Can you keep collectibles in your SMSF?

Artworks as collectibles need to be stored and not displayed. Picture: Getty Images

I am regularly asked about what can be held in a self managed superannuation fund (SMSF). Though the rules have tightened in recent times, it is still possible to own collectibles such as art, vintage cars, watches or wine in your fund — you just have to know and comply with the parameters set by the Australian Taxation Office. But those limits are severe.

To put it bluntly, you cannot have these assets in your daily life for pleasure or recreation of any sort.

But there will be times for any investor who might have expertise in a certain field of interest when an exceptional opportunity might appear. If that happens and you don’t have the cash on hand then acquiring the asset for your SMSF could be the way forward.

Under these circumstances it might be worth all the trouble.

Luke Star, an accountant with Star and Associates, says: “We have overseen SMSFs with diverse assets such as water rights or art collections.” 

Star says key issue around collectibles is to separate them from use by “related parties”.

“Related party rules cover a broad range of people associated with the SMSF. From members of the fund, relatives and business partners of members (including their spouse and children) and companies and trusts influenced or controlled by a fund member or their associates.

The related party net also covers employers who contribute to the SMSF and their associates.”

Mark Wilkinson, superannuation partner at BDO in Sydney, says: “The rules effectively require that personal use assets not be purchased from or used by fund members or associates at all — and that they be stored away from the family home.

“It is also worth noting that the transfer of assets from an associate will also breach the provision, so you cannot make in-specie contributions of assets that the fund would otherwise be prohibited from purchasing.”

In other words, you can acquire, lease out and dispose of collectible and personal use assets using an SMSF, but you need to be very careful when dealing with anyone that falls into the category of a related party.

Although collectibles cannot be stored in private residences of related parties, there is an exemption whereby the collectible such as artwork can be stored, but not displayed, in a business premises of a related party.

Assuming you get through the acquisition and storage requirements, there are still more rules to follow. The asset must be insured within seven days of acquisition, the decision where to store the asset must be documented and the asset must be valued every three years. In fact, the rules are so strict such that a collectible car owned in an SMSF cannot be driven for any reason, even to take it for a service as this would breach the related party usage rules.

So why would anyone want an SMSF if there are all these rules around collectibles?

Financial adviser Xavier Lo says: “If an SMSF trustee believes they can derive a capital gain or income by buying and selling collectible watches and is in accordance with the fund’s investment strategy document, it would be prudent for the trustee to work through a checklist to make sure everything is done correctly. This would include getting a stand alone insurance policy over the asset and confirming the watch has been stored in a bank safety deposit box.”

Outside of collectibles and personal use assets, there are other assets that can be purchased in an SMSF that cannot be acquired in retail or industry super fund.

Wilkinson says: “The most common asset is business property which includes farm land and can be purchased from a member and leased back to that member or their business.

“Provided the assets do not breach the SIS Provisions there is almost no limit — we have seen SMSF that have held farms, vineyards, all sorts of livestock including racehorses, machinery of various types and many SMSF become involved in property ownership and in some cases development.”

Star also sees property commonly purchased by SMSFs and adds: “A popular strategy for business clients is to purchase commercial property in an SMSF and lease it to a related business on commercial terms under the business real property exemptions.

“Residential property can also be purchased by an SMSF but can’t be leased to any related party including a related business.

“Any property purchases in an SMSF should be only made with the guidance of expert assistance as there are many parts of the process that need to be accurate and dealt with according to the legislation. Failure to do things correctly could lead to non-compliance and expensive outcomes, including double stamp duty and penalties.”

There is still the ability for SMSFs to hold a wide range of investments but the strengthening of the rules mean the super fund operates for the sole purpose of providing a benefit at retirement for the members.

As multiple layers of rules apply, getting tax, legal and finance advice is strongly recommended before proceeding with any non-standard investment.

James Gerrard is the principal and director of Sydney planning firm FinancialAdvisor.com.au