The Government has recently implemented legislation stipulating how and when self-managed super fund (SMSF) trustees may invest in collectables and personal use assets. This article considers the key changes. It also considers a recent case. This case illustrates that even complying with the new rules might not be enough to safeguard an SMSF’s assets.
In 2010, the Super System Review (more commonly referred to as the Cooper Review) recommended that SMSF trustees should be completely prohibited from investing in collectables and personal use assets. The Review felt that these assets represent an unacceptable risk that investments may be made for current day benefits rather than proper retirement purposes.
The Government rejected the recommendation of a blanket ban. Instead, the Government has implemented restrictions on SMSF investments in collectables and personal use assets. The legislation is contained in the new reg 13.18AA of the Superannuation Industry (Supervision) Regulations 1994 (Cth). These changes commenced on July 1, 2011.
ASSETS The provisions cover artwork, jewellery, antiques, artefacts, stamps, rare folios, manuscripts, books, memorabilia, wine, spirits, motor vehicles, recreational boats, memberships of clubs, coins, medallions and bank notes.
NO LEASES SMSF trustees must not lease collectables and personal use assets to a related party of the SMSF. Similarly, SMSF trustees must not 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 SMSF trustees must not allow collectables and personal use assets to be used by a related party of the SMSF.
STORAGE SMSF trustees must not store collectables and personal use assets in the private residence of related parties.
The insertion of this provision – especially in light of the two prohibitions previously mentioned – suggests that “storage” is different to “use” or “leasing”. Accordingly, this raises the question as to the possibility of storing collectables or personal use assets in premises of related parties, so long as they are not a private residence. For example, might an SMSF trustee be allowed to store artwork in the business premises of a re- lated party? Clearly this seems to go against the intention of the law but the actual“black letter” does not seem to prohibit it. This could be the subject of future legislative clarification.
INSURANCE The new rules also stipulate that within seven days of acquisition, SMSF trustees must insure collectables and personal use assets in their own names. Memberships of sporting or social clubs are excluded from this requirement.
SMSF trustees must make written records of the reasons for the storage decisions. There is no express timeframe as to when these written records must be made. However, the records must be kept for at least 10 years after the deci- sion.
Where SMSF trustees realise collectables and personal use assets, and a related party receives an interest in the asset because of the realisation, the realisation must be at a market price determined by a qualified independent valuer. This is interesting for a number of reasons.
Firstly, the legislation is framed in terms of an SMSF trustee that “realises” a collectable or a personal use asset. However, sometimes related parties receive assets from SMSF trustees where those assets have not been “realised”. The most obvious example is where an SMSF trustee pays an in specie lump sum by way of transferring an asset directly to a member. It appears that in this circumstance an independent valuation is not needed.
Secondly, the ATO has long maintained that qualified independent valuers are desirable, especially where the “value of the asset represents a significant proportion of the fund’s value or where the nature of the asset indicates that the valuation is likely to be complex or difficult”. (See ATO Superannuation Circular 2003/1.) How- ever, this is the first time that there has been actual legislative compulsion to utilise qualified independent valuers.
GRANDFATHERING The new rules do not immediately apply to collectables and personal use assets that were held before July 1, 2011. These rules only start to apply to such “older” assets on July 1, 2016.
PENALTIES The rules prescribe a penalty for contravention of any of the above rules of 10 penalty units (that is, $1100).
Consider an SMSF trustee that buys a crate of wine, containing 200 bottles. The SMSF trustee stores the wine in the cellar of the personal residence of its directors. The auditor of the SMSF tells the SMSF trustee that this isn’t allowable. The trustee then sells the crate immediately to the directors. The wine is sold at a fair price, but the price is not determined by a qualified independent valuer. There are two ways to construe this situation. The first way is to say that three contraventions have occurred (that is, the storage, the failure to record the decision to store, and the disposal without proper valuation). Under this construction the trustee is liable for a total of $3,300 of fines (that is, 3 x $1110).
The second way is to say that each of the three contraventions has occurred 200 times (that is, in respect of each of the 200 bottles). Under this second construction, the trustee is liable for a total of $660,000 of fines.
Recent case law suggests that the first construction would be adopted. See 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].
