Preparing collectible assets for the new rules
The transitional provisions for collectibles will end in less than six months. What are some of the traps and what needs consideration regarding the new legislation?
During 2009 and 2010, the Australian government established the Super System Review, more widely known as the Cooper Review.
One of the recommendations of the Cooper Review was a ban on investing in collectibles and personal use assets. Instead of banning these items outright, however, the government’s response was to impose stricter rules pertaining to their storage, leasing, and insurance.
Findings released in the ATO June 2015 statistical report show that this new legislation is having the desired effect: there has been a decrease of 43 per cent in collectibles in SMSFs since 2010, meaning collectibles now amount to only 0.2 per cent of total funds’ assets.
Given that the transitional provisions end on 30 June 2016, it is anticipated that this will drop further. Below are some considerations to keep in mind when dealing with the changing legislation.
What items classify as collectibles and personal use assets?
Officially called ‘section 62A assets collectibles and personal use assets’, these items include artwork, jewellery, antiques, artefacts, coins or medallions, postage stamps or first day covers, rare folios, manuscripts or books, memorabilia, wine, cars, recreational boats, and memberships of sporting or social clubs, to name a few. In other words, they are assets that are ordinarily used or kept mainly for personal use or enjoyment.
What are the new rules?
The new rules were legislated in the Superannuation Industry Supervision Act Sub Regulation 13.18AA.
These rules stipulate that the trustee of any SMSF:
• must not lease the asset to a related party;
• must not store the item in the private residence of a related party;
• must document their decision in respect of the storage of the item in writing, and keep it for at least 10 years; and
• must insure the item in the name of the SMSF within seven days of acquisition.
• the trustee of an SMSF commits an offence if a related party of the fund uses the item; and
• the transfer of the asset to a related party requires a qualified independent valuation
What are the common traps?
Gold bullion bars are not classified as a collectible or personal use asset. However, bullion coins are if their value exceeds their face value, and if they are traded at a price above the spot price for their metal content. This can therefore vary from year to year, so it’s important to continually reassess whether they classify as a collectible and treat them accordingly, especially in regards to storage and insurance.
Any motor vehicle purchased using your SMSF counts as a collectible. This means you cannot personally drive the vehicle for any reason – including to get it serviced, or for restoration work to be undertaken. An unrelated party is not prohibited from driving the vehicle, however.
Any trustee of an SMSF who gives custody of a fund’s s62A asset to an associate would in effect be entering into a lease arrangement with the associate. This is due to the broad definition of lease arrangement per Section 10(1) of the SIS Act:
“Any agreement, arrangement or understanding in the nature of a lease (other than a lease) between a trustee of a superannuation fund and another person, under which the other person is to use, or control the use of, property owned by the fund, whether or not the agreement, arrangement or understanding is enforceable, or intended to be enforceable, by legal proceedings.”
All collectibles and personal use assets must be insured irrespective of their value. The insurance policy must be taken out in the name of the fund, and cannot be added onto an existing home and contents policy.
As an example, artwork stored in a professional art gallery is likely to be covered under the gallery’s insurance policy. However, this cover is not sufficient to comply with this new legislation, and the artwork must also be insured by a policy in the name of the fund.
Transfer to a related party
Trustees are able to sell a collectible and personal use asset to a related party. However, the sale must be made at a market price as determined by a qualified independent valuer. The purpose of this is to ensure that the related party is not receiving a benefit, and that the transaction does not cause detriment to the fund by selling at a price below market value.
If a collectible and personal use asset was purchased prior to 1 July 2011, and is transferred out of fund prior to 30 June 2016, the transaction does not need to be supported by a qualified independent valuation. The transaction does, however, still need to be at market value and on arm’s length terms.
It is of course possible to adhere to all of the new legislative requirements for collectibles and personal use assets without removing any of these items from your clients’ funds.
However, it may be worthwhile assessing the difficulty level in making any of the required changes needed to remain compliant before the end of the transitional arrangements on 30 June 2016.
You may find it could be much easier and far less costly to simply transfer the assets out of their funds before this date.
Deanne Firth, director, Tactical Super