By Stephen Kuchar
Can a super fund invest in artwork, collectibles or other similar types of investments?
The short answer is "yes".
Although the Cooper Review recommended that investment in these style of assets be prohibited, the Government legislated to enable these to continue, but under specific guidelines. These guidelines were set to ensure that the fund meets its obligations and remains in compliance with superannuation laws, including a sole purpose of providing retirement benefits to members.
Which assets are included?
Superannuation laws specify lists the following assets:
- Coins, medallions or bank notes
- Postage stamps or first day covers
- Wine or spirits
- Motor vehicles
- Recreational boats
- Memberships to sporting or social clubs
In order to hold an investment in one of the assets listed above, the super fund trustees must ensure that:
- The item is not leased or under a lease arrangement with a related party of the fund
- The item must not be stored at the private residence of a related party of the fund
- The trustees must make a formal decision on where to store the item. The decision must be in writing and kept for at least 10 years.
- The item (other than a membership) must be insured, with a policy in the fund's name.
- The item must not be used by a related party of the fund
- The item (or any interest in it) cannot be sold to a related party without a valuation from a qualified independent valuer.
Who is a related party?
A related party is very broadly defined under superannuation laws. It includes (but is not limited to) the members themselves, any relatives of members, and any entities that the related parties control.
Due to the wide ranging definition, a comprehensive list cannot be included in this Super Hot Spot. Please contact your adviser should you wish to discuss your particular circumstances.
Are existing investments subject to the restrictions?
superannuation law contains transitional arrangements for existing investments.
Investments that fall into the categories above, which were purchased before 30 June 2011, are not subject to the restrictions discussed above until 30 June 2016.
What happens if you don't meet the requirements above?
Failing to meet the requirements above has two major implications.
Firstly, the fund's status as a complying fund may be revoked. This would have significant taxation consequences, including loss of all tax concessions and a tax liability of 45% of the fund's net asset value.
Secondly, the requirements above are strict liability provisions, and as such, any trustee that fails to meet the requirements may be held to have committed a criminal offence.
Interaction with other superannuation laws
A number of other provisions of superannuation laws are relevant and must be considered. These include:
- Sole purpose: The 'sole purpose' rule requires that all trustee actions are undertaken with the sole purpose of providing retirement benefits to the members. Conflicts arise with issues such as appropriateness of the investment acquired, storage, insurance, market liquidity, income generation and the "enjoyment" of the investment. For example, displaying artwork in the members' home may provide benefits earlier than retirement and hence conflict with the sole purpose rule.
- Arm's length: All transactions of the fund must be made and maintained at arm's length. If you don't, the income from these assets will be taxed at 45% (instead of the concessional 15%).
- Related party transactions: Superannuation laws
contain a few restrictions on transactions with related parties. In
relation to artwork & collectibles, these include:
- prohibition from acquiring the investment from a related party
- if the investment is leased to a related party, it will be considered to be an "in-house asset" and must remain less than 5% of total market value of fund
- tax at 45% if non-arm's length income received as discussed above
- Investment strategy: Each super fund must have an investment strategy, and all investments must meet the strategy. Prior to investing, trustees must assess whether the particular investment is an appropriate one and may need to update investment strategy accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.