By William Fettes (wfettes@dbalawyers.com.au, Lawyer and Bryce Figot (bfigot@dbalawyers.com.au), Director, DBA Lawyers
All newly acquired investments by SMSF trustees in collectables and personal use assets since 1 July 2011 have been subject to strict rules under reg 13.18AA of theSuperannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’). However, SMSF trustees should be aware that the grandfathering relief in relation to such investments that were held prior to 1 July 2011 will come to an end on 1 July 2016. Therefore, to avoid potential penalties, SMSF trustees with grandfathered investments in collectables and personal use assets will need to consider the current rules carefully and take appropriate action before 1 July 2016 to ensure their investments are compliant.
This article provides an overview of the rules concerning collectables and personal use assets.
The origin of the rules
The current rules in relation to collectables and personal use assets arose in response to the 2010 Super System Review (also known as the Cooper Review). The Cooper Review expressed concern that there was an unacceptable risk that investments by SMSF trustees in collectables and personal use assets may be made for present day benefits rather than for the purposes of retirement. Accordingly, the final report recommended a total prohibition on SMSF trustees making such investments.
However, the federal government rejected the recommended blanket ban and instead sought to allay these concerns by legislating certain restrictions which are contained in reg 13.18AA of the SISR which commenced 1 July 2011.
Collectables and personal use assets
Regulation 13.18AA covers artwork, jewellery, antiques, artefacts, coins, medallions or bank notes, postage stamps or first day covers, rare folios, manuscripts or books, memorabilia, wine or spirits, motor vehicles, recreational boats, and memberships of sporting or social clubs.
As matter of passing curiosity, we note that collectables and personal use assets include antique firearms but not modern firearms. Moreover, we note that it applies to spirits and wine, but not to beer or pre-mixed drinks.
No leases to related parties
Sub-regulations (2) and (3) of reg 13.18AA require that SMSF trustees must not lease collectables and personal use assets to a related party of the SMSF, or enter into lease arrangements in respect of these assets with related parties. A lease arrangement is a broad concept covering any agreement, arrangement or understanding in the nature of a lease.
No use by related parties
SMSF trustees must not allow collectables and personal use assets to be used by a related party of the SMSF.
Storage in private residence of related parties
Sub-regulation (3) of reg 13.18AA prohibits SMSF trustees from storing collectables and personal use assets in the private residence of related parties.
The drafting of this provision raises the question of whether it may be possible to store collectables or personal use assets in the offices of related parties where those offices are not a private residence. For example, might an SMSF trustee be allowed to store artwork in the business premises of a related party?
The ATO has published material on their website which clarifies the position:
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.
Remember to keep a record of the reasons for deciding on where to store the assets.
Though this is not binding on the ATO, as the regulator of SMSFs, it is consistent with the legal construction of the regulations and the ATO seems relatively likely to follow the views expressed in such public materials.
SMSF trustees must also make and keep written records of the reasoning behind any storage decisions. There is no specific timeframe as to when the written records must be made, however, the record must be kept for at least 10 years after the decision.
Insurance
The rules stipulate that SMSF trustees must insure collectables and personal use assets in the name of the SMSF within seven days of acquiring such items, excluding memberships of sporting or social clubs.
More specifically, reg 13.18AA(5) provides:
Each trustee of a regulated superannuation fund that is a self managed superannuation fund commits an offence if:
(a) the fund owns a section 62A item, other than a membership of a sporting or social club; and
(b) it is more than 7 days since the fund acquired the item; and
(c) the item is not insured in the name of the fund.
The reference to ‘owns’ is an interesting aspect of the drafting of sub-reg (5). It must be noted that most of the compliance requirements in reg 13.18AA are drafted using the language ‘holds an investment involving’ rather than ‘owns’ [emphasis added].
This difference in language raises the question of whether the requirement for taking out insurance in the fund’s name would still apply in relation to investments in collectables and personal use assets which are held through an interposed entity. For example, could an SMSF trustee invest in artwork as a unitholder in a div 13.3A non-geared unit trust without the insurance requirement applying? If so, this would allow for more flexible insurance arrangements, such as having artwork insured as part of an overall gallery policy.
Realisation of assets and related party transfers
Collectables and personal use assets must be realised for a market price determined by a qualified independent valuer if a related party receives an interest in the asset because of the realisation.
More specifically, reg 13.18AA(7) provides:
A trustee of a regulated superannuation fund that is a self managed superannuation fund commits an offence if:
(a) the trustee realises an investment held by the fund involving a section 62A item; and
(b) a related party of the fund receives an interest in the item because of the realisation; and
(c) the realisation was not at a market price determined by a qualified independent valuer.
Though the ATO has long maintained that qualified independent valuers are desirable, it is notable that this is the first time that there has been an actual legislative requirement to utilise a qualified independent valuer.
Moreover, given the legislation is framed in terms of the SMSF trustee being the entity which ‘realises’ the collectable or a personal use asset, this raises the question of exactly what kind of dealings are covered.
Neither ‘realises’ or ‘realisation’ are defined in the SISR. Therefore, in the absence of an express definition, we note that words should take their ordinary meaning. Relevantly, Macquarie Dictionary defines realise as follows:
…
- to covert into cash or money: to realise securities.
- to obtain as a profit or income for oneself by trade, labour or investment
- to bring as proceeds, as from a sale: the goods realised $1000
…
- to convert property or goods into cash or money.
…
Furthermore, the explanatory statement which introduced the provisions in reg 13.18AA uses the language ‘disposes of’. This would tend to suggest that disposal of the asset is required for the purposes of the regulations.
Though the above points are not entirely dispositive, it is arguable that a transfer of an asset directly to a member by way of in specie lump sum would not be caught by reg 13.18AA(7) and thus independent valuation would not be required. Naturally, however, this is a novel and untested construction and therefore the most prudent course of action may be to obtain a qualified independent valuation in any event.
The end of grandfathering
As noted above, the rules in reg 13.18AA did not immediately apply to existing investments in collectables and personal use assets when the requirements commenced on 1 July 2011. This is because reg 13.18AA(9) provides that sub-regs (2)–(7) do not apply to investments in collectables and personal use assets that were held by the fund on 30 June 2011. However, the rules will apply to such ‘older’ assets from 1 July 2016 because reg 13.18AA(9) ceases to be enforced as of 1 July 2016 (refer to reg 13.18AA(10)).
Thus, SMSFs with grandfathered collectables and personal use assets must conform with reg 13.18AA by July 2016. For example, if artwork was stored at a member’s private residence, was not insured, or was leased to a member, the artwork must be leased to a third party at arm’s length terms and insured, or otherwise disposed of by 1 July 2016.
Penalties for contraventions
The prescribed penalty for contravention of any of the above rules is 10 penalty units (ie, $1,800 currently) for each SMSF trustee. This is another timely reminder of the advantages of using a corporate trustee over individual trustees.
Where contraventions involve a collection of items, the potential for a penalty multiplier to apply to the facts should also be considered. Case law, such as Olesen v Eddy [2011] FCA 13 [32], Vivian v Fitzgeralds [2007] FCA 1602 [33] and Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518 [31] suggests that a multiplier approach is unlikely, however, no guarantee can be given about this and SMSF trustees should be very careful to ensure they comply with the rules.
Conclusion
SMSF trustees who have previously enjoyed grandfathered protection in relation to their investments in collectables and personal use assets held prior to 1 July 2011 will need to take appropriate action to ensure they meet the strict requirements of the SISR prior to 1 July 2016.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
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