The Closing Door for Collectables and Personal Use Assets

9 March, 2016

Prior to 1 July 2011 SMSFs were able to invest in collectables and personal use assets.  This meant that some super funds were investing in some pretty exotic items.  These sorts of investments can cause some amusement when valuing a super fund during a family law split.  There have been instances where the investments included rare books, artwork, wine, a Ferrari, a coin collection and membership of a ski chalet.  Fundamentally however they cause a bigger concern for authorities as it seems to breach the sole purpose test behind superannuation.  The sole purpose test requires that the purpose of any investment or decisions of the super fund is to fund the retirement of the members.

Until 2011 it was not unheard of for a super fund to purchase artwork and then for the members to hang the artwork on the walls of their home.  While they could argue that the artwork is an investment as it will (hopefully) increase in value there is a counter argument that by hanging the artwork on the walls the members are getting a benefit now of enjoyment and pleasure.  This would arguably be a breach of the sole purpose test.  One question to ask would be – would the trustees have purchased the artwork and hung them if the members were personally repulsed by the art notwithstanding the value of the paintings.

As a result of these concerns 13.18AA was inserted into the Superannuation Industry (Supervision) Regulations 1994 which, while it did not ban the investment in collectables, made the conditions in which they could be held onerous.  These include:

  1. The item must not be leased to a related party (so the trustees could not buy a Ferrari and then lease it to the brother of a member);
  2. The item must not be stored in the private residence of a related party of the fund;
  3. A decision in relation to the storage of the collectable must be documented and kept for at least 10 years;
  4. The item must be insured in the name of the fund;
  5. The item must not be used by a related party (this means, for example, a membership of a chalet could not be used by a member’s business partner); and
  6. Any sale of the item to a related party must be at market price determined by a qualified valuer.

The above regulations were grandfathered in so those funds which held collectibles on 30 June 2011 could continue to do so.  That grandfathering however ceases on 1 July 2016.  The word from the ATO is that they will not be lenient on any funds which have failed to take steps to off-load their collectable investments or comply with the regulations from that date.

So it you are an SMSF member and you have a Pro Hart hanging on your walls, an original copy of Gone With the Wind on your bookshelf or a Ferrari sitting in your garage owned by the SMSF you better start figuring out whether it is worth the hassle to keep them.  And no this does not mean you can start drinking the SMSF’s wine collection, that would still be a breach of the sole purpose test.

Paul Salinas

9 March 2016

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