One of the reasons that people set up a Self-Managed Superannuation Fund (SMSF) is to invest in the asset class known as ‘collectables’. As at March 2011, $592 million in SMSF assets were invested in artwork, collectables, metal, and jewels, according the quarterly statistical report issued by the Australian Taxation Office.
- coins or medallions;
- postage stamps and first day covers;
- rare folios, manuscripts or books;
- recreational boats;
- memberships of sporting or social clubs; and
- other similar assets.
Many of these collectables have ended up on the walls, in the cellars or the garages of the SMSF trustees. There have not been many rules about how collectables should be stored, maintained or valued, other than the requirement that they should not give rise to personal use and enjoyment.
The Cooper Review of Superannuation recommended that collectables be disallowed as an investment in SMSFs. Many SMSFs invest in Australian art – particularly indigenous art – and this announcement, together with the introduction of the resale royalty scheme on commercial resales of artworks, brought about a sharp decline in prices for Australian art.
This decline was made worse by the global financial crisis and, if fund trustees had been forced to dispose of collectables and artworks in particular, they would have realised significant losses.
The consequent flood of artworks on the market would have had a further depressing effect in the long term. As a result, there was a considerable outcry among fund trustees and advisers. They saw the policy to disallow investment in collectables as an over-reaction to the potential for some trustees to have personal access to the collectables.
New reforms passed by Parliament took effect from July 2011 and govern the use of collectables and personal use assets in an SMSF. To be allowed as an investment in an SMSF, a collectable or personal use asset must satisfy all of the requirements below.
- It must be part of the SMSF’s investment strategy. The written investment strategy must include collectables as an asset class and set ranges and targets for the class, as well as showing that the trustees have considered the risks associated with the asset.
- It must be acquired at a price accompanied by an independent valuation from an appropriately qualified valuer.
- It must be covered by a lease on terms and conditions of a commercial nature where the collectables are exhibited or displayed.
- It must not be acquired from, or leased to, a related party of the SMSF.
- It must not be stored or maintained in any private premises owned, occupied by, or otherwise used, by a related party.
- It must be valued by an appropriately qualified valuer prior to disposal and sold at or above that valuation.
- It must be insured in the name of the SMSF within seven days of acquiring the asset.
- It must be stored in an appropriate location and the reasons for selection of the location must be recorded by the trustees.
- What happens to the artwork held in a storage facility and the artwork leased out when the gallery or custodian fails?
- Will art and collectible dealers need to become accredited if they are to sell collectables to SMSFs, in the same way that real estate agents and financial advisers must be accredited and consequently controlled by government regulation?
- Will SMSF-approved auditors have the capacity and knowledge to ensure compliance with the proposed legislation?
- What is an appropriate time-frame for investment in collectables – especially as an SMSF moves into pension phase?
A number of questions, especially about storage, arise from the proposed regulations. Although it is clear that collectables cannot be stored at the private residence of a member of the fund, storage at a related party’s non-private premises (such as an office) is not expressly excluded. Whether such storage will require a use or lease arrangement as a result is unclear.
With artwork and wine in particular, there is a history of custodian and wine and art storage facility failures in Australia, one of the latest being art dealers Smith and Hall in late 2010. In that case, 980 artworks have been located, secured and stored to date, but there are competing claims by artists and investors over title to works, and up to 80 works are still unaccounted for.
At present there is no government regulation to control the provision of collectable advisory services, storage facilities and custodian arrangements for SMSFs and this is seen as a source of concern by many SMSF advisers.
Further questions to be considered are:
The regulations applied from 1 July 2011 affect all new collectables investments made from that date. Under transitional provisions, collectable investments held on 30 June 2011 must comply by 30 June 2016.
Australian Taxation Office – “Self-managed super fund statistical report – March 2011”
Sydney Morning Herald (14 March 2011) – “Accreditation of art not in the picture” – Leonie Lamont