As a result of the Cooper Review, rule changes have been implemented in relation to the requirements for the ownership of collectible and personal use assets by self-managed super funds (SMSFs).
These rules will apply to any specified asset acquired after 1 July 2011 and to assets owned prior to this date, with effect from 1 July 2016.
The assets covered include artwork, jewellery, antiques, artefacts, coins, medallions and bank notes, postage stamps and first day covers, rare folios, manuscripts and books, memorabilia, wine or spirits, cars, recreational boats, memberships of sporting or social clubs, and other assets used or kept primarily for personal use or enjoyment (excluding land).
Questions that often arise regarding the eligibility of collectibles tend to focus on when coins and notes qualify as collectibles, and how bullion is treated. For coins and notes, it is often the case that their value is different to the face value of the currency, and this makes the purchase of precious metals in the form of commemorative coins a collectible. Whereas, it is argued that if it is purchased in the form of bars or ingots then it is a commodity rather than a collectible.
Outlining the new rules and standards
For all collectibles, these changes mean there are now a series of additional specific investment standards that are to be met by the SMSF, including:
- Asset cannot be leased to a related party;
- Asset cannot be stored in a private residence of a related party;
- Documented decision of asset storage;
- Asset to be insured within seven days of acquisition in the SMSF’s name;
- Asset not to be used by a related party; and
- If the asset is disposed of to a related party, then it must be at market price and assessed by a qualified independent valuer.
Each of these standards carries a separate strict liability penalty of up to $1,100.
In relation to insurance, an issue that is still to be resolved is whether or not the ownership of the policy can be in the name of an entity that may be providing storage and/or has usage of the asset. This is particularly relevant with artwork stored or rented though a gallery where the gallery will be covering the artwork under their policy.
Other considerations and measures to have in place
Just meeting these new standards is not enough. There are several other factors that need to be verified for ownership, including compliance with the superannuation legislation and satisfaction for audit. These can be categorised as the following:
- Confirmation the asset or its acquisition does not breach the superannuation investment standards – we need to ensure the prior owner is not a related party as collectibles are not within the acquisitions from related party prohibition exceptions. The penalty for breaching these acquisition rules may involve gaol time.
- Confirmation of the asset conforms with the SMSF’s written investment strategy – we need to consider that collectibles are generally indivisible and illiquid. This means we need to consider the impact on the SMSF’s capacity to manage its cashflow requirements and provide timely access to liquidity to meet both its expenses and benefit liabilities as they fall due.
We also need to consider the rate of return of the collectible. This does not mean that it must produce income, but if no income is arising from the collectible, then there should be an indication of why and how capital appreciation is expected to arise to justify the acquisition as a legitimate investment. - Proof of acquisition – unlike shares or property, there is no standard acquisition documentation, so sufficient details need to be obtained to identify the actual asset being acquired. Apart from a unique description of the item, confirmation that the vendor is the owner would be beneficial, as well as proof of its authenticity.
- Proof or recognition of ownership – generally, there is no equivalent of a registry to formally list ownership. This means written records of not only the acquisition, but location of storage and use (including confirmation by those parties provided storage) also adds weight to evidence of ownership.
- Associated transaction aspects – if the collectible is producing income, then a written lease should be in place. This will potentially cover aspects such as care, maintenance and storage of the collectible. Additionally, as physical assets, they may be subject to degradation – either naturally or due to other actions – and the costs for maintenance will need to be factored into the overall return on the asset.
- Ongoing valuation of the asset for both accounting and member interest purposes – most collectibles do not have recognised secondary markets with daily trading for valuations. Other methods will need to be used to obtain valuations for these assets. It is important to note that these valuations must be at arm’s length, and the methodology for the valuation should be justifiable to independent scrutiny.
All this does not mean that an SMSF cannot invest in a collectible, but that serious consideration must be given to its appropriateness as an investment, compared with other assets that may produce similar returns – particularly without the additional red tape.
Finally, for those SMSFs with collectibles purchased prior to 1 July 2011, examination about whether they will be able to meet the new conditions should be considered now, and not left to 30 June 2016.
Philip La Greca is technical services director of Multiport.
