As the dust settles on the rules that now apply to investing in collectables and personal use assets, attention is turning to what action trustees who held these items prior to July 1, 2011 need to take. Peter Burgess explains.
To ensure that self-managed superannuation funds (SMSFs) that held collectables and personal use assets prior to July 1, 2011, have time to comply with the new rules, a five-year transition period applies. SMSFs which held collectables and personal use assets (now defined as a “section 62A item”) as at June 30, 2011, will have until June 30, 2016 to comply with the new rules.
However, what action, if any, will these SMSF trustees need to take prior to June 30, 2016 in order to satisfy the new rules? For many SMSF trustees, this should be a relatively simple question to answer. It is clear that if a section 62A item is currently being stored at the private premises of a member, the SMSF trustees will need to make alternative storage arrangements for that item before July 1, 2016. This may mean arranging for the item to be stored in a professional storage facility (for example, a professional gallery if the item is artwork) or storing the item at the premises of a related party (as long as it is not the private residence of the related party).
However, what if the section 62A item is currently being displayed at the business premises of a related party? Does the concession which allows SMSF trustees to store a section 62A item at the premises of a related party, which is not their private residence, extend to situations where the item is being displayed at those premises? Furthermore, what if the section 62A item is currently being leased to a related party but is excluded from the definition of an in-house asset by virtue of the grandfathering provisions in section 71 of the SIS Act? Do the new rules which prohibit a section 62A item being leased to a related party mean that these arrangements now need to be unwound?
‘It appears the intent of the policy is to allow the ‘storage’ but not the ‘display’
Although the new rules do not distinguish between the storage and display of a section 62A item, it appears the intent of the policy is to allow the “storage” but not the “display” of a section 62A in the business premises of a related party. In any event, the definition of a “lease arrangement” in section 10 of the SIS Act is sufficiently broad to ensure such arrangements would be caught as a lease to a related party and prohibited under the new rules, which do not allow a section 62A item to be leased to a related party. In SMSFR 2009/4, the Commissioner formed the view that a “lease arrangement” includes informal arrangements under which a person uses or controls the use of fund property, including where no rent is payable in exchange for that possession.
This will require SMSF trustees to ensure that a section 62A item is being stored and not used in a manner which could constitute a “lease arrangement” with a related party. Given the difficulties that this may pose for SMSF auditors, and the need for SMSF trustees to document their decisions and ensure the item is insured, in a practical sense many SMSF trustees who held a section 62A item at the business premises of a related party prior to 1 July, 2011 may need to make alternative arrangements for the storage of that item by July 1, 2016.
An interesting scenario arises in situations where the section 62A item is being leased to a related party but is not an in-house asset by virtue of the grandfathering provisions in the SIS Act. This can arise in situations where the lease arrangement with the related party was put in place prior to August 11, 1999 and there has been an uninterrupted sequence of lease arrangements with a related party ever since.
A recent example provided to SPAA involved an antique clock which was purchased by an SMSF prior to August 11, 1999 and has been displayed in the premises of a related entity and leased to that related entity since August 11, 1999. Under section 71B of the SIS Act, this asset is exempt from the definition of an in-house asset.
Although a section 62A item which is being leased to a related party may not be an in-house asset by virtue of the grandfathering provisions, the new regulations specifically prohibit a section 62A item being leased to a related party, whether or not the item is an in- house asset. Therefore, it is logical to conclude that lease arrangements, which have been grandfathered under section 71 of the SIS Act, will need to be unwound by July 1, 2016. Presumably the ATO will clarify this position well before July 1, 2016.
A similar situation arises where the section 62A item is currently used by a related party as part of the legitimate maintenance of the item. In SMSFR 2008/2, the ATO identifies several scenarios where the personal use of an SMSF asset would not constitute a breach of the sole purpose test. For example, an SMSF may provide benefits that fall outside the scope of those that are specified in subsection 62(1) of the SIS Act as an incident of activities carried on by it that meet the requirements of the sole purpose test.
