Mind Food

Art in SMSF? Yes you still can.

Mr Giraffe

I’ve recently started art classes and was chatting with my teacher, Gabrielle Jones, about the state of the Australian art market. I mentioned the impact that the changes to the rules around investment in art by SMSFs had had on the demand for investment grade* artworks.

Like many, Gabrielle assumed that art could no longer be held by an SMSF……
Well, the good news is that an SMSF can still invest in art, you just have to be very, very careful to follow the new, more stringent rules and do your research so you have a good estimate of the costs and hurdles around insurance, storage and valuation.

The Q & A from the ATO reproduced below has a very clear, straightforward summary of the does and don’ts when investing in art.

(*
Yes, I’m not a fan of that phrase either; particularly when applied to art. I would welcome suggestions for an alternative that makes me sound like less of a philistine.)

Scenario questions for investments in collectables and personal use assets made after 1 July 2011Can my SMSF still invest in art, other collectables and personal use assets?
The regulations do not prohibit SMSFs from investing in artwork and other collectables; the regulations prescribe a set of rules which SMSF trustees must adhere to if they make such investments.
All investments made by a SMSF must still comply with all existing legislative requirements, including the sole purpose provisions of the SIS Act.

Can my SMSF's artwork, other collectables or personal use assets be displayed in the business premises of a related party of the fund?
No. Artworks, other collectables and personal use assets are not permitted to be used by related parties. For example, an artwork is 'used' by being displayed. Therefore, displaying artwork by hanging it for viewing in the premises of a related party is not permitted. This prohibition extends to hanging artwork in business premises of a related party where it is visible to parties such as clients and employees.

Can my SMSF's artwork, other collectables and personal use assets be stored in the business premises of a related party of the fund?
Yes, SMSF trustees are permitted to store artwork, collectables and personal use assets in premises owned by a related party, such as a purpose-built storage facility, provided that the premises are not part of the private residence of a related party. A private residence includes all parts of a private dwelling (above or below ground), the land on which the private residence is situated and all other buildings on that land, such as garages or sheds.
However, it is important to remember if the artwork, other collectable or personal use asset is on display you will be in breach of regulation 13.18AA (6), which prohibits the use of the asset by a related party
. You also need to remember you are required to keep a record of the reasons for the decision you have made regarding the storage.

Can my SMSF lease its artwork to an art gallery?
Yes, provided the art gallery is not owned by a related party of the fund and the lease is on arm's length terms. Refer to the next question for further information on related party lease arrangements.
The artwork is still required to be insured in the name of your SMSF, regardless of whether the art gallery has its own insurance policy.

Does it make any difference if the art gallery is owned by a member or a related party of the member?
Yes. If your fund acquired the artwork on or after 1 July 2011, it cannot enter into a lease or lease arrangement with any related party of the fund in relation to the artwork. This means your SMSFs artwork cannot be leased to the art gallery if it is owned by a related party of the fund.
Lease arrangements can be formal or informal arrangements under which a person uses or controls the use of the artwork and include arrangements where no amount of money is paid to the fund in exchange for the use of the artwork.

A more detailed explanation can be found in paragraphs 24 - 27 and 113 - 123 of SMSFR 2009/4.

Can my SMSF's wine collection be stored at my home or at the private residence of a related party if that residence has a purpose built wine cellar?
If your fund acquired the wine on or after 1 July 2011 it must not be stored in the private residence of any related party. A private residence includes all parts of a private dwelling (above or below ground), the land on which the private residence is situated and all other buildings on that land, such as garages or sheds.
If your fund acquired the wine before 1 July 2011, you must ensure
that the wine ceases to be stored at the private residence of a related party prior to 1 July 2016.

How can my SMSF record the reasons for the decision on where to store its collectables and personal use assets?
If your fund acquired the collectable or personal use asset on or after 1 July 2011, the regulations require a written record of the reasons for the decision relating to the storage of the item be kept for a period of 10 years after the decision is made.
This decision could, for example, be documented in the minutes of a meeting of the trustees. It must be recorded in writing, either in hard copy or electronically.
Your fund's approved auditor may ask for a copy of this record during their compliance audit on your fund.


My SMSF invested in collectables prior to 11 August 1999 and they have been leased to a related party ever since. Do the regulations apply to these investments?
Yes. The regulations apply to all collectable and personal use assets owned by an SMSF. As existing assets of the fund at 1 July 2011, the fund has until 1 July 2016 to comply with the standards by unwinding the lease.

