Tips and traps of owning artworks and collectables in an SMSF

The total amount of assets invested by SMSFs as at June 2020 was $733 billion, with roughly $342 million is invested in artworks or collectables¹. For those considering of transferring their favourite painting or putting a collection of football jumpers in an SMSF, individuals need to think again about what they can and can’t do. If a member or a relative owns it, then the asset can’t be transferred or sold to the SMSF - even if it’s at market price. In contrast, if the fund purchases an artwork or collectable from a non-related third party, it may be all acceptable.

Any collectables, artworks and personal-use assets owned by the SMSF must comply by strict rules that apply to their acquisition, storage, insurance and use. These rules are there to make sure members and their associates do not obtain a current-day benefit from the item, and that the artwork or collectable contributes to the superannuation benefits for members on retirement or for their dependants on their death.

What is an artwork or collectable?

An artwork or collectable may mean different things to different people. For example, some people collect old bottles while others may have an interest in stamps or coins. The legislation is quite specific and applies to the following:

• artwork, such as a painting, sculpture, drawing, engraving or photograph, or similar items, including a reproduction
• jewellery
• antiques
• artefacts
• coins, medallions or bank notes, such as:
  • coins and banknotes are collectables if their market value exceeds their face value;
  • bullion coins are collectables if their market value exceeds their face value or nominal value, and they are traded at a price above the spot price of their metal content
• postage stamps or first-day covers
• rare folios, manuscripts or books
• memorabilia
• wine or spirits
• motor vehicles
• recreational boats
• memberships of sporting or social clubs

Storage, use and access

Any SMSF that holds artwork, a collection or personal-use assets must comply with the rules that restrict where they are stored and who uses and accesses them.

An asset cannot be displayed in a private residence of a related party, however, it is possible to store it on the related party’s property - but not physically in their private residence. The storage area could include a garage, shed or similar structure.

Examples

1. Artwork held within an SMSF cannot be stored or hung in the private residence of a related party. However, it can be stored, but not displayed, in the garage located on the property.
2. Restrictions on the use of the asset also extend to a vintage car, which may be owned by the SMSF. This includes related parties driving the car, even to take it for servicing or to have restoration work undertaken. However, a non-related party is able to drive the vehicle to have it repaired or serviced, if required.

The trustee of the SMSF is required to retain written information concerning the storage of the artwork or collectable which must be retained for at least 10 years after the trustees make the decision. This may help ensure that appropriate storage has been considered in line with the legislation, and that the investment is directed towards producing retirement income or capital gains rather than one that provides current-day enjoyment for its members.

Insurance

Any artwork, collectables and personal-use assets, with the exception of memberships of sporting and social clubs, must be insured in the name of the SMSF trustee within seven days of acquisition. As part of the decision to invest in collectables and personal use assets, trustees need to consider the cost of insurance and whether the asset can be insured.

Assets may be insured under separate policies or collectively under the one policy, but it must be in the name of the fund. It is not possible to insure the assets as part of a trustee's home and contents insurance.

Sale of the artwork or collectable

If the asset is sold or transferred to a related party, it must be sold at its market price as determined by a qualified independent valuer. A valuer should be qualified by holding a formal valuation qualification or has specific knowledge, experience and judgment as recognised by their particular professional community. Independence means that the valuer should not be a member of the fund or a related party of the fund, such as an investment partner.

Artworks and collectables – not for every SMSF

It may seem that a collection, famous artwork or a personal-use asset can constitute a useful investment of an SMSF. However, trustees’ enthusiasm may be dampened by the restrictions placed on the acquisition, use and storage of the investment. Nevertheless, there are many funds that see the investment value of the asset and how it can diversify the fund’s investment portfolio.

¹ Australian Tax Office