From 1 July 2011, investments in collectables and personal use assets have been subject to strict rules under regulation 13.18AA of the SISR. Investments held before 1 July 2011 have until 1 July 2016 to comply with the rules.
Under the new rules, there are a series of investment standards that need to be met by the SMSF holding the collectibles, including that the asset cannot be stored in a private residence of a related party. In addition, there must be a documented decision about asset storage.
Most significantly, the collectible must be insured in the fund’s name within seven days of the SMSF acquiring it.
According to Michael Hallinan, Townsends Business and Corporate Lawyers' special counsel for superannuation, the new rules can potentially be “bypassed” if the SMSF converts to a small APRA fund.
“The collectables rules only apply to SMSFs. They do not apply to any other type of regulated superannuation fund,” he said.
“This solution is not cost-free. To be a small APRA fund, the existing trustees/corporate trustee must retire and be replaced by a professional licensed trustee company so there will be a loss of control and the addition of considerable expense in professional trustee fees.
“Further, the licensed trustee company may not be willing to act as trustee of a fund with collectables or with certain types of collectables (given the problems of proper storage and valuation difficulties). So while there is a theoretical solution, conversion to a small APRA fund may not be a realistic solution."
He noted that if the “collectables” are transferred to a company or unit trust controlled by a member or a relative of the member, the company or trust will be a related entity and the super fund’s interest in the company or unit trust will be an in-house asset.
“So transferring the collectables to a controlled entity will not solve the problem – unless the value of the collectables is less than five per cent of the market value of the superannuation fund and the superannuation fund has no other in-house assets,” he said.
“However, a word of caution may be prudent. Simply transferring the collectables to a controlled trust may not be sufficient as the ATO may argue that the trustees still ‘holds’ an investment in collectables by means of its proprietary interest in the trust. Given that shares in a company are an item of personal property in their own right (unlike an interest in a unit trust), the ATO may find it more difficult (but not impossible) to argue that the superannuation fund still holds the collectables after they have been transferred to a company.”
The law firm noted that it appears the “better solution” is to either comply with the new rules, which the ATO has stressed it won’t be flexible with come 1 July, or transfer the collectables out of the superannuation system.