AFR article... crosses over to the Whiskey thread!
Collectibles lose their gleam for SMSF trustees as new rules come into place in July
From July 1, new legislation takes effect that will tighten the rules around collectibles and ensure trustees make investment decisions based solely on their potential to deliver retirement benefits, writes Brendan Swift.
Graeme Colley, the director of education and professional standards at the SMSF Professional's Association of Australia, ...
Graeme Colley, the director of education and professional standards at the SMSF Professional's Association of Australia, says the new requirement that collectibles have to be insured is proving to be the biggest challenge for trustees Louise Kennerley
by Brendan Swift
Turning the many pleasures of retirement – vintage cars, fine art and wine collections – into investments for retirement has been a perk enjoyed by a number of self-managed super fund trustees.
Not any more. From July 1, new legislation takes effect which will tighten the rules around collectibles and ensure trustees make investment decisions based solely on their potential to deliver retirement benefits.
"Even though there were quality assets selected in most funds, there was simply no doubt that people were getting at least some form of pre-retirement benefit out of that," says Ernst & Young executive director and Self-managed Independent Superannuation Funds Association chairman Chris Balalovski.
"People were using it to support some of their hobbies and their weekend passions for vintage motor vehicles and Stratocaster guitars from the 1950s, which they would use and play and derive a lot of pleasure."
The value of collectibles has always formed a small proportion of Australia's $590 billion SMSF sector but the stories are colourful. Balalovski says he remembers one investor had a few hundred barrels of whisky in his fund.
"What happens at pension time – how is he going to receive his minimum pension payment? Is it a few millilitres of whisky every now and then?"
BIG DROP IN VALUE
However, the new legislation has prompted a significant turn-around. The value of collectibles has almost halved to about $400 million since the five-year transition period was announced in 2011 following the Cooper review.
"The art market in particular suffered and there was a huge outcry from dealers talking about flooding of the markets with people divesting themselves of artworks including sculptures and photos."
The new laws apply to a wide range of collectibles such as artwork, jewellery, antiques, artefacts, coins, postage stamps and even memberships of sporting or social clubs.
From July 1, collectible assets cannot be stored in the private residence of a related party (such as a member of the SMSF) or leased to a related party (including formal and even informal arrangements where money is not exchanged). However, this means a collectible such as a piece of art can still be stored in a related party's business premises although it probably should not be displayed, as this might deem the asset to have been used before retirement.
The storage method must also be formally documented in writing, including the reasons for the decision, and that information kept for 10 years.
Graeme Colley, the director of education and professional standards at the SMSF Professional's Association of Australia, says the new requirement that collectibles have to be insured is proving the biggest challenge for trustees although most now have their arrangements in order.
"There doesn't seem to be any members wanting to dump things on to the market … they've had five years to get into action," Colley says.
SMSF trustees receiving an account-based pension have greater flexibility to transfer their collectibles out of the fund, according to admin company SuperGuardian. Trustees can complete an in-specie partial commutation of the asset to the member and its value will count towards the members' minimum pension requirements.
While collectibles transferred to a related party must be done at arm's length and at market value, from July 1 a qualified independent valuer will also need to determine that valuation.
PROOF OF BENEFITS
Trustees will also have to think hard about how collectibles fit into their investment strategy, which sets out the SMSF's investment objectives and specifies the types of investments the fund can make. Other considerations include the risk of acquiring the asset, diversification, liquidity and the ability of the fund to meet its ongoing obligations.
Collectibles represent highly specialist territory and investment returns are difficult to predict as a broad asset class.
"A lot of people investing in this space are professionals in that area," says Perpetual Private head of strategic advice Colin Lewis. "Several years ago I knew a fellow who worked with gold bullion and so he was an expert in that space, and gold bullion was in his SMSF."
(Colley says auditors are seeing more SMSF investments in gold ingots, which are stored in a safe, but these are not defined as collectibles, unlike gold coins, medallions or jewellery.)
While collectibles are best left to the experts, Lewis also notes that the five-year transition period from 2011 not only encouraged trustees to sell but also halted much new investment.
"I don't know anybody who has added a collectible to a fund since then," Lewis says, noting that the new laws applied immediately from 2011 for newly acquired collectibles.
Trustees who fail to comply with the new regime face considerable penalties and shouldn't expect any further leeway.
"The tax office has basically said don't come to us on July 1, you've had five years to get your house in order, we're not going to be very lenient in that regard," Lewis says.
Each breach of the new legislation can attract a penalty of $1800 per trustee – although this can be applied multiple times. There are also existing general administrative penalties that can attract fines of up to $10,800 per trustee for each offence.
"There's too many self-Indulgent wieners in this city with too much bloody money! Now, if I was driving a 1967 275 GTB four-cam... "