You can keep art in your Super advises specialist art market accountant, Michael Fox, in this follow-up to his article on SMSF write-off measures – and invest in more. Here’s how.
Since the Cooper Report made its recommendation to ban artwork as a suitable investment for super funds in 2010, there has been a perception that SMSFs either have to dispose of their collections or are unable to make new purchases.
Neither is true. And one the good things that came from the near prohibition five years ago is that collectors wishing to use their super funds to buy art have to put a lot more thought and consideration into their acquisitions.
The new super art laws mandate insurance and storage requirements as well as rules for related party access and enjoyment of artworks. Compliance with the super art laws is the same as for SMSF trustees without collectables “ act prudently. For this reason, it is probably not wise for a novice SMSF collector to buy a painting at an exhibition opening on a whim.
All superannuation funds must have an investment strategy, and if you are to buy art as part of your strategy, some basic research should be undertaken. Personal taste may be a factor; however the trustee must be able to show that, as a super fund investment, art will be able to contribute to the provision of retirement benefits to the members of the fund.
Collections are generally preferable for SMSFs than single artwork holdings. In a similar way to shares, collectors will balance out the risks of individual works rising and falling in value by holding a quantity of art. Because of the new administrative requirements, it also makes sense to document a number of artworks instead of a single piece and spread out these costs.
The new super art requirements fall into three categories:
2. display; and
3. related party use.
Collectors will need ready access to either specialist art insurance or to general insurance covering the location of the artworks. The SMSF has no more than seven days to insure new acquisitions and failure to do so will result in the fund being in breach of the new regulations. Insurance firms will also have certain expectations about the way artworks are stored. For example, waterproofing and security will be important considerations.
The ATO view is that super art displayed at the private residence of a member immediately confers a pre-retirement benefit and, as a result, the fund will be in breach of the SIS Act and lose its tax concessions. Even bubble-wrapped artwork stored at a member’s home will contravene the new regulations. The solution is to hire a storage facility or arrange a ‘safe house’, however a written record of the decision to store your art purchases needs to made prior to each acquisition and then kept for at least 10 years.
Related parties are not allowed to have use of the artworks. Related parties of a fund may include:
- a member;
- an employer-sponsor; and
- a ‘Part 8’ associate of a member or an employer-sponsor.
- ‘Part 8’ associates are defined broadly to include relatives of the fund members and related entities of the individuals, partnerships or companies that operate the fund, deemed to be related either by ownership or through control of management. The new super art related party requirements mean all leasing of artworks between SMSFs and trustees or employer-sponsors will be unlawful as at 1 July 2016.
The key to navigating around the new requirements is to make sure the way your super art collection is documented and stored will pass the necessary annual audit. Once again, this is a good outcome from the Cooper Report.
Most artworks will be collected by super funds during what is known as their accumulation stage, which is the period before members retire. Art that is well-bought can be a good fit for the accumulation stage and may also be seen as a hedge against the periodic fluctuations of the share market. Once in benefit stage, it is possible to transfer artworks back to the members tax-free (but bear in mind this carries the possibility of a 5% resale royalty trigger).
Finally, if you have a super fund and wish to buy Aboriginal artworks, please try to source these works from reputable dealers, particularly those that have signed to the Code. This may be seen as more of a pre-retirement ethical benefit that will not cause you to breach the new regulations.
Michael Fox is a Melbourne-based tax agent and valuer who specialises in the art market.