SMSFs warned on legal hurdles when selling collectables to related party 

In an example, John and Mary’s SMSF has purchased a collection of artwork as an allowable investment under s62A of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SIS Act’).

John and Mary want to know whether it is possible for their SMSF to sell the artwork to their art dealer niece and whether the sale would require the SMSF to obtain a valuation report.

Under superannuation law, Mr See said an SMSF is permitted to invest in collectables and personal use assets such as artworks, jewellery, vehicles, wine, and boats provided that the investment is made for genuine retirement purposes and does not provide any present-day benefit for the members of the fund, and the trust deed of the fund permits the trustee of the fund to enter into such an investment. 

“It is important to note that collectables and personal use assets cannot be leased to or be in a part-lease arrangement with a related party. It also can’t be used by a related party or stored or displayed in a private residence of a related party,” said Mr See.

This means that John and Mary’s SMSF is permitted to sell the collection of artwork to their niece who is a related party of the fund.

The sale of the artwork from John and Mary’s SMSF to the related party will trigger s109 of the SIS Act. Mr See noted Section 109 of the SIS Act provides that an SMSF has the obligation to always deal with other parties at an arm’s length basis (i.e. commercial basis), especially when dealing with related parties.

“In keeping with s109 of the SIS Act, any collectable and personal use asset that John and Mary’s SMSF sells to a related party of the fund must be sold at market price as determined by a qualified, independent valuer,” Mr See explained.

“The ATO has stated that it is usually the valuation process undertaken rather than who conducted the valuation that governs the acceptability of a valuation.

“In relation to collectables and personal use assets, John and Mary’s SMSF will meet its valuation requirements if the following valuation principles are satisfied, which include using a qualified independent valuer to obtain a valuation report if the asset was acquired on or after 1 July 2011 and is to be transferred or sold to a related party after that date, or if the asset was acquired before 1 July 2011 and is to be transferred or sold to a related party on or after 1 July 2016.

“Furthermore, the person conducting the valuation must base their valuation on objective and supportable data.”

The valuation also has to be arrived at using a ‘fair and reasonable’ process, according to Mr See. This includes taking into account all relevant factors and considerations likely to affect the value of the asset, if it has been undertaken in good faith and it also uses a rational and reasoned process.

Furthermore, the valuation is capable of explanation to a third party and the qualified independent valuer determines the market price.

“It would also be prudent for the trustee of John and Mary’s SMSF to keep all supporting evidentiary documentation in relation to the valuation of the artwork on the fund’s register in the event that the ATO decides to conduct a review on the valuation method used to determine whether the SMSF has met its valuation requirements in accordance with superannuation laws,” Mr See added.