Collectables and personal use assets kept in SMSFs.

Many SMSFs hold collectable and personal use assets because the Fund’s trustees have a leaning towards these assets because of their hobby, expertise or lifestyle objectives.

Collectables and personal use assets including items such as:

• Artwork, including paintings, drawings, photographs and sculptures
• Jewellery, including watches and rings
• Antiques and artefacts, including furniture, rare manuscripts and books
• Motor vehicles, including classic cars and motor bikes,
• model train sets, model boats, fire arms (licensed or not),  
• Recreational boats and aircraft,
• Coins, stamps, gold bullion and silver ingots worth more than their face value
• Wine and spirits, and
• Similar assets that have been purchased to satisfy a member’s hobby or “lifestyle” including memberships of sporting or social clubs.

Notwithstanding that many of these types of investments are very sound in nature and meet the Fund’s Investment Strategy, most of these types of assets are stored at the related party’s private residence, in their garage, on their walls or in their wine cellar. They offer the related party current enjoyment and use, or a “present day benefit” rather than a retirement benefit applicable to all of the Fund’s members.

Factors that help determine that the asset is not held solely for retirement purposes include the fact that often no rental or other income is received although it’s holding costs and maintenance are paid by the Fund.

A SMSF may still hold collectables and personal use assets so long as:

• The investment complies with all other relevant investment restrictions including sole purpose and how the asset has been acquired and from whom,
• The decision on where and how the asset is stored must be documented and the written record kept,
• The asset is insured in the Fund’s name within 7 days of its acquisition. The insurance must be completely separate from the related party’s home and contents policy,
• A related party cannot use or enjoy the asset whilst it is in the name of the Fund, and
• If the asset is eventually transferred to a related party, it must be at market value determined by a qualified independent valuer with all relevant taxes paid by the Fund.  

Storage

Collectables and personal use assets must not be stored or displayed in the private residence, including garages and sheds, of any related party but the asset may be stored only, in premises owned by a related party, provided that it is not their private residence. In other words, the storage or display of the asset must not be in a position that enables a related party to enjoy it.

Leasing

All assets owned by a SMSF should be capable of generating income for the Fund and its members to benefit their eventual retirement.

Because collectable and personal use assets cannot be used or enjoyed by related parties, they cannot generate income from those related parties to the benefit of the Fund. The asset can be leased, however, to non-related parties so long as they are done so on arms-length terms. So, art-work owned by a SMSF can be leased to a business or gallery so long as the business or gallery is not owned by a related party, the lease agreement is at arm’s length and the rental received is market value.

Selling collectables and personal use assets

Collectables and personal use assets may be sold to a related party so long as the sale is at market value determined by a qualified (by way of formal qualifications or expertise) and independent (in the interests of the Fund and not a related party) valuer. 

Transition period to comply with these new rules

If the Fund has held collectable and personal use assets since before 1 July 2011, the Trustees have until 30 June 2016 to comply with these new rules. If the Trustees sell such an asset before 1 July 2016, the sale must be on arm’s length terms and at market value, however the valuation does not have to be determined by a qualified, independent valuer. Any sale after 1 July 2016 must comply with the new rules.

Further advice

Baumgartner Super will be pleased to discuss any aspect of this article with you if required.