Clients with self-managed superannuation funds (SMSF) often ask what assets the SMSF can acquire. Here we will look at collectables, and whether they are allowed to be purchased in your SMSF.
The first questions is ‘Why’?
Why do you want to acquire the asset/s in your SMSF? If the answer is any reason other than to provide for the retirement of members, or their dependants on the death of a member, then you may find the asset purchase is non-compliant.
To be compliant, your fund must be maintained for the sole purpose of providing retirement benefits to members, or to their dependants if a member dies before retirement. This sole purpose test (section 62 of the Superannuation Industry (Supervision) Act 1993), is your starting point. Any asset purchase, including collectibles, must meet this test to be compliant.
Let’s assume you are looking to acquire vintage cars. The question to ask is, is the acquisition a viable investment, or simply a desire of the members to own vintage cars. Does the investment ‘stack up’ relative to other forms of investment to build/protect the retirement savings of members?
The sole purpose test extends to how the collectible is managed once acquired. Given the asset is for the sole purpose of the member’s retirement benefits, the members (or their associates) cannot use or enjoy the asset in any way. This means there are some rules around:
- Storage: the collectable cannot be stored at the trustee’s residence or displayed at their office. The ATO says, “You can store (but not display) collectables and personal use assets in premises owned by a related party provided it is not their private residence. They can’t be displayed because this means they are being used by the related party. For example, if your SMSF invests in artwork it can’t be hung in the business premises of a related party where it is visible to clients and employees.” In addition the trustees must document their decision on where the asset will be stored (for example, in a minute of a meeting of trustees).
- Lease only to unrelated parties: the leasing of the collectible can only be undertaken with an unrelated party.
- Insurance: the collectible must have its own insurance policy owned by the SMSF (multiple items can be listed on the same policy i.e., wines of different brands). The insurance policy must be in place within 7 days of acquisition.
- Sold at market value: if a collectible is sold to a related party, then it must be sold at market value. Collectibles also require a qualified independent valuation if sold to a related party.
- Not encumbered: ensure that the assets have no security interests over them prior to your purchase.
The sole purpose test means you are precluded from:
- staying in a holiday home owned by your SMSF
- driving a vehicle owned by the SMSF
- enjoying artwork held by the SMSF, and
- those bottles of Penfolds Grange owned by the SMSF that broke (wink, wink) are likely to trigger an audit as they should have been properly stored in a way that prevents breakage.
Your investment strategy
An SMSF investment strategy should articulate the plan trustees have for a fund and the investments they choose to hold. It should drill down into the reasons why certain assets will be acquired (or sold) and how these choices align to the retirement goals of the members. If your SMSF is considering purchasing collectibles, it is essential that your investment strategy is aligned to these types of investments and articulates why the asset fits within the strategy. This is particularly important if the collectible/s will dominate the types of assets held by the fund, its liquidity, and diversity.
Can your SMSF purchase a collectible (such as artwork) from a member or a related party of the fund? The answer is no. SMSFs are not allowed to purchase assets, other than listed shares and business real property, from related parties. The SMSF can however transfer or sell the asset to a member, or related party of the Fund – providing the sale is at market value, determined by an independent valuer.