In just under a year, the new rules governing SMSF investments in collectables take effect. Julie Steed examines what steps trustees have to take to adhere to these regulations.
Out of the 2010 Cooper review came the tightening of rules regarding SMSFs holding collectables. The changes are designed to ensure there is limited opportunity for SMSF members to gain any current day or personal benefit from the asset. While these rules apply for all collectables acquired from 1 July 2011, collectables already held in an SMSF as at 30 June 2011 were given a five-year transitional period to comply. That five-year period ends on 30 June 2016.
It means trustees have just over 12 months to ensure they comply with the requirements.
Collectables – what do they include?
The definition of collectables is contained in section 62A of the Superannuation Industry (Supervision) (SIS) Act 1993 and regulation 13.18AA(1) of the SIS Regulations 1994. Collectables include: artwork (within the meaning of the Income Tax Assessment Act 1997), jewellery, antiques, artefacts, coins, medallions or bank notes, postage stamps or first-day covers, rare folios, manuscripts or books, memorabilia, wine or spirits, motor vehicles, recreational boats, membership of sporting or social clubs, and personal-use assets.
Personal-use assets are assets that are ordinarily used or kept mainly for personal use or enjoyment (excluding land).
What are the rules?
There are six rules relating to collectables:
- The asset must not be leased to a related party.
- The asset must not be stored in a private residence of a related party.
- A decision regarding asset storage must be documented and kept for 10 years.
- The asset must be insured in the SMSF trustee’s name.
- The asset must not be used by a related party.
- A transfer to a related party requires an independent valuation.
Looking at these in detail:
1. The asset must not be leased to a related party.
A lease may include a formal documented lease or a less formal lease arrangement. A lease arrangement is defined in section 10(1) of the SIS Act and includes any agreement, arrangement or understanding between an SMSF trustee and another person, where the other person uses, or controls the use of, property owned by the fund.
As such, the lease of a collectable will include situations where the collectable is in the possession of another party for their use and under their control. There is no need for the lease to involve any payment for use of the asset.
Accordingly, a collectable cannot be on display in the residence or offices of a member, their relatives or business partners. It may, however, be acceptable for the collectable to be stored in a fireproof safe of a related-party business.
2. The asset must not be stored in a private residence of a related party.
The term ‘private residence’ is not defined, however, the ATO has stated a private residence includes all parts of a private dwelling (above and below ground), the land on which the private residence is situated and all other buildings on that land, such as garages or sheds.
This area has caused difficulties for many trustees who have custom-built storage facilities for vehicle collections in their backyard. It can be particularly problematic where the SMSF owns one of several vehicles in a collection. If the trustees are not able to separate the collection, they may need to acquire the vehicle from the SMSF.
Related parties include fund members, their relatives, business partners and their spouses. Relatives include spouses, parents, grandparents, siblings, aunts and uncles, nephews and nieces, children and grandchildren and include the spouses of any relatives. However, for this rule, cousins are not counted as relatives.
3. A decision regarding asset storage must be documented and kept for 10 years.
Trustees are required to give genuine consideration to the storage of the collectable and to document the reasons why the decision regarding the collectable’s storage was made.
4. The asset must be insured in the SMSF trustee’s name.
Insurance must be arranged within seven days of the trustee acquiring the collectable, except for memberships of sporting or social clubs. The requirement for insurance also applies regardless of the value of the asset. There is no specific requirement for the SMSF to insure the asset at its market value, however, trustees need to ensure they comply with other aspects of SMSF investment rules if a different value is used. Multiple collectables can also be held under one policy.
If SMSFs have held particularly unusual assets since 30 June 2011, or are considering investing in particularly unusual assets, it is important to ensure insurance can be arranged.
Many trustees have experienced difficulties in arranging insurance for an asset that is stored in a location out of the trustee’s control. For example, in the past, many paintings would be insured by the gallery owner where the painting is displayed. Typically the cost of insurance was borne by the gallery, but deducted from the fees that the painting owner receives from the gallery for having the painting on display. The gallery owner’s premiums will be based on the security of the particular location.
It is also likely if the collectable is moved, the insurer will be required to be notified and premium rates may change.
5. The asset must not be used by a related party.
This rule only applies to jewellery, motor vehicles, boats and sporting memberships on the basis other collectables have no ‘use’ other than viewing for personal enjoyment.
This is also an area where practical difficulties need to be overcome. For example, it is common for vintage cars to improve their value by competing in rallies and shows. However, even to improve the value of the vehicle, it is not possible for a member or related party to drive the vehicle. It may be possible for unrelated members of the same car club to drive each other’s vehicles, but damaging another person’s vehicle may be a risk that no one is prepared to accept.
6. A transfer to a related party requires an independent valuation.
If a collectable is to be acquired by a related party, the trustee must obtain a valuation from a qualified independent valuer. The super fund must then not dispose of the collectable for less than the price in the valuation.
A valuer will be qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community. This may be demonstrated by being a current member of a relevant professional body or trade association.
The valuer must also be independent. This means the valuer must not be a member of the fund or a related party of the SMSF. They should be impartial and unbiased and not be influenced or appear to be influenced by others.
Depending on the nature of the collectable, it may prove difficult to find a qualified independent valuer.
Collectables and other investment rules
It is important to remember there is nothing in the collectables rules that allows another investment rule to be compromised. However, the collectables rules may impose additional restrictions on otherwise allowable activities.
Consider a super fund that has a golf course investment that comes with an annual membership. The annual membership may be an incidental benefit and therefore the investment still meets the sole purpose test. However, the collectable rules prohibit personal use. Accordingly, the fund could hold the annual membership (and meet the sole purpose test), but the collectable rules prohibit a member or related party from using the golf membership.
Similarly, any collectables that are held in pre-1999 unit trusts that are exempt from the in-house assets arrangements will need to comply with the collectables rules by 30 June 2016.
A contravention of any of the above rules incurs the imposition of 10 penalty units per offence (currently $170 per unit). Any offence is a strict liability offence, meaning it only needs to be proven the contravention occurred and not that the contravention was intentional or reckless.
Auditors are required to report all instances where the trustee of an SMSF fails to meet a statutory time period by more than 14 days. A statutory time period is a time period prescribed in the SIS Actand SIS Regulations. The requirement to insure the collectable within seven days of the acquisition is such a statutory time period. If a trustee does not arrange insurance until 30 days after acquiring the asset, the auditor will be required to report the contravention, albeit they may be able to report the contravention has already been rectified.
It is important to review any collectables currently held in an SMSF and determine how the fund will comply by 30 June 2016. If it is not possible or practical for the rules to be complied with, the fund will need to dispose of the asset before this date.
Over the coming months, trustees will need to ensure they have considered any collectables held in the fund, including:
- reviewing storage arrangements to ensure they meet the requirements and are documented,
- ensuring the collectable is insurable in the name of the SMSF trustee, and
- ensuring there is never any personal use of the collectable.