My SMSF is considering investing in historic artefacts but I am having trouble finding an insurance company which will insure them. What should I do?
The regulations require that a trustee must ensure that any collectable or personal use asset purchased by the fund is insured within seven days of the date of purchase. Trustees who fail to do so will commit an offence. As part of the decision to invest in collectables, trustees need to give consideration to their ability to comply with all the regulations prior to making the investment.
If, after your fund has made the investment, it is unable to obtain insurance, it is important for you as trustee to contact both your fund's approved auditor and the ATO with a view to rectifying the situation.


What if my fund owned the historic artefact before 1 July 2011?
If you acquired a collectable or personal use asset prior to 1 July 2011, you must ensure that it is insured in the name of the fund prior to 1 July 2016 to comply with the new rules.

Do I have to have a separate insurance policy for each collectable and personal use asset?
No. The rules require that collectable and personal use assets owned by an SMSF are insured as assets of that fund under an insurance policy taken out in the name of the fund. In this context, 'separately' means clearly identifiable as fund assets - that is, separately insured from other assets of the trustees. This means that these assets cannot be insured under a trustee's home and contents insurance. However, the collectable and personal use assets may be insured by the fund under separate policies or collectively under the one policy.
Remember that all collectable and personal use assets of the fund need to be insured in the name of the fund irrespective of their value.


My SMSF's artwork, which was acquired after 1 July 2011, is stored in a professional art gallery and is insured under the gallery's insurance policy. Is my fund still required to have an insurance policy for this artwork?
Yes. The regulations require that the fund's artwork must be insured in the name of the fund.

If my SMSF owns a motor vehicle - for example, a vintage car - which was purchased after 1 July 2011, can I drive the motor vehicle to maintain its condition and value?
No. The regulations do not allow for any use of the motor vehicle by a related party of the fund regardless of the purpose for that use. This means you cannot drive the vehicle for any reason, including taking it for a maintenance drive or to have restoration work undertaken. However, a person who is not a related party is not prohibited from driving the vehicle for such a purpose.

Can my SMSF sell its artwork to a related party?
Yes. However, if your fund acquired the artwork on or after 1 July 2011, the sale must be made at a market price as determined by a qualified independent valuer. This ensures that a related party does not receive current day benefit from such a transaction - for example, by purchasing the item from the fund at below market value - and also that the transaction does not cause detriment to the fund by selling at below market value.
If your fund acquired the asset before 1 July 2011 and sells it to a related party on or after 1 July 2016, it also must comply with the new rules.
If your fund acquired the artwork before 1 July 2011 and sells it before 1 July 2016, the transaction does not need to be supported by a valuation determined by a qualified independent valuer. However, the transaction must still take place on arm's length terms.


Who is a qualified, independent valuer?
A valuer will be qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community.
This is best demonstrated by being a current member of a relevant professional body or trade association such as:
  • Australian Antique and Art Dealers Association
  • Auctioneers and Valuers Association of Australia
  • National Council of Jewellery Valuers.
A valuer is independent if they are independent of the interests of the fund. This means that the valuer should not be a member of the fund or a related party of the fund (for example, an investment partner).
If your SMSF transfers a collectable or personal use asset which was acquired on or after 1 July 2011 to a related party of the fund, it is required to be done at market value as determined by a qualified independent valuer. Your valuer can seek guidance on acceptable valuation methods from the
SMSF valuation guidelines when it is published.

Is my fund's investment in bullion coin considered to be a collectable and therefore required to comply with the restrictions contained in regulation 13.18AA?
Coins are collectables if their value exceeds their face value. Therefore, if bullion coins have a value that exceeds their face value and they are traded at a price above the spot price of their metal content, they will be a collectable and your SMSF must comply with regulation 13.18AA in relation to the investment.

What does my approved auditor need to do when checking my SMSF's compliance with the new rules?
An approved auditor is required to examine and form an opinion as to whether your fund has complied with all provisions of the SIS Act, including the sole purpose test and these regulations. In doing this, your auditor must conduct the audit in accordance with the Australian Auditing Standards and the Standards on Assurance Engagement.
In complying with these audit standards, the auditor must obtain sufficient appropriate evidence on which to base their audit opinion. This may include evidence on where the collectable or personal use asset is stored, documentation on the decision for storing it, insurance cover information and any lease documentation. Where a related party receives an interest in the item, the auditor may seek verification that the transaction was conducted at market price, as determined by a qualified independent valuer.


If my SMSF fails to comply with any of the regulations, what can happen?
Each trustee of the fund commits an offence if any of the collectable and personal use assets regulations are contravened and is liable to a fine of 10 penalty units. One penalty unit is currently $170. Breaches will also be considered by the ATO when determining the fund's complying status.

If your fund is experiencing difficulty in being able to comply with the rules for investments in collectables and personal use assets, contact the ATO and your fund's approved auditor as soon as practical to discuss how your situation can be resolved.

The link to this article on the ATO’s website is here.