By Tim Miller
Miller Super Solutions
30 June 2016 is not just the end of the current financial year, it’s the end of an era. That’s when the transition period ends for any SMSF that held ‘Collectable and Personal Use assets’ prior to 1 July 2011. That’s right no more Penfolds pension payments or driving the grandkids to the movies in the Model-T Ford. Fair to say you hope no-one was doing that regardless but now is the time to take stock. Whilst the asset class is relatively minor as a percentage of overall SMSF assets, we all know clients who have items that fit into the category and it’s likely that we all know clients who held assets prior to 1 July 2011 that are likely to fail the requirements if they don’t act soon.
So what do we have to ensure?
Assets must not be leased to a related party
An SMSF is unable to lease an asset to a related party, including lease arrangements which by their nature are less formal.
As an example, a lease arrangement was often used when trustees of an SMSF displayed artwork in their home. Prior to 2011, it wasn’t necessarily a breach of legislation to have a lease arrangement for assets maintained within the home if the Fund was receiving arm’s length consideration for the asset
There is no issue with a SMSF owning and leasing collectable assets so long as the lease is not to a related party, for example, where artwork is leased to a gallery, so long as the gallery is not owned by a ‘related party’ this is fine.
Item must not be stored in private residence of related party
Private residence incorporates all the land on which the private residence is maintained and any other building on that land such as sheds or cellars.
The regulations do not prohibit these assets from being stored at other premises owned by a related party such as business premises or a storage facility. Storing an asset does not allow an asset to be displayed where it can be viewed by the public or employees. So to again use artwork as an example, it is not considered ‘stored’ if it is on display in the office reception.
Decisions on storage of item must be documented
If a fund chooses to store rather than leases an asset, it must record in writing the reasons for storing the asset and retain those records for 10 years.
The Governments reasoning is by requiring the trustees to records their reasons for storing the asset it will ensure they have considered as part of their investment objectives and strategy, that the asset is appropriate and that by storing the asset it retain or enhance its value and thus will be beneficial for the members or their beneficiaries at retirement or death.
Item must be insured in fund’s name
Asset, excluding memberships, must be insured within 7 days of acquisition and the insurance must be in the name of the Fund.
This provides a protection mechanism for a member’s retirement benefit in the event that the asset is damaged or suffers some other insurable event, as the expectation is that a member’s benefit will not be lost.
With the insurance to be in the name of the Fund it ensures that assets are maintained separately from other assets of the Trustee which gives greater integrity to the process and satisfies other superannuation law requirements to maintain assets of the fund separately from personal assets.
It is not acceptable to insure the assets under the member’s general household insurance policy, which of course would now prove difficult given assets can’t be stored at private residence.
Insurance is of course another consideration and cost that will raise questions about the legitimacy of certain assets with regards to providing for a member’s retirement benefit.
Items must not be used by a related party
Related parties are prohibited from using collectable and personal use assets, even if that use is insignificant or incidental. Displaying an asset, such as a piece of art or an antique item is considered use.
Trustees holding these assets need to ask themselves if there is any likelihood that they, or a related party, are likely to use the asset beyond 30 June 2016, even if that use is incidental or insignificant, and if the answer is yes then they should reconsider who holds the asset and perhaps consider selling it to themselves or the related party. This leads to the next requirement.
Independent valuation of assets
When an SMSF sells or transfers an asset to a related party it is required to have the value of the asset determined by a qualified independent valuer.
Having an independent valuer safeguards the integrity of the transaction from an arms-length perspective. Under existing laws the trustees must still adopt an arm’s length approach to all transactions however they have capacity to value the asset as they see appropriate.
Collectables and personal use assets are a legitimate asset class for an SMSF to invest in however the rules surrounding this type of investment are prohibitive, particularly when dealing with related parties, so trustees must take care to get things right as penalties can and no doubt will be applied.
So now, not June 2016 is the time for those that held the assets at 30 June 2011 to be reminded of the obligations that await post 30 June 2016 and start preparing to comply prior to that date. It’s also a good opportunity to remind trustees that the law prohibits an SMSF from buying any collectable or personal use assets from a related party, whether directly or via an in-specie contribution.
General advice warning:
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
Miller Super Solutions is the SMSF education & training creation of Tim Miller, assisting SMSF professionals and trustees with the practices associated with establishing, running and ultimately closing down SMSF’s.