If you’ve ever found yourself discussing the viscosity of a drop of Spanish red from Rioja, the aroma of an organic wine from Orange, or the types of grape varieties suited to the slopes of the Clare Valley, then you may be pleased to know that wine and self managed super funds (SMSFs) do mix.
An SMSF may purchase a collection of wine as an investment for the fund, as long as certain requirements are adhered to. Firstly, the trustee can’t purchase the wine collection from a related party of the fund and the fund must ensure that the investment is in line with the investment strategy outlined in its trust deed.
A sweet investment?
All funds must have an investment strategy and regularly monitor that strategy. The trustees need to be able to demonstrate that they have sufficiently researched the investment potential of any investments to be satisfied that they make worthwhile investments for the fund.
The investment strategy document should detail the rationale for selecting an investment. So in the case of a wine collection, you would need to demonstrate why that particular wine was a valid investment – just liking the taste is not sufficient.
Don’t pop that cork
Consideration of course should also be given to the sole purpose test. As a general rule, the sole purpose test provides that the fund needs to be run exclusively for genuine retirement purposes. There are a limited number of other purposes that are allowed, such as providing against total and permanent disability. However, the trustee must ensure that they are not deriving any personal use or enjoyment from the asset, such as drinking the wine!
Trustees need to be able to demonstrate from a custodian viewpoint that they are also taking adequate precautions to protect any asset held by the fund. For example, the wine collection should be kept in a secure location and be stored to minimise damage.
Rule changes
In July 2011, the Government introduced new rules that deal directly with collectables in SMSFs. These specifically require that SMSF trustees that invest in collectables or personal use assets such as wine to:
- Not lease this asset to a related party;
- Not store the asset in the private residence of a related party;
- Not permit use of the asset by a related party;
- Document the reasons for deciding on the storage of the asset;
- Insure the asset within seven days of acquisition, unless the asset is a membership to a sporting or social club;
- Obtain a valuation from a qualified independent valuer, should the fund later transfer the asset to a related party.
These new rules apply to all SMSFs where collectables or personal use assets were acquired on or after 1 July 2011, while existing assets will have until 1 July 2016 to comply with the new rules.
As an example, if an SMSF acquired a wine collection on or after 1 July 2011, the collection must not be stored in the private residence of any related party of the fund. A private residence includes all parts of a private dwelling (above or below ground), the land on which the private residence is situated and all other buildings on that land, such as garages or sheds.
If your SMSF acquired the wine before 1 July 2011, you must ensure that the wine ceases to be stored at the private residence of a related party prior to 1 July 2016.
It is recommended that specific advice be sought before you invests in any type of alternative asset as there are a number of rules that need to be considered before making the transaction.
Important: 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. Consider the appropriateness of the information in regards to your circumstances.
