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SMSF & Collectables

New regulations for SMSF investments

In May 2011 the government announced proposed changes to the rules for self managed super funds investing in collectables and personal use assets. The new rules are a softer alternative to banning this type of investment altogether, as some stakeholders suggested.

A SMSF can invest in an antique wedgwood china bowl but the members can’t use it at breakfast!

The assets mentioned in the proposed regulations are:

  • artwork,
  • jewellery,
  • antiques,
  • artefacts, coins or medallions,
  • postage stamps or first day covers,
  • rare folios, manuscripts or books,
  • memorabilia,
  • wine,
  • cars,
  • recreational boats; and
  • memberships of sporting or social clubs.

Background to the government position

So why are these particular assets under scrutiny? It’s because of the general rule that the assets of a SMSF should not provide personal benefit or enjoyment to the members. Collectables and personal use assets are more likely than other investment types to provide a current day benefit to a member.

For example, a SMSF which has invested in a vintage car cannot allow a fund member to drive the car. This would be providing a current day benefit to the member. The purpose of a self managed super fund is to invest with the object of providing retirement benefits to members.

A portfolio of shares or a term deposit does not have the same potential to provide a current day benefit.

Click here for the press release on the topic, and here to see the draft regulations.

General investment rules

Many of the rules for collectables apply to any SMSF investment

Rules such as the prohibition on storing the assets at a members property, obtaining appropriate valuations and compulsory insurance are specific to collectables.

However many of the other rules apply to the SMSF investments generally. So even you are not considering investing in collectables or personal use assets the following points are a helpful guide when considering any SMSF investment.

1. Investment Strategy

You cannot invest in collectables unless your investment strategy allows it.

2. Trust Deed

You cannot invest in collectables unless your trust deed allows it. For the sake of flexibility most modern deed will allow the trustees of the fund to make any investment allowed by the relevant laws.

3. Sole purpose test

All the activities of a SMSF must comply with the sole purpose test. That is, the activities of the fund must have the purpose of providing retirement benefits to members. Investing with the object of providing personal enjoyment breaches this test.

The ATO provides some detailed examples of how this test operates in SMSF ruling SMSFR 2008/2. See paragraphs 52 onwards.

4. Prudent person test

A trustee has the obligation “to take such care as would an ordinary prudent person in dealing with property of another for whom they felt morally bound to provide”.

The prudence requirement implies the trustees need to have the necessary skill to be able to invest in collectables.

A trustee who does not have the expertise to value artwork would need to seek professional advice on the likely income and capital growth of the piece before making an investment.

5. Likely investment return

The trustees need to consider the likely return on the artwork in relation to other investments. After all, the fund is supposed to be building its assets to fund retirement benefits. If the artwork is expected to provide a return of 2% a year it is difficult to justify it as an investment compared to other asset classes.

6. You cannot buy assets from members

The super legislation prohibits a fund buying assets from its members. There are exceptions for listed securities and business real property (factories, shops, farms etc) but not for collectables.

7. You cannot lease assets to a related party

The exception to this is an in house asset valued at less than 5% of the total fund value.

8. You must deal on an arms length basis

The proposals would mean collectables have to be valued prior to disposal (sale) and sold at or above that value. This is effectively just an extension of the rule in the superannuation legislation requiring the fund to conduct transactions on an arm’s length basis.

Selling an asset to a member at less than market value would also breach the prohibition against providing financial assistant to members.

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