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Changes to collectibles and personal use assets inside Self managed Super

06 March 2013

For a moment it looked like SMSFs were no longer going to be able to invest in art and other collectables after the Cooper Review recommended a ban on holding these assets. The report also suggested that those SMSFs who already owned them should have five years to remove them from their fund, or convert their fund to a Small APRA Fund. However, this was met with strong opposition with the result being that collectables and personal use assets are still allowed as an investment option although the Government has tightened up some of the requirements for SMSFs who invest in them.

The tightened rules apply to collectables and personal use assets acquired by an SMSF after 1 July 2011, and transitional rules apply to collectables and personal use assets held by the fund prior to 1 July 2011, until 1 July 2016, upon which date the SMSF must comply.

Collectables and personal-use assets are defined by the Superannuation Industry (Supervision) Act to be artwork, jewellery, antiques, artefacts, coins, medallions, bank notes, postage stamps or first day covers, rare folios, rare books, rare manuscripts, memorabilia, wine, spirits, motor vehicles, recreational boats and memberships of sporting or social clubs.

It’s worth noting, that whilst bullion coins are considered to be a collectable where they have a value in excess of face value and metal content, gold bars are not. As a commodity, bullion is looking increasingly attractive to SMSF trustees as awareness increases of the value of precious metals held as an investment asset.

Besides defining what is meant by artwork and collectables, the regulations also outline how SMSFs can own or use them. These include:

1. Not Stored in Private Residence

Collectables and personal use assets cannot be stored at the private residence of any related party of the SMSF, specifically at the primary residence of an individual. This does not refer to a location such as a place of business or specially constructed storage facility. However, whilst it is possible to store collectibles in the business premises of a related party, they cannot be placed on display.

2. Reasons for Storage in Writing

An SMSF must also document why they stored the investment at a particular location, with the documentation being kept on file for 10 years.

3. Maintain Insurance

SMSF trustees must also ensure the asset is insured in the name of the super fund and the insurance must be in place within seven days of the asset being purchased. Sensibly, this rule doesn’t apply to sporting or social club memberships.

4. Valuation by Independent Party

When a super fund sells any piece of artwork or collectible to a related party, the super fund must get an independent valuation of the item and the agreed sale price cannot be less than that valuation.

5. Not leased to a Related Party.

Collectables and personal use assets must not be leased to any related party of the SMSF. A related party of the SMSF includes the members of the SMSF, their relatives and any partnerships, partners of partnerships (if a member is in partnership with them) trusts and companies that members of the SMSF control.

The ATO has already warned that it will be strongly policing rules prohibiting the leasing of collectables to related parties and ensuring they are independently valued.

Besides the new rules you also need to consider whether a collectable or personal use asset conforms to your SMSFs written investment strategy, particularly given that collectables are generally illiquid. Consider the impact on your SMSF’s capacity to manage its cash flow requirements and provide timely access to liquidity to meet both its expenses and member benefit liabilities.

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This information is general in nature and provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. It does not constitute a securities recommendation, financial or taxation advice. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.