Investing in art is one way to diversify your SMSF portfolio – especially because the asset class is generally less volatile than stocks. And if you catch a rising artist on the way up (like the example of Del Kathryn Barton in Alistair Bailey’s column last week [1]), you can also realise some extraordinary capital gains.
But let’s face it, owning an artwork in a self managed super fund [2] is not much fun. Back in July, I explained that when your SMSF invests in an artwork or collectable, you can’t personally ‘enjoy’ that asset. Rather, you must store it away from your home, or rent it to a museum or corporation of some sort (read, Don’t get stung by new SMSF artworks and collectables rules [3]).
But, once you reach retirement age, theoretically, you can withdraw that artwork or collectable, which means it’s then yours to enjoy.
As with many things within super, such a transaction is tricky. So how do you carry it out without getting into trouble?
First of all, you must establish why you’re withdrawing the asset:
- Maybe it’s because you can’t satisfy the new super rules about artwork and collectibles, which set valuation and storage requirements. If that’s the case, you have until June 2016 to remove the assets from your fund. Perhaps you can’t get appropriate insurance. Under these circumstances, it may be best to remove the asset from your SMSF.
- Maybe you want to make a benefit payment to yourself. If you want to keep the artwork, you’ll have to pay yourself a lump sum because pension income payments can only be made with cash or cash equivalent (such as an electronic funds transfer). Remember that you can only pay yourself a lump sum benefit from your super fund if you satisfy a Condition of Release. [insert link to resources centre) Appropriate amounts of benefits tax – and other taxes such as Capital Gains Tax, which I’ll discuss below – have to be considered at this point.
- Maybe you want to gift the asset prior to your death. It’s often advantageous to deal with your super assets prior to death because after the age of 60 you can take benefits out of your super fund tax-free, whereas after death your non-dependants will likely have to pay tax on the Taxable Component portion of the benefit.
Whatever your reason for taking the artwork or collectible out of your fund, you now need to make sure you follow certain steps in order to comply with the super laws.
The new super rules about these types of assets demand that when artwork or collectables are paid in specie or sold to a related party of your fund (which includes fund members, their relatives and other entities), then you must have an independent valuer assess the asset.
The valuer must provide a market value for the nominated asset, which is then used by the super fund in determining adjustments to account balances and any tax issues.
It would make sense that this valuation is provided before the ownership of the asset is transferred, however there is nothing in the super laws that specifically makes this demand. In order to ensure you don’t run into problems, make sure the valuer is an independent, acknowledged expert in the particular asset class.
The Australian Tax Office is expected to release a ruling on these points regarding SMSFs at some stage, and we’ll bring you up-to-date with any changes or clarifications they announce.
Once the ownership of the asset is changed into your own name, then the trustees will have to consider the capital gains tax implications on the SMSF as a result of the sale or benefit payment of the artwork or collectable. (The asset will not incur any tax liability for the fund if it is being wholly used to pay a pension.)
The next step is for the trustees to amend the fund’s asset register to reflect that the asset is no longer owned by the fund.
In some cases you may need to review your fund’s investment strategy and how it has been implemented. If, after the asset is removed from the fund, the fund no longer owns any artwork or collectables, but the investment strategy says that these asset classes will be held, then clearly this will need to be addressed.
Finally, if a benefit is being paid out in specie then you’ll need to make sure all trustees complete the relevant documentation, such as a Payment Summary. They will also need to make sure that member account balances are appropriately adjusted.
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.