Many SMSFs holding collectables or personal assets may be in breach of the Superannuation Industry (Supervision) (SIS) Act 1993 due to inadequate insurance cover, according to an industry insurance specialist.
Current legislation governing the inclusion of collectables or personal assets in an SMSF portfolio dictates any of these types of assets acquired after 1 July 2011 must have stand-alone insurance within seven days of purchase.
However, Self Super Insurance director John Kelly told selfmanagedsuper many trustees were relying on group insurance cover, a practice that was not compliant with the Australian Taxation Office (ATO) rules.
“How these policies work is that the seller of the asset, or it could be the place that is storing the asset, purchases an insurance policy to cover all of the assets under their control,” Kelly said.
Typically the seller or custodian of the asset would then charge the SMSF trustee an administration fee to cover a portion of the group insurance premium. The client would then also be provided with a certificate of insurance stipulating the SMSF is noted for the interest in a particular asset being insured.
“The problem with it is these group insurance policies don’t comply with the ATO laws. The ATO says, using a gallery as an example, if the gallery has an insurance policy you still must arrange your own insurance policy,” Kelly said.
“Where everyone gets confused is because the gallery or seller is issuing you with a document referencing the SMSF’s name, everyone in the chain believes that is evidence of stand-alone insurance.
“But it’s not stand-alone insurance. It’s just a document referencing the SMSF’s interest as part of the group policy.
“The danger of a group policy is that ultimately it is one limit to cover all of the assets. So if there is a huge loss somewhere else, it can actually erode the amount of cover that is purchased where the SMSF might have no cover at all. So the super fund has no guarantee it has access to the cover the trustee thinks it does.”
However, the onus of compliance sat with the SMSF trustees and not the sellers or custodians of the assets, he warned.
He said he suspected those group policies were being put in place to make the purchase of personal assets more commercially palatable as the administration charge might be $100 as opposed to an $800 premium for individual insurance.
According to Kelly, the appointment of administrators to the Rare Coin Company recently made the insurance issue very topical.
“The administrators sent out a letter to the clients, which included many SMSFs, saying they’d done an assessment of the assets as a part of the winding up process and essentially the value of items is about $300 million and the value of the group insurance policy is about $145 million, so they’ve had to approach the existing insurance broker for the additional $145 million cover,” he said.
“Their group policy is a perfect example where everybody would have had trouble. If they’d had a total loss, everyone would have only got half of the value of their assets back. The ATO would have flipped out.”
He said the situation, if not rectified properly, could end up affecting thousands of SMSFs by 2016, when all personal assets, regardless of when they were purchased, needed to comply with the new rules.