With a looming deadline for collectibles and SMSFs, FirstTech* Executive Manager, Craig Day, has prepared a timely update for accountants and advisers on the provisions and rule changes.
Self-managed super fund members need to ensure any collectible or personal use assets held in the fund meet new rules that come into effect on 1 July 2016.
The new rules came in as part of the Cooper Review into the superannuation system and were introduced to address concerns and tighten any grey areas around how super funds can hold assets such as fine art, vintage cars, jewellery, and wine.
Prior to these rules some SMSF fund trustees had been storing assets such as paintings in the private residences of members, arguing that any benefit they received by being able to view the works was incidental only.
The government was also concerned that SMSF fund members were investing in assets that don’t produce sufficient income to be able to fund members’ retirement needs. As a result, restrictions were introduced that tighten the way SMSFs can hold collectibles.
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While the new rules applied immediately to any new collectible and personal use assets acquired by SMSFs on or after 1 July 2011, a five year transition period applied to existing assets held by SMSFs at 30 June 2011. Therefore, the same rules will apply to all collectible and personal use assets held by SMSFs from 1 July this year, regardless of when they were acquired.
What are the rules?
Where a fund holds a previously grandfathered collectible or personal use asset on 1 July, these rules and restrictions will apply from that date:
- The asset cannot be leased to a related party of the fund, such as a member or relative.
- The asset cannot be used by a related party.
- The asset must not be stored at a private residence of a related party.
- The asset must be insured in the fund’s name within seven days of acquisition.
- All decisions in relation to the storage of the asset must be in writing and must be kept with the fund’s records.
If the trustee decides to dispose of a previously grandfathered collectible or personal use asset after 1 July 2016 the trustee will also need to arrange for the asset to be valued by a qualified independent valuer prior to disposal.
Now’s the time to act
Where a client currently holds a grandfathered collectible or personal use asset in an SMSF, advisers should be alerting them to the upcoming rule changes and encouraging them to start considering their options now to avoid any potential breach from leaving it too late.
For example, finding appropriate storage facilities and an insurer willing to insure a precious and fragile asset at a reasonable cost can be both difficult and time consuming. Unless this is sorted out ahead of time a fund may be left in a position of not being able to meet the new rules by the 1 July deadline.
An alternative could be to sell the asset, however depending on the type of asset and the size of the market that too can take a significant amount of time. Another option could also be to sell the asset to a related party or to transfer it as an in-specie benefit payment prior to 1 July. However, in both cases it would be important to ensure the asset is transferred at market value and that the client has satisfied the relevant conditions of release requirements.
The important message is not to leave it until the end of the financial year to take action. Start talking to impacted clients now so that their fund remains inside the rules and continues to assist fund members to achieve their retirement goals.
For a copy of a client friendly version of this article that you can use in client newsletters or meetings, please contact firstname.lastname@example.org.
*FirstTech has been ranked first by advisers for technical support in the Wealth Insights service level surveys from 2008-2017.