Why art and jewels have lost their SMSF sparkle

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Collectables have provided some self-managed superannuation funds with a valuable way to maximise diversification.

They have been particularly useful for trustees with special expertise or interest in a specific category, such as artworks, jewellery and wine.

Unfortunately the potential for abuse - in particular, the temptation to buy them for personal use rather than solely as an investment - prompted the Cooper review to recommend last year that SMSFs be banned from investing in collectables.

smsf

The government rejected this advice, but with a sting - strict regulations about the purchase, maintenance and sale of collectables. Rule breaches can cost a maximum of $1100 for each breach.

It's all in a new Section 62A of the Superannuation Industry (Supervision) Act.

While the legislation hadn't been approved at the time of writing, the date of effect was set at July 1, 2011. Collectables acquired on or after that date are covered immediately, while those held at June 30, 2011 will be covered from July 1, 2016.

As Meg Heffron, a principal with SMSF advisory group Heffron Consulting, notes, it presumably isn't a coincidence that the new section is right next to Section 62, which spells out that super investments must have the sole purpose of generating retirement savings.

As for Section 62A itself, this provides for the imposition of regulations relating to SMSFs making, holding and realising investments in a specific list of assets.

The list covers artwork, jewellery, antiques, artefacts, bank notes, coins, medallions, stamps, first day covers, rare folios, manuscripts, books, memorabilia, wine, spirits, motor vehicles, recreational boats, memberships of sporting or social clubs, and anything else that is usually kept for personal use or enjoyment.

This is slightly more comprehensive than the original list which didn't include bank notes or spirits.

It referred only to cars, not motor vehicles.

The circumstances under which these assets may be bought, held and sold by an SMSF are set out in new Regulation 13.18AA. As Heffron explains, this focuses on prohibiting interactions with so-called related parties as defined by the "in-house assets" rules.

Related parties are mainly members of the fund, relatives of members (including spouses of relatives), partners in a partnership, and a company or trust controlled by the members.

The new regulations specifically state that collectables must not be leased to related parties, or stored in the private residence of a member or a related party.

This is a major break from past practice. Where and how collectables are to be stored has to be properly recorded and then kept for at least 10 years.

The collectables must be insured in the name of the SMSF within seven days of acquisition. If the collectables are eventually sold or transferred to a related party, the transaction must be done at the market value determined by an independent valuer.

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Peter Freeman is a former managing editor of The Australian Financial Review. He runs his own self-managed super fund.

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