The Self-Managed Super Fund Professionals’ Association of Australia (SPAA) has welcomed new draft regulations governing how self-managed superannuation funds (SMSFs) can make, hold or sell investments in collectables, such as artwork and personal use assets. Importantly, we believe the new draft rules are consistent with SPAA’s own guidelines released last year in response to the Cooper Review.
The proposed draft regulations seek to amend the Superannuation Industry (Supervision) Regulations 1994 (SIS regulations) to include rules with which trustees must comply when investing in collectables and personal use assets. In particular, the proposed regulations would prevent SMSF trustee members from gaining a “current day benefit” from an investment in these assets and ensure that such assets are for retirement purposes only.
The new draft regulations define collectables and personal use assets as: artwork (within the meaning of the Income Tax Assessment Act 1997); jewellery; antiques; artefacts; coins or medallions; postage stamps or first day covers; rare folios, manuscripts or books; memorabilia; wine; cars; recreational boats; and membership of sporting or social clubs.
SPAA’s philosophy is that SMSFs should have investment choice as far as possible. SMSFs have long been able to invest in artworks and other collectables, provided they fell within the investment strategy set by fund trustees and met the superannuation sole purpose test. The practical reality is that very few SMSFs hold artworks or other collectables and, in those that do, the trustee normally has some expertise in relation to that particular investment class. Therefore, we regarded that initial recommendation by Cooper to ban artwork and collectables in SMSFs as akin to using a sledgehammer to crack a nut.
We believe the new draft regulations released in May will provide much-needed clarity for SMSF members on important issues such as how collectables and personal use assets are to be purchased, stored, valued and documented in order to generate retirement income. Ultimately such regulations will be of assistance to trustees, their advisers and SMSF auditors.
It would be fair to say the SPAA guidelines featured prominently during consultations with the Government and that many of the key components of our guidelines are broadly reflected in the draft regulations. Included in the SPAA guidelines is a requirement that the investment be consistent with the fund’s investment strategy and the sole purpose of providing retirement benefits to members (the “sole purpose test”) and be permitted by the fund’s governing rules. We said that the investment must be valued each year and that it must be appropriately authenticated, with the provenance and didactics confirmed and documented. We said that an approved auditor must, as part of the annual audit, apply appropriate audit procedures to verify the existence, ownership and valuation of the artwork. We also said that trustees should be able to reasonably demonstrate the commerciality of any lease and/or exhibition terms and conditions. We also said that trustees should seek professional independent advice, preferably from a SPAA Specialist Advisor, to assist with the appropriateness of the investment and the associated SMSF compliance issues.
However, key issues still to be addressed in the Government’s draft regulations are the rules around related party storage of collectables and personal use assets. The draft regulations will allow these items to be stored on the premises of a related party as long as it is not the private residence of a fund member; but still to be clarified is whether the definition of storage includes “display”. Also to be confirmed is whether a valuation needs to be performed by an accredited valuer, particularly where no valuer profession exists, such as in numismatics.
SPAA’s own guidelines were designed to address the issues raised by the Cooper Review – in particular, Cooper’s concerns about members storing and displaying artwork on the premises of a related party. The guidelines then went on to address the different assets within the class of artworks and collectables.
Overall, we are pleased with the draft regulations issued by the Government. We believe the draft regulations provide a sensible solution to issues raised by the Cooper Review.
Andrea Slattery is the CEO of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).
