New rules regarding how your SMSF can invest in artworks and collectables have just been introduced and breaching these rules could see you slapped with a hefty fine.
The rules, which came into effect on 1 July, were introduced by the federal government to clarify how investments in artworks and collectables should be handled in order to close a loophole that allowed these investments to be used for personal enjoyment while receiving preferential tax treatment. Prior to these rules, there were no enforceable guidelines around how these assets could be held to prevent them from giving rise to personal benefits.
Let’s take a brief look at how these new rules work.
The best place to begin is to understand what the terms ‘artworks’ and ‘collectables’ mean.
Artworks are photographs, drawings, paintings, engravings, sculptures or reproductions of any of these items. Collectables are postage stamps or first day covers, rare folios, jewellery, manuscripts or books, antiques, artifacts, coins, bank notes, medallions, memorabilia, wine, motor vehicles, recreational boats, memberships of sporting or social clubs and anything, other than land, kept for personal use or enjoyment.
There are two potential types of returns available from investing in artworks and collectables – capital gains (or losses) and income. The principal source of return is the capital gain, which is generated by a rise in the value of the asset over the medium to long-term. Income is generated by the asset when your SMSF leases the artwork or collectable to someone, such as an art gallery.
Under the new rules for SMSFs, artworks and collectables can’t be stored at the ‘private residence’ of any related party, which means the primary residence of a member of your fund. However, you can store the investment at a place of business or specially constructed storage facility. You must document why you stored the investment at a particular location and this document must be kept on file for at least 10 years.
Your SMSF can’t lease artworks or collectables to a related party of your fund, that means, you or your relatives. A related party also includes most employers who contribute to your super fund as well as any entity that makes contributions for a member of your SMSF.
There’s a specific exclusion from super fund related parties using any recreational boat, car, jewellery, or membership of a sporting or social club. The purpose here appears to be that the government doesn’t want these assets to lose value due to regular use. If your fund invests in sporting or social club memberships, it must do so because they’re good investments, not because you and your family want to use them for personal purposes.
The new regulations insist that the investments are insured. This insurance must be in the name of your super fund and must be in place within seven days of the fund purchasing the asset. Some commentators have argued that many trustees will find it difficult to get this insurance. However, it can be expected that general insurers will come to the party over time. Sensibly, this rule doesn’t apply to sporting or social club memberships.
The final part of these new regulations says that when a super fund sells a piece of artwork or a collectable to a related party then the super fund must get an independent valuation on the item and the agreed sale price can’t be less than that valuation.
If you fail to abide by the new rules, then your fund can be fined between $1,100 to $6,600 for individual trustees or $5,500 to $33,000 if your fund has a corporate trustee structure.
These penalties are ‘strict liabilities’ which means that if the breach can be proven then a court can immediately impose a penalty up to the above amounts and there is no need to examine why the trustee breached the rules.
These new rules apply to all new artwork and collectable investments made after June 2011. For such investments held by a super fund before July 2011, the rules won’t come into effect until after June 2016, which means you must sell any non-complying assets before this date.
Also in Thursday’s Switzer Super Report:
- Is Bega Cheese too tasty?
- The Gold Coast property play – dynamite or dud?
- Stock tips to lock in before reporting season
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.