While owning collectable and personal use assets inside a SMSF may sound appealing, there’s a big catch.
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In the grander scheme of the $889.5 billion in assets controlled by self-managed superannuation funds (SMSFs) in Australia, $591 million is sort of a drop in the ocean.
In fact, it’s less than 1% of total SMSF assets. But that’s the amount of money SMSF trustees are holding in what the Australian Tax Office describes as “collectables and personal use assets” according to the ATO’s March quarter SMSF asset allocation data.
Think of classic cars and motorcycles, recreational boats, oil paintings, bronze sculptures and other artworks, high-end jewellery, antiques and artefacts, rare coins and bank notes, stamps, wines and spirits, and sporting memorabilia. That’s what some of Australia’s contingent of roughly 606,000 SMSFs are holding in their retirement nest eggs on behalf of their members.
For all intents and purposes, the sky is almost the limit when it comes to the exotic types of assets SMSFs are legally allowed to own.
The ATO’s data shows the value of assets in this segment has been steadily increasing over time. Since March 2020, for example, the total value of collectables and personal assets held by SMSFs has risen by more than 40%.
That’s despite the fact that holding these types of assets within an SMSF can be extremely arduous. There are lots of rules. Breaching them risks severe financial penalties, even imprisonment.
There are advantages in holding collectables and personal use assets. Collectables can diversify an SMSF portfolio, potentially reducing risk by spreading investments across different asset classes.
Some collectables have a history of appreciating in value over time, providing the potential for capital growth.
In addition, as registered super funds, SMSFs can enjoy tax concessions including a lower tax rate on income and capital gains. This can be advantageous when it comes to collectables that appreciate significantly in value.
While owning these types of assets inside a SMSF may sound very appealing, there’s a very big catch. Collectables and personal use assets held within a SMSF can’t be used or enjoyed by its members or related parties.
The ATO has a very strong focus in this area. According to the regulator, data collected from Auditor Contravention Reports for the 2022 financial year of audit shows that as at 20 September 2023, 240 contraventions have been reported by SMSF auditors for funds breaching the collectable rules.
Under legislation – outlined within the Superannuation Industry (Supervision) Act 1993 – a superannuation fund must be maintained for the sole purpose of providing benefits to its members upon their retirement, or for beneficiaries if a member dies.
The guiding rule for SMSFs in this regard is the “sole purpose test”.
The primary aim of the sole purpose test is to ensure that all SMSFs only invest for the purposes of providing retirement benefits to the members of the fund, or their dependants in the case of a member’s death before retirement.
In other words, the assets of the fund can’t be used for personal enjoyment or benefit, such as for the purchase of artworks and antiques that can be displayed around the family home, or for vehicles that can be used for everyday purposes.
They must not be stored in the private residence of any related party of the fund; and trustees must make a written record of the reasons for their decisions on where to store the collectables and personal use assets. Proper storage and maintenance records should be maintained and available for audit purposes and must be kept for 10 years.
Under the legislation relating to collectables, collectables and personal use assets must not be leased to any related party of the funds.
A related party of the fund includes the members of the fund, their relatives and any partnerships, partners of partnerships (if a member is in partnership with them), trusts and companies which members of the fund control.
Trustees must ensure that collectables and personal use assets (other than a membership of a sporting or social club) are insured in the name of the fund within seven days of acquisition.
Collectable assets must be regularly valued to ensure that they are recorded at their market value. Accurate valuations are essential for determining the fund's overall value and ensuring compliance with contribution caps. Additionally, it is crucial to have insurance coverage for collectables to protect them from loss or damage.
It’s possible for an SMSF to sell its collectables and personal use assets, but any transfer of ownership to a related party must be done at a market price that’s determined by a qualified independent valuer.
Valuing collectables can be subjective and may lead to disputes with the ATO. An incorrect valuation can impact an SMSF’s compliance and tax status.
Collectables can be illiquid, meaning they may not be easy to sell quickly. This can pose challenges for those needing to access funds in the SMSF.
Properly storing and insuring collectibles can be expensive, reducing the overall returns on the investment.
The temptation to use collectables for personal enjoyment can be high, leading to potential breaches of SMSF rules.
A contravention of the sole purpose test may lead to a super fund being taxed at the highest marginal tax rate, losing its compliance status, and individual trustees facing civil and criminal penalties including fines and imprisonment. Higher penalties apply to corporate trustees.
The important thing is to understand all the rules around holding collectables, and not breaching them. Detailed information on owning collectables and personal use assets within an SMSF is available on the ATO’s website.
Tony Kaye, Senior Personal Finance Writer
September 2023
vanguard.com.au