On 18 May 2011, the Government released draft Regulations outlining rules for self managed superannuation funds’ (SMSFs) investment in collectables and personal use assets.
Back in 2009, the Government commissioned an independent review of the governance, structure and operation of the superannuation system – the Super System Review (Cooper Review).
The final report of the Cooper Review recommended, amongst other things, that SMSF trustees be prohibited from investing in collectables and personal use assets because of the risk that the investment may be made for current day benefit rather than retirement income purposes.
The Government rejected the recommendation on the basis that it would restrict investment choices for SMSF trustees but it announced that it would tighten the rules to ensure that trustees could not gain a current day benefit from the assets.
Accordingly, the Government has now introduced the proposed regulations to amend the Superannuation Industry (Supervision) Regulations 1994 to include rules with which SMSF trustees must comply when investing collectables and personal use assets.
What are “collectables” and “personal use assets?”
Collectables and personal use assets are: artworks (within the meaning of the Income Tax Assessment Act 1997 (Cth)), jewellery, antiques, artefacts, coins or medallions, postage stamps or first day covers, rare folios, manuscripts or books, memorabilia, wine, cars, recreational and memberships of sporting or social clubs.
What are the proposed regulations?
The proposed regulations specify that each trustee of a SMSF commits an offence if the fund:
- enters into a lease arrangement with a related party in relation to the collectable or personal use item;
- stores the collectable or personal use item in the private residence of a related party (note this means that SMSF trustees can store these assets in premises owned by a related party provided its not the home of the related party);
- does not keep a record of the reasons for the decision on where to store the collectable or personal use assets;
- does not insure the collectables or personal use assets within 7 days of acquiring the asset;
- uses an item of jewellery, a car, a recreational boat or a membership of a sporting club; and
- disposes of a collectable or personal use asset to a related party at a price other than market value determined by a qualified independent valuer.
Each regulation is a strict liability offence. This means that once a breach of a regulation is established the intention of the trustee at the time of the breach is irrelevant.
When are the proposed regulations due to commence?
The proposed Regulations are due to commence on 1 July 2011. SMSFs that invest in collectable or personal use assets from 1 July 2011 will have to comply with the new regulations
There will be a transitional period for SMSFs with existing investments in collectables and personal use assets.
SMSFs that currently have collectables or personal use assets will have until 1 July 2016 to either ensure it complies with the regulations or alternatively sells the investment.
What does this mean for SMSF investment in these assets in the future?
Going forward, SMSF trustees will need to carefully consider whether they will be able to comply with the regulations prior to investing in a collectable or personal use asset.
Some trustees may decide that complying with the new regulations will be too onerous and may, as a result, cease investing in these types of assets going forward.
For example, the proposed regulations require trustees insure the collectable or personal use asset within 7 days of acquisition. Trustees may find complying with this regulation very difficult. Some licensed insurers may not offer that kind of insurance or may not offer that kind of insurance at reasonable rates. If the trustee fails to insure the asset within 7 days of acquisition it will breach the regulation. Further, because breaching a regulation is a strict liability offence, the trustee will not be able to use the fact that they could not obtain insurance as a defence and may be subject to a penalty of $1,100.
The regulations regarding storage could also pose some problems for trustees of SMSFs. For example, each time the storage location of the asset changes presumably the trustee will have to create a new record of the reasons for the decision on where to store the asset.
Submissions regarding the proposed regulations close on 14 June 2011.