Want to enjoy your art? Don't put it in a self-managed super fund
Investing through a self-managed super fund (SMSF) means you can invest in anything from pink diamonds to Porches, but there are strict rules you must adhere to.
When looking at what kind of assets your SMSF can actually buy, the first step is to remember the one key rule that is firmly cemented into SMSF regulation: the sole purpose test.
This means all investments must be for the sole purpose of providing retirement benefits for members of the fund.
Simply put, no relatives or associates can gain any immediate benefit from your fund's assets or activities.
It is essential to understand the restrictions that are in place surrounding SMSF investments before setting your heart on an asset that may not align with these rules.
All investments by your SMSF must be made on a commercial arm's length basis.
The ATO breaks this down by clarifying that the purchase and sale price of fund assets should always reflect true market value, and the income should always reflect a true market rate of return.
Conducting transactions at arm's length helps you to protect your retirement benefits, and is in place to make sure that you get appropriate returns on the fund's investments.
If your investments are not at arm's length, the value of your SMSF assets will suffer, and there could be serious consequences for your fund - and to you personally.
Generally, the ATO specifies that you can't buy assets from, or lend money to, fund members or other related parties.
If you don't comply with the investment restrictions, the Australian government has the authority to impose significant penalties on you as the fund holder, including disqualifying you as a trustee or prosecuting you.
If you are unsure of the rules, you should consult an SMSF professional to ensure your investments comply with the law.
The most common and compliant SMSF investment portfolios include:
Residential, commercial, industrial or NDIS property.
Listed Australian shares, overseas listed shares, or shares in private companies with non-related parties.
Property purchased with borrowed funds, or property partnerships with non-related parties.
Crypto currency investments.
Cash management accounts, or term deposits.
You can also invest in more interesting, less mainstream assets such as pink diamonds, gold bullion and collectible cars.
Assets like boats, artworks and wine can technically qualify as an SMSF asset, however the regulations surrounding these types of assets have become so strict that you need to be absolutely certain this is the asset you want to invest in.
To illustrate just how complex and strict the regulations that a personal asset falls under, take art.
In the case of an SMSF investment, the artwork can be owned but it must be completely insured, must be stored in a specific storage location outside of the family home, and if a gallery rents the piece from you to display and it falls under their insurance policy, you must take out additional cover in the fund's name.
Also, if you hang the artwork in your business space, even if you pay rent, you are breaking the law and can face serious consequences.
This is just the tip of the iceberg for when it comes to personal investments.
One of the main differences between these more exotic investments and the more traditional ones such as properties is the leveraging: it is near impossible for an SMSF to leverage anything but a property.
So, while it is common and fairly straightforward to turn $200,000 into a $650,000 investment property using an SMSF loan, the same does not apply to a classic car or gold bullion for which they are currently no commercial lenders.
In fact, every asset that an SMSF can invest in is usually restricted in some way, especially if is does not meet the sole purpose test to benefit everybody in the fund.
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