Newsletter No. 11, November 2012

Artwork and Collectables

I was recently asked by a client whether she should get rid of some artwork that her self managed superannuation fund (SMSF) had purchased a few years ago.  She had just finished reading Chapter 9a of my book and was not sure what she should do with the artwork that was currently displayed in her home.

I explained to her that the superannuation law in relation to investing in collectables and personal-use assets came in on 1 July 2011.  Under the law if a SMSF purchases an asset such as artwork; jewellery; antiques; artefacts; coins or medallions; postage stamps or first day covers; rare folios; manuscripts or books; memorabilia; wine; cars; recreational boats – basically, assets that are ordinarily used or kept mainly for personal use or enjoyment, it must comply with the following conditions:

  • the asset  must not be leased to a related party
  • the asset must not be stored in a private residence of a related party
  • trustees of the SMSF must have a documented decision on storage of the asset and this document must be kept for ten years
  • the asset must be insured in the SMSF’s name within seven days of being purchased
  • the asset must not be used by a related party; and
  • if the asset is sold to a related party, then the trustees must have an independent valuation of the asset and the sale price must reflect a true commercial sale price.

A “related party” includes members of the SMSF, relatives of the members of the SMSF and any businesses the members control (refer to pages 68 to 72 of my book for full definitions).

The good news for my client is that because her SMSF purchased the artwork prior to 1 July 2011, she has two options as to what to do with the artwork in order to comply with the superannuation law.

Option 1:  Lease the artwork from her SMSF

Under the old superannuation law, she is able to lease the artwork from her SMSF provided the value of the artwork is no more than 5% of the total value of the assets held by her SMSF.  For example, if the total accumulated superannuation savings in her SMSF is $250,000, then provided her artwork is no more than $12,500, she can lease the artwork from her SMSF.   This transaction is referred to as an “in-House Assets” transaction.  Please refer to Chapter 15 of The Self Managed Super Handbook for details.  She would also need to pay her SMSF a commercial rate of rent for the usage of the artwork.

Option 2:  Purchase the artwork from her SMSF

Her SMSF can sell the artwork to her directly.  If she decides to do this she needs to prove that the sale price she paid to her SMSF to purchase the artwork is at a commercial rate.  Perhaps she can ask the art gallery where her SMSF purchased the artwork to give a written quote on the artwork’s value.

Artwork remains in the SMSF

If the artwork remains in the SMSF, trustees need to ensure that it is insured in the SMSF’s name. It must also be stored in a secure place.  Under the old law, this could mean storage in a suitable container and kept somewhere on a member’s property.  As long as it is not displayed for someone’s enjoyment or personal use.

However, my client does need to be aware that although the new law is for new investments acquired by SMSF’s from 1 July 2011, the conditions under the new law will also apply to her SMSF from 1 July 2016.  When the new rule was introduced, it gave a five year transitional period for any investments acquired prior to 1 July 2011. This means that, come 1 July 2016, my client will no longer be able to:

  • lease the artwork from her SMSF
  • store the artwork in her private residence
  • use the artwork for any purpose

She must also have a documented decision on storage of the asset and this document must be kept for ten years. I hear all the time from lovers of artwork who are not too happy about the new law.  I guess I can only say that you need to keep in mind that the sole purpose of a superannuation fund is to provide for your retirement.  Therefore, investments must be made solely for retirement income purposes.  Arguably, assets such as collectables and personal use assets have been acquired in the past by SMSFs to provide immediate personal enjoyment to members of the SMSF which is not in keeping with the purpose of the SMSF.

I guess the good news is that our Government does recognise that these assets can be legitimate investments for some SMSFs and as a result it has not stopped SMSFs from acquiring them.

Monica Rule is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Fund in plain English”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.