WHAT IS IN STORE FOR SMSFS IN 2016?
A timely reminder to prepare for the new rules on SMSF’s holding (Section 62A) collectible assets from 1st July 2016.
One of the many recommendations of the Cooper Review 2009/10 was a ban on investing in collectibles and personal use assets within an SMSF. However, the Government took a slightly softer approach and did not ban them outright, but instead will adopt new rules as to how the SMSF’s must manage them. Insurance, storage and leasing arrangements will all need to be carefully considered.
This has already had a significant impact on SMSF’s making new investments in collectible assets, partly I suspect in response to trustees taking advice on the difficulties involved in managing them within the SIS legislation going forward.
What are collectibles and personal use assets
These items include (but are not limited to) 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. To be blunt, they are assets that may well be kept primarily for personal use or enjoyment rather than their potential increase in value.
The new rules require 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 the document 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 is in breach 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
Common traps and how to manage them
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. Coins can move dramatically up and down in value and, with the requirement to revalue assets every year, this could very well change the classification of coins from year to year, making it more difficult for trustees to manage and comply with the rules, especially the insurance and storage. The best policy
for coins or bullion would be to have them stored securely at all times in any case.
Any motor vehicle purchased by trustees of an SMSF is a collectible. Therefore must not be driven by a member for any reason and must be driven only by an unrelated party. This may of course be the reason why in the last 15 years I have never seen a motor vehicle being owned in an SMSF.
Any trustee of an SMSF who gives custody of an SMSF collectible to an associate would in effect be entering into a lease arrangement with the associate and a lease arrangement must be entered into including considerations given to how legally watertight the arrangement is.
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. This is possibly one of the more difficult aspects to manage considering finding a willing insurer at a reasonable cost.
To give an example artwork stored in a professional art gallery is likely to be covered under the gallery’s insurance policy. However, as ridiculous as this seems this cover is not sufficient to comply with the 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.
To sum it up
It is, of course, possible to comply with all of the new legislative requirements for collectibles and personal use assets. However trustee’s need to carefully consider the holding costs of these assets, as it is not only the actual cost involved, but also the additional burden this places on the fund auditor to ensure that the requirements have been met and all these additional costs may well take the “shine” off holding the investment in the SMSF.
SMSF MANAGER -OPTIMA PARTNERS
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