Gold and silver in your SMSF — an auditor’s perspective
The inclusion of gold or silver in an SMSF’s portfolio sets in train a series of questions for the auditor. No trustee wants a last-minute train wreck over these investments. For some products, the rules are clear-cut. But what about bullion? Is this ever considered to be a collectable asset? The audit requirements hinge upon this question — and some results are surprising.
If physical gold or silver held within an SMSF is deemed to be a collectable or personal use asset, the strict requirements of Superannuation Industry (Supervision) Regulation 13.18AA apply to that investment.
The collectables route
Under these rules, the auditor must obtain sufficient appropriate evidence that the fund trustee:
- Does not lease the asset to a related party (note: a “lease” for this purpose includes any related-party use of that investment).
- Does not store the asset in a related party’s residence (a commercial storage facility is generally required to ensure there is no private use).
- Documents storage decisions in writing and keep these decisions for at least 10 years.
- Insures the item in the fund’s name within seven days of acquisition.
- Arranges for the asset to be valued by a qualified, independent person prior to any transfer to a related party.
The non-collectables route
If the gold or silver is not a collectable or personal use asset, the auditor will content themselves with assessing the investment’s:
- Value at year-end – usually verifiable against prices published by the bullion provider.
- Ownership – confirmed by a storage facility’s annual holding statement or the initial invoice.
- Storage and physical evidence – if the investment is not held within a commercial storage facility, the auditor will assess the security measures implemented by the trustee, including whether an independent physical check of the precious metal is warranted.
- Insurance – it is important to note that precious metals stored in a home safe can be insured. If precious metals comprise a significant part of the SMSF’s total investment, an auditor may recommend insurance in the fund’s best interest. If the bullion is stored with a provider, insurance cover is usually extended with the facility.
So, let’s start with the obvious question, at which the two routes clearly divide.
Is bullion a collectable?
Collectable and personal use assets include a wide variety of investments, including jewellery, antiques and artefacts. The ATO assists by clarifying that coins and banknotes will be deemed collectables if their value exceeds their face value. As we know, “money” is not necessarily money at all. Grandpa’s imperial coin collection would certainly fall within this category, as will collector coins, specimen coins and proofs. Coins with historical or atheistic value are referred to as “numismatic”. Such investments are headed immediately down the collectables route.
But what about bullion coins?
Again, the ATO provides some guidance:
“Bullion coins are collectables if their value exceeds their face value and they are traded at a price above the spot price of their metal content.”
Clear as mud? Not quite. Bullion coins generally trade at a premium above the spot price of their metal content due to fabrication and retailing costs. Bullion bars trade closer to the metal’s spot price, though a premium still usually applies.
Does this premium seal the fate of bullion as a collectable asset?
This SMSF auditor doesn’t think so.
Bullion dealers price both coins and bars on their spot value alone. Where the bullion’s buyback price is derived from the spot value and the coin or bar trades at this amount plus a standard mark-up for metal preparation, it is reasonable to conclude that no personal use or collective attributes are involved. GST Ruling 2003/10 supports this view. This ruling creates a tax exemption for precious metals, provided these satisfy certain purity requirements and exist in a tradable form. Though within a different context, the ruling highlights a common-sense principle. If bullion bars or coins derive their value in the marketplace as a tradable form of precious metal, they will not be considered a collectable asset.
For example, the Royal Canadian Mint Maple Leaf coin has more complex engraving than the Eureka bullion coin. This serves as a security feature and the coin is internationally recognised as the purest standard of tradable gold. It trades at a face value above the Eureka, but its buyback price is the same. The Canadian Maple Leaf’s price does not vary with the year of the coin and is derived from the metal’s spot value.
Take care, however — if bullion derives its value by some gauge other than the spot price, the investment is headed back to collectable territory. Bullion coins such as the Lunar Dog Coin or the Rectangular Dragon Coin have a more pronounced numismatic value. Though distinguishable from proof coins, the bullion version is also commemorative and the mintage is often limited. SMSFs pay a significant premium to invest in these products, despite the buyback value continuing to reflect spot prices. So, while bullion dealers do not recognise a collectable value in these coins, it is likely that the broader marketplace will.
The auditor will monitor all forms of bullion held within the SMSF annually. If the investment is deemed to have acquired intrinsic value apart from its form as a tradable precious metal, it will be re-classified as a collectable for the purposes of Regulation 13.18AA.
Should trustees wish to avoid the collectables radar when holding gold or silver bullion in their SMSF, it may be advisable to select a form of bullion with minimal numismatic value. If SMSF trustees are seeking to minimise costs and maximise the return on the fund’s precious metal investment, this is a logical approach. Remember, auditors will assess the collectable status of gold and silver bullion held within an SMSF each year. Though a certain bullion coin may be considered non-collectable at one point, the status of that product may change.
Naomi Kewley, managing director, Peak Super Audits