SMSFs

The regulator of Self Managed Superannuation, The ATO, has released an interpretative decision regarding Art in SMSFs. It’s position is that the superannuation laws place significant obligations on the trustees of the fund in terms of it’s control and management, however it does not prescribe which types of assets the fund can invest in. So the bottom line is that yes, an SMSF is able to invest in works of art, however it does come with conditions to enable trustees to meet their compliance obligations.

 

Conditions for compliance

Firstly, Art must be an allowable investment according to the terms of the SMSF’s trust deed. Next, the trustees must give effect to an investment strategy for the fund, which includes works of Art, and is made with the fundamental objective of providing for the member’s retirement. It follows from this that the trustees should not invest in Art unless they understand the risks and costs involved. Expert advice should be sought, including information on the potential income or capital growth that could be generated from art investments, the ease with which it could be disposed of, and the costs involved. The ATO considers that the understanding of this advice would be essential for trustees to be able to demonstrate compliance with these provisions. Further to this, the costs involved with the prudent storage and insurance of the Art should be considered an essential part of the fund’s overall investment strategy.  

 

Restrictions on use

Probably the most common issue when it comes to SMSFs investing in Art or Collectables is the use of the asset. Generally when people buy works of Art, it is for the purpose of exhibiting the Art in their home, or place of business etc. to gain the current benefit and enjoyment from owning it. This is in contrast to a SMSF, which must comply with the sole purpose test (Section 62 of SISA). This test basically ensures that trustees only invest the assets of the fund for the purpose of providing retirement benefits for members, or death benefits to a member’s dependants upon the member’s death.

 

Therefore, if a SMSF invests in a work of Art, and the Art work is subsequently displayed in a residence belonging to a member (or associate) at no cost to that member, then the ATO view is that this will generally breach the sole purpose test. A breach of the sole purpose test is considered a serious issue, with substantial penalties and the possible loss of complying status of the fund. This would also mean the loss of the tax concessions available inside the super fund.

Further regulations as at 1st July 2011

Tax Laws Amendment (2011 Measures No. 2) Bill 2011 received Royal Assent on 27th June 2011 which deals with collectables in SMSFs and is now law.

 

Firstly, a new section has been added (section 62A) which states that:

 

The regulations may prescribe rules in relation to the trustees of regulated superannuation funds that are self managed superannuation funds making, holding and realizing investments involving:

(a) artwork (within the meaning of the Income Tax Assessment Act 1997); or
(b) jewellery; or
(c) antiques; or
(d) artefacts; or
(e) coins or medallions; or
(f) postage stamps or first day covers; or
(g) rare folios, manuscripts or books; or
(h) memorabilia; or
(i) wine; or
(j) cars; or
(k) recreational boats; or
(l) memberships of sporting or social clubs; or
(m) assets of a particular kind, if assets of that kind are ordinarily used or kept mainly for personal use or enjoyment (not including land).

 

After a consultation period, final regulations were issued on 30 June 2011.

 

These regulations will require SMSF trustees who invest in collectables or personal use assets to:

 

 Not lease this asset to a related party;

 Not store the asset in the private residence of a related party;

 Not permit use of the asset by a related party;

 Document the reasons for deciding on the storage of the asset;

 Insure the asset, unless the asset is a membership to a sporting or social club;

 Obtain a valuation, from a qualified independent valuer, should the fund later transfer the asset to a related party.

 

These rules will apply to all SMSFs where collectables or personal use assets were acquired on or after 1 July 2011, while existing assets of this kind in a SMSF will have until 1 July 2016 to comply with the new rules.