Action plan for SMSF collectables and personal-use assets

An important feature of the new regulations that now apply to self-managed superannuation funds (SMSFs) investing in collectables and personal-use assets is that not all collectables and personal-use assets need to comply with the new rules straight away. Collectables and personal-use assets that were held in an SMSF prior to 1 July 2011 are not required to comply with the new rules until 1 July 2016. Therefore, for many trustees it is business as usual.

However, sooner or later – and certainly well before 1 July 2016 – these trustees will need to consider what action, if any, they will need to take to comply with the new regulations. For many, this should be a relatively simple question to answer.

What is clear from the new regulations is that alternative arrangements will have to be made before 1 July 2016 for collectables and personal-use assets (defined as a section 62A item in the new regulations) held by an SMSF prior to 1 July 2011 that are currently being stored at the private residence of a member. This may mean arranging for the item to be stored in a professional storage facility, or storing it at the premises of a related party.

But what if the section 62A item is currently being displayed at the business premises of a related party? Or what if it is currently being leased to a related party, but is excluded from the definition of an in-house asset by virtue of the grandfathering provisions in section 71 of the Superannuation Industry Supervision (SIS) Act? Do the new rules that prohibit a section 62A item being leased to a related party mean that these arrangements now need to be unwound? 

Similarly, what if the section 62A item is currently being used by a related party, and the personal use constitutes incidental personal-use, which is required for the legitimate maintenance of the asset? Do the new rules that prohibit the personal use of that item apply even in such cases? 

It appears the policy intention is to allow the ‘storage’ but not the ‘display’ of a section 62A item in the business premise of a related party. The definition of a “lease arrangement” in section 10 of the SIS Act is very broad, and includes informal arrangements under which a person uses or controls the use of fund property – including where no rent is payable in exchange for that possession.

Since the new regulations specifically prohibit a section 62A item being leased to a related party, SMSF trustees will have to ensure any such items purchased before 1 July 2011, which are currently being stored in the premise of a related party (which is not their private residence), are not being displayed or used in a manner which could constitute a ‘lease arrangement’ after 30 June 2016. As mentioned, the new regulations specifically prohibit these items being leased to a related party or used by them. Therefore, irrespective of whether or not the lease arrangement is currently grandfathered under section 71 of the SIS Act, if the asset being leased to a related party constitutes a section 62A item, the arrangement will need to be unwound prior to 1 July 2016.

Similarly, if the item was purchased by the SMSF prior to 1 July 2011, the personal use of that item by a related party (even if the personal use constitutes incidental use and is needed for the legitimate maintenance of the asset) will need to cease by 1 July 2016.

The new rules also require the SMSF trustees who own a section 62A item (other than a membership of a sporting or social club) to obtain insurance for it. In practice, the application of this provision is likely to be difficult for some SMSF trustees who hold collectables, since very few companies worldwide insure collectables.

SMSF trustees who are unable to obtain insurance for a section 62A item purchased before 1 July 2011 will need to make alternative arrangements for these items by 1 July 2016.

Peter Burgess is the national technical director of the SMSF Professionals’ Association of Australia.