One of the reasons that people set up SMSF is for the investment choice that it provides, which also includes the ability to invest in collectable.  

SIS Regulations do not prohibit a Self Managed Super Fund from investing in collectable and personal use assets; but regulations prescribe a set of rules which trustees must adhere to, if the fund makes such an investment.

History - origin of the rules

The rules in relation to collectable and personal use assets arose in response to the 2010 Super System Review (also known as the Cooper Review). The Cooper Review expressed concern that there was an unacceptable risk that investments by SMSF trustees in collectable and personal use assets may be made for present day benefits rather than for the purposes of retirement. Accordingly, the final report recommended a total prohibition on SMSF trustees making such investments.

However, the federal government rejected the recommended blanket ban and instead sought to allay these concerns by legislating certain restrictions which are contained in Reg 13.18AA of the SISR which commenced 1 July 2011.

What assets are considered Collectibles and Personal Use Assets?

Regulation 13.18AA(1) of the SIS Regulations  sets out what are generally considered and specifies the assets that are taken to be collectable and personal use assets as:

• artwork – including paintings, sculptures, drawings, engravings and photographs
• jewellery
• antiques
• artefacts
• coins, medallions or bank notes    
  • coins and banknotes are collectable if their value exceeds their face value
  • bullion coins are collectable if their value exceeds their face value and they are traded at a price above the spot price of their metal content
• postage stamps or first-day covers
• rare folios, manuscripts or books
• memorabilia
• wine or spirits
• motor vehicles and motorcycles
• recreational boats
• memberships of sporting or social clubs.

The new rules create two kinds of collectable assets, those held before 1st July 2011 and those acquired on or after that date.

To update your SMSF trust deed for $125 Incl. GST - Click here

For assets acquired prior to 1 July 2011

The law provided for a transitional period, the fund had until 1^st  July 2016 to comply with the restrictions or they must dispose of the asset.   

This means that if such an investment was held before 1^st July 2011, the rules did not apply until 1 July 2016, at which time you were required to comply.

For assets acquired on or after 1^st  July 2011  - the restrictions apply immediately.

What are the restrictions from 1st July 2016 for collectable assets purchased prior to 1st July 2011 by a SMSF?

Any collectable asset purchased prior to 1st July 2011 had to be sold prior to 30th June 2016. However, if the SMSF trustees decided to continue to own the asset from 1st July 2016, the following restrictions were imposed on these assets:

• the asset cannot be leased to a related party
• the asset cannot be stored in a private residence of a related party
• there must be a documented decision by trustees on storage
• the asset must be insured within 7 days of acquisition in the SMSF’s name (Note: must be a separate insurance policy – not your house / business insurance policy!)
• the asset cannot be used by a related party, and
• if the asset is disposed of to a related party, it must occur at market price assessed by a qualified independent valuer.

To learn how to commence a pension from your SMSF Click here

Free Webinar

Click above for introduction video

Free Technical Webinar on "Related party borrowing" 

You have upto 31st January 2017 to comply to the PCG 2016/5

ATO has issued Practical Compliance Guideline (PCG) 2016/5 “Safe Harbour Protection” for SMSF trustees with related party loans under a Limited Recourse Borrowing Arrangement (LRBA).

The guidelines provide protection for trustees of SMSFs to ensure that their related party loan is treated as arms’ length, and any income from the asset is not to be treated under the non- arm’s length income (NALI) provisions. 

The webinar will discuss with real life examples on how to tackle the below issues:

• Low Interest Rates – Is it a contribution? And what was the ATO’s considered view in the past?
• What is NALI and how is it defined? What is the ATO’s stated position on non-commercial loans?
• What are the Safe Harbour Provisions –Does it automatically make income from non complying loans NALI?
• Challenges for trustees in meeting the guidelines and;
• Possible actions to be taken by SMSF trustees.

Topics:

- Has your SMSF borrowed from a related party?

- Are you concerned about the new ATO measures announced in PCG 2016/5 ?

- What steps you need to take to ensure your borrowing is compliant

Speaker : Agni Chowdhury

Agni has Masters in Accounting from Macquarie University and is a CPA SMSF Specialist Member. He has worked in SMSF space for over 6 years dealing with complex trustee issues. He has a special interest in actuarial certificates and their use in the proposed limiting pension balance of $1.6M post 1st July 2017.

Click here to learn how you can lend to your SMSF to purchase property.

Storage, Leasing & Usage of collectable.

SMSF trustees can lease collectable and personal use assets to unrelated parties and the lease must be on arm's length commercial terms. For example, your SMSF can lease artwork to an art gallery provided the gallery is not owned by a related party and the lease is on arm's length terms such as rent and period of lease etc.

Collectable and personal use assets can not provide a present day benefit to trustees, this means that members of the fund or any related parties, including part 8 associates lease collectable from the SMSF.

Sub-regulation (3) of reg 13.18AA prohibits SMSF trustees from storing collectable in the private residence of members and related parties.

You can store (but not display) collectable and personal use assets in premises owned by a related party provided it is not their private residence. Personal use assets such as artwork can not be displayed  as this will breach Section 62 of SIS Act (Sole purpose test). For example, if your SMSF invests in a valuable painting, it can not be hung in a business premises of a member or of a related party where it is visible to clients and employees of members and related party. 

The auditor of the fund may ask trustees for to keep a record of the reasons for deciding on where to store the assets. This decision should be minuted by the trustees prior to 1st July 2016.

To learn how to audit a SMSF in less than half time, click here

Insurance of Personal use assets

Collectable purchased by the fund must be insured in the name of the fund within seven days of purchase. More specifically, reg 13.18AA(5) provides each trustee of a regulated superannuation fund that is a SMSF commits an offense if:

(a)  the fund owns a section 62A item, other than a membership of a sporting or social club; and

(b)  it is more than 7 days since the fund acquired the item; and

(c)  the item is not insured in the name of the fund.

As part of the decision to invest in collectable and personal use assets, you need to consider the availability and cost of insurance. If your fund has made the investment and you find you can't obtain insurance, contact both your fund's SMSF auditor and the ATO to try to rectify the situation.

Is selling the collectable to a member of the fund or to a related party an option for trustees?

Collectable can be sold to a related party provided the sale is at market price as determined by a qualified, independent valuer.

• A valuer is qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community.
• A valuer is independent if they are independent of the interests of the fund. This means the valuer should not be a member of the fund or a related party of the fund (for example, an investment partner).

If your fund acquired a collectable asset before 1 July 2011 and sold the asset to a member or a related party before 1 July 2016, no valuation by a qualified independent valuer is required, however, the transaction must take place on arm's length terms, which means that the member or the related party must pay market price to the SMSF.

Failure to comply with the new rules will attract penalties.  Each of these standards carries a separate strict liability penalty of up to $1,800. Multiple penalties can apply to each individual trustee, that means if there are four trustees, each trustee will be penalized $1,800.

Click here to learn how to convert from individual trustee to a corporate trustee of a SMSF.

Disclaimer