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Investments in Collectables & Personal Use Assets by SMSFs

OVERVIEW

The government released draft regulations in May 2011 regarding the investment by self managed superannuation funds (SMSFs) in collectables and personal use assets. These regulations, which are contained in section 62A of the SIS Act, received royal assent in June 2011 and apply to all new investments from 1 July 2011. Transitional rules apply for existing investments until 30 June 2016.

These changes aim to support the sole purpose test that underpins the SMSF legislation, by attempting to ensure that investments are acquired with the aim of maximising retirement benefits, as opposed to providing current day benefits.

WHAT ARE COLLECTABLES AND PERSONAL USE ASSETS?

Amongst the collectables captured by these rules are memorabilia, artwork, jewellery, antiques, wines, coins and stamps. Personal use assets include cars, recreational boats, memberships of sporting or social clubs and other assets that may be used for personal benefit and enjoyment.

WHAT IS A RELATED PARTY?

A related party includes a member of the self managed superannuation fund, their relatives (including parents, siblings, lineal descendants and spouses of each of these relatives), and any partnerships (plus partners in that partnership), trusts and companies that they control.

THE RULES

1. Assets must not be leased to a related party. Many SMSFs have previously had arrangements with related parties to display artworks and memorabilia in business premises or similar facilities. Arrangements of this nature, including where no rental is paid, will be prohibited by the new rules. Depending on the quality of the assets held, some SMSFs may find it difficult to come to the same terms in a new arrangement with an unrelated party.
2. Assets must not be stored in private residence of related party. Previously related parties were able to store, but not display, collectables and personal use assets at private residences. The new rules require that assets be held by unrelated third parties, eg at a professional storage facility, or possibly stored, but not displayed, at non-residential properties of related parties.
3. Decisions regarding storage of assets must be documented. Trustees will be required to draw up minutes of meetings or similar documents outlining the basis for decisions made regarding the storage of assets. This requirement reflects the higher risks inherent in investing in and holding collectables and personal use assets relative to other investment classes.
4. Assets must be insured in fund’s name. This is clearly a very onerous requirement, as it can be very difficult and costly to obtain insurance for certain collectables. Some funds may decide that the costs of obtaining insurance outweigh the benefits of holding the assets. As the insurance must be in the fund’s name, it is not sufficient for assets to be listed on a personal or business contents insurance policy.
5. Assets must not be used by a related party. Incidental personal use of certain assets had previously been allowed, however are outlawed by the new rules. Usage includes the display of artworks or memorabilia at business premises, as well as the more obvious examples such as using a golf course membership or driving a vintage car.
6. Independent valuation is required for transfer of assets to related party. Where assets are to be transferred to related parties, the fund must utilise the services of a qualified, independent valuer to determine the market value. This ensures that the related party does not receive any undue benefit from the transaction.

 TRANSITIONAL RULES

SMSFs holding collectables and personal use assets at 1 July 2011 have until 30 June 2016 to comply with the new rules. Funds electing to retain their existing assets may need to enter into new arrangements with unrelated parties to meet these obligations, and will certainly need to review their existing storage and insurance arrangements.

Many trustees will elect to dispose of the affected assets, rather than dealing with the relatively onerous new rules, particularly given that some will find it difficult to earn the same levels of income from unrelated parties as they have previously received from related parties. The five year transitional period will hopefully avoid the scenario whereby huge amounts of artworks and similar assets are sold en masse, resulting in SMSFs incurring significant losses upon disposal of these items.

Where an asset is owned prior to 1 July 2011 and sold during the transitional period, there is no requirement to have an independent valuer determine market value, but the assets must still be sold an arm’s length terms.

PENALTY REGIME

Each trustee commits an offence if any of these regulations are contravened. A fine of 10 penalty units ($1,100) may be imposed for each offence. The complying status of the fund may be jeopardised by significant breaches of these rules.

OTHER OBLIGATIONS

In addition to these regulations, trustees should ensure that any collectables or personal use assets acquired or held are done so in accordance with the fund’s trust deed and investment strategy.

FINAL WORD

The team at Bell Partners have substantial experience working with self managed superannuation funds of all shapes and sizes and can work with you to ensure that you meet your obligations under the new collectables rules.  Please contact Peter Child on (03) 9832 8415 for further information.

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