Buying collectables through your SMSF is strewn with a myriad of rules that you should be made aware of. The rules have changed as of July 1, 2011 and if you have bought collectables for your SMSF before this date then you have until June 30, 2016 to comply with the new rules.
So what is the definition of a collectable?
A collectable is a thing that might be otherwise considered personal use assets or items you might purchase as an investment.
*This is a list of such items and some definitions:
- artwork – including paintings, sculptures, drawings, engravings and photographs
- coins, medallions or bank notes coins and banknotes are collectables if their value exceeds their face value
- 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
- postage stamps or first-day covers
- rare folios, manuscripts or books
- wine or spirits
- motor vehicles and motorcycles
- recreational boats
What are some of the pre-existing rules for SMSF collectable investments?
- The SMSF investment strategy for the fund must be agreed upon by all members and documented when the fund is commenced and updated at least once a year or when it is agreed that the SMSF strategy is to be changed. Minutes of all meetings must be kept in writing.
- Collectables could be a part of that strategy, but having a strong knowledge about the items is certainly a consideration. Before making it a part of your portfolio, it must pass the ‘sole purpose’ test. Included (below) is a document from the ATO SMSF link to help clarify definitions and give examples of breaches (contravenes #19-95) that may occur in mishandling collectable assets.
What are the new rules for SMSF collectable investments?
- A decision must be made and documented as to where the item will be stored. The documentation could be in the form of minutes of a meeting by trustees of the fund and the record should be stored for 10 years.
- So you might need some clarification as to where you can keep a collectable investment. If you cannot keep it at your private residence, a related party residence, or at your business, even if you think you will pay market value rent (which you can’t do, by the way because it breaches the ‘arm’s length rule’), then where can you keep the collectable? The best way to know is to check with the ATO to get a final ruling before making a decision on where you can rent, lease or otherwise store a collectable, if in doubt.
- Insurance must be obtained for the item, in the fund’s name, within 7 days of acquisition. (If an item is uninsurable or cost prohibitive insurance, then it may not be a good candidate for a ‘collectable investment’.)
- ‘Arms-length’ rule – The item cannot provide any current or present day benefit. In the context of a SMSF investment, it is for providing exclusive retirement or death benefits in relation to its’ members while not providing a current or present day benefit to any member, including but not restricted to relatives of the fund. (Related parties)
The definition of a related party is the following: An immediate family member, (grand to sibling’s children, including adoptees) including spouses, or business partners including
affiliates or employers, including spouses.
- When selling a collectable item, it must be valued by a qualified, independent valuer.
However, if you sell the collectable before July 1, 2016 then the transaction does not need to be valued by an independent valuer before being sold. The transaction must still abide by the ‘arm’s length’ rule and sold at market value.
This article was created as general information only and not to be considered complete or advice. .