Self-managed superannuation fund (SMSF) trustees should be aware that the grandfathering relief that currently applies to collectables and personal use assets held prior to 1 July 2011 will come to an end on 1 July 2016.
This means that the strict rules under reg 13.18AA of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’) which apply to collectables and personal use assets bought from 1 July 2011 will soon apply to older such investments as well.
To avoid potential penalties by the Australian Taxation Office (ATO), SMSF trustees with grandfathered investments in collectables and personal use assets will need to carefully review the rules under reg 13.18AA and take appropriate action before 1 July 2016 to ensure their investments are compliant.
Background
The current rules in the superannuation regulation (reg 13.18AA) arose in response to the 2010 Super System Review (also known as the Cooper Review).
The Cooper Review recommended a total ban on SMSF trustees making investments in collectables and personal use assets on the basis that there was an unacceptable risk and that SMSF trustees may be using these assets for present day benefits rather than for the purposes of retirement.
However, the Government at the time rejected the recommendation of a blanket ban and instead legislated the restrictions in reg 13.18AA of the SISR, which on commenced 1 July 2011 to address the concerns raised by the Cooper Review.
Firstly, let’s recap what are collectables and personal use assets?
The regulation (reg 13.18AA) defines these assets as artwork, jewellery, antiques, artefacts, coins, medallions or bank notes, postage stamps or first day covers, rare folios, manuscripts or books, memorabilia, wine or spirits, motor vehicles, recreational boats, and memberships of sporting or social clubs.
The end of grandfathering
When the rules commenced on 1 July 2011, existing investments in collectables and personal use assets were excluded under reg 13.18AA(9) which provides that sub-regs (2)–(7) do not apply to investments in collectables and personal use assets that were held by the SMSF trustee on 30 June 2011.
However, the rules will begin to apply to these ‘older’ assets from 1 July 2016 because reg 13.18AA(9) will cease to be enforced as of 1 July 2016.
Thus, SMSF trustees with grandfathered collectables and personal use assets must conform with reg 13.18AA by July 2016.
Therefore after 1 July 2016, all SMSFs holding collectibles and art (as defined by the ATO) will have to comply with the new rules.
The new rules
Under the new rules, trustees must not lease collectables and personal use assets to a related party of the SMFS or enter into lease arrangements in respect of these assets with related parties.
Trustees also much not store collectibles and personal assets in the home of related parties.
The ATO also has rules around storing artwork in the business premises of a related party. The ATO says that if the SMSF invests in artwork, it can’t be hung in the business premises of a related party where it is visible to clients and employees.
It is also important to keep a record of the reasons for deciding on where to store the assets.
Trustees must also insure collectibles and personal use assets in the name of the SMSF within seven days of acquiring such items, excluding memberships of sporting or social clubs.
Finally, an asset sold to a related must be sold at a market price determined by a qualified independent valuer.
Penalties for contraventions
The prescribed penalty for contravention of any of the above rules is 10 penalty units (ie, $1,800 currently) for each SMSF trustee.
Where contraventions involve a number of items, the potential for a penalty multiplier to apply to the facts should also be considered. Case law, such as Olesen v Eddy [2011] FCA 13 [32], Vivian v Fitzgeralds [2007] FCA 1602 [33] and Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518 [31] suggests that a multiplier approach is unlikely, however, no guarantee can be given about this and SMSF trustees should be very careful to ensure they comply with the rules.
Conclusion
The grandfathered protection for collectables and personal use assets held prior to 1 July 2011 comes to an end in July 2016. Therefore, SMSF trustees with such grandfathered investments will need to take appropriate action to ensure they meet the strict requirements of the SISR prior to 1 July 2016.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
