Collectables and Personal Use Assets in SMSF

Self-Managed Super Funds (SMSFs) in Australia can invest in various assets, including collectables and personal use assets, but these investments come with stringent regulatory requirements.

The Australian Taxation Office (ATO) has established specific rules for SMSFs that own collectables and personal use assets to ensure these investments are made for genuine retirement purposes rather than providing current-day benefits to fund members or related parties.

These regulations cover storage, insurance, usage, and disposal of such assets and are designed to maintain the integrity of the superannuation system. Non-compliance can result in significant penalties, making it essential for SMSF trustees to understand these requirements in detail.

What Qualifies as Collectables and Personal Use Assets?

The Superannuation Industry (Supervision) Regulations 1994 specifically define collectables and personal use assets to include:

Collectables

1. Artwork (paintings, sculptures, drawings, engravings, photographs)
2. Jewellery and gemstones
3. Antiques and artefacts
4. Coins, medallions, and bank notes
5. Postage stamps and first day covers
6. Rare folios, manuscripts, and books
7. Memorabilia and collectable cards

Personal Use Assets

1. Wine and spirits
2. Motor vehicles and motorcycles
3. Recreational boats
4. Memberships of sporting or social clubs
5. Musical instruments
6. Recreational or hobby equipment
7. Other items used for personal enjoyment

These assets are subject to special rules under section 62A of the SIS Act and regulation 13.18AA of the SIS Regulations when they are owned by an SMSF.

Storage Requirements

One of the most stringent requirements for SMSF-owned collectables and personal use assets concerns where and how they must be stored:

Key Storage Rules

1. The asset cannot be stored in the private residence of any related party of the fund
2. The asset must be stored in a manner that prevents any related party from receiving a current-day benefit
3. The decision about where and how the asset is stored must be documented, and this written record must be kept for 10 years
4. Storage options typically include professional storage facilities, bank vaults, or secure business premises (not owned by a related party)

The prohibition against storing collectables in a related party's residence is absolute—there are no exceptions. This is to prevent fund members or their relatives from enjoying or displaying these assets, which would constitute a current-day benefit.

"A member's private residence includes any property where a related party has the right to use all or part of the property as a residence, even if they are not currently residing there."

Insurance Requirements

Insurance is another critical requirement for collectables and personal use assets held by SMSFs:

1. The collectable or personal use asset must be insured in the name of the SMSF
2. Insurance must be arranged within 7 days of the asset being acquired by the fund
3. The insurance policy must provide adequate coverage for the asset's value
4. The SMSF must be the beneficiary of any insurance payout

This insurance requirement helps protect the fund's investment and ensures that if the asset is damaged or destroyed, the fund (not any individual) receives the compensation.

Insurance Documentation

SMSF trustees must keep records of the insurance policy, including:

1. Policy documents showing the SMSF as the insured party
2. Proof of payment of premiums
3. Regular policy renewal documentation
4. Evidence that insurance was arranged within the required 7-day timeframe

Usage Restrictions

Strict usage restrictions apply to collectables and personal use assets owned by an SMSF:

1. The asset cannot be leased to or used by a related party of the fund
2. The asset cannot be leased to any entity controlled by a related party
3. The asset must not provide any current-day benefit to fund members or related parties
4. The asset can only be displayed on premises owned by a related party if it's used exclusively for business purposes (not in any area used for private purposes)

These restrictions are designed to ensure that assets are acquired and maintained solely for their investment potential, not for the personal enjoyment or use of fund members or their relatives.

"Business premises" means premises used wholly and exclusively in one or more businesses carried on by an entity. This excludes any part of the premises used for private or domestic purposes.

Valuation Requirements

Proper valuation of collectables and personal use assets is crucial for SMSF compliance:

1. All collectables and personal use assets must be valued at market value for reporting purposes
2. Valuations must be conducted by a qualified independent valuer when an asset is disposed of to a related party
3. Annual valuations are required for financial statements and reporting to the ATO
4. The valuation methodology must be documented and appropriate for the specific type of asset

Qualified Independent Valuers

When selecting a valuer, ensure they have:

1. Formal valuation qualifications
2. Membership in a relevant professional body
3. Experience with the specific type of asset being valued
4. No financial interest in the transaction or relationship with the parties involved

The ATO scrutinizes transactions involving collectables and personal use assets, particularly those involving related parties. Having proper, independent valuations is crucial for demonstrating compliance.

Documentation Obligations

SMSF trustees must maintain comprehensive documentation for collectables and personal use assets:

1. Written records of trustee decisions about storage arrangements
2. Insurance policies and premium payment receipts
3. Acquisition documentation, including purchase prices and dates
4. Valuation reports, especially for disposals to related parties
5. Disposal documentation when assets are sold or transferred
6. Evidence that assets are not being used by related parties

Most of these records must be kept for a minimum of 10 years and should be readily available for fund auditors and ATO inspections.

"Documentation is your best defense in the event of an ATO audit. Thorough, contemporaneous records demonstrate your commitment to compliance with the regulations."

Compliance and Penalties

Non-compliance with the regulations for collectables and personal use assets can result in significant consequences:

Potential Penalties

1. Administrative penalties: Up to $13,320 per breach (as of 2023-24) for each individual trustee
2. Direction to rectify: Mandatory orders to correct the breach within a specified timeframe
3. Education direction: Requirement to complete an approved SMSF trustee course
4. Non-complying fund status: Loss of tax concessions, with fund assets taxed at 45%
5. Civil and criminal penalties: For serious breaches, including potential prosecution

The ATO takes a firm stance on compliance with these regulations. During the annual SMSF audit, auditors specifically check for adherence to these rules, and breaches must be reported to the ATO.

Conclusion

While SMSFs can invest in collectables and personal use assets, the regulatory framework is designed to ensure these investments are made for retirement purposes rather than current enjoyment.

Key points to remember about collectables and personal use assets in SMSFs include:

1. Assets cannot be stored in the private residence of any related party
2. Assets must be insured within 7 days of acquisition in the name of the fund
3. Assets cannot be used or leased by related parties
4. Proper valuation and documentation are essential
5. Disposal to related parties requires independent valuation
6. Strict penalties apply for non-compliance

Given these stringent requirements, SMSF trustees should carefully consider whether investing in collectables and personal use assets aligns with their fund's investment strategy and whether they are prepared to comply with all the associated regulations.

For trustees who do choose to include these assets in their SMSF portfolio, implementing robust compliance processes is essential to avoid penalties and ensure the fund maintains its complying status.