Since July 1, 2011, do-it-yourself superannuation funds attracted to investments in art and collectables must comply with rigid new rules that will prompt many trustees to think twice about including them in their portfolios.
Obligations such as a requirement that – within seven days of being bought – the investments must be insured, as well as a total restriction on funds leasing them to a related party or storing them in the private residence of a member or someone related to a member, are major changes that have been introduced for new investments.
Existing art and collectable investments have been given five years to comply with the new rules.
Superannuation lawyer Bryce Figot, of DBA Lawyers, says the regulations are probably stricter than the draft rules released earlier.
Trustees hit with fines
They make it an offence punishable by a fine of $1100 not to insure such investments within the required time. The penalty is imposed on the fund trustees.
Rules on how such investments must be stored are very strict, says Figot.
It’s an offence with a similar penalty to store a work of art or collectable in the private residence of a member or related party.
The shed doesn’t count
The definition of private residence is expanded to include land used for a private residence and buildings on that land, such as a garage or shed.
Leasing such investments to related parties is also an offence.
As far as the storage of art and collectables is concerned, trustees are in future expected to write down the reasons why they store any new art and collectable investments in a particular place. It’s a punishable offence if they don’t.
The idea of this, says a memo that explains the new regulations, is to ensure DIY fund trustees consider appropriate storage that will maintain the asset as an investment rather than something that provides them or a related party with current-day enjoyment.
A DIY fund can store a collectable investment in premises owned by a related party that isn’t a home or building on land used for private purposes.
This suggests it could be stored in a business premises owned by a member or a relative of a member.
The regulations suggest a purpose-built storage facility that limits any personal enjoyment a related party may gain from the fund owning the investment. Restricting personal enjoyment is a major emphasis in the new rules.
Bullion and fine liquor
The investments the regulations apply to are listed as artwork, jewellery, antiques, artefacts, coins, medallions or banknotes, postage stamps or first-day covers, rare folios, manuscripts or books, memorabilia, wine or spirits, motor vehicles, recreational boats, and memberships of sporting or social clubs.
Artwork is more specifically defined as a painting, sculpture, drawing, engraving or photograph, which could be a reproduction or something similar.
Coins and banknotes are collectables if their value exceeds their face value. Spirits include but are not limited to whisky, gin, vodka, tequila, brandy and rum.
Insurance could be tricky
In all circumstances where these investments are owned, insurance is a major issue.
Insurance broker Geoffrey Lapish, of Consolidated Insurance Agencies, which offers a fine arts insurance service, says if a DIY fund wishes to store a painting in a business premises there would be certain expectations from the insurer. The building would have to be both secure and weatherproof and artwork must be professionally stored.
A monitored alarm system linked to a security service is another expectation.
Trustees who store investments in risky locations, such as bushfire-prone areas, should be aware they may have difficulties insuring any art or collectables.
One point to note about fine arts insurance is that for investments worth less than $100,000-plus it may appear expensive. While there are no problems insuring artwork and collectables worth less than this, says Lapish, there are minimum premium levels of between $1500 and $2000 to cover the time and paperwork involved.
One important point to note about insuring such investments is that the fund must comply with ownership rules. Lapish says if someone knowingly insures a super fund-owned painting in their home against the rules there could technically be no insurance.
Many ways to become a criminal
Offences against the new regulations are criminal offences and you can’t insure against criminal activity.
Other rules which are punishable offences are using fund investments and selling a fund-owned investment to a related party – a member or relative – at a price that has not been independently determined.
Where DIY fund trustees sell collectables and personal use assets and a related party receives an interest in the asset because of the sale, the new regulations say the realisation must be at a market price determined by a qualified independent valuer.
A related party could gain a benefit if an asset is disposed through an “in specie” transfer where the asset goes direct from the fund to a member. Figot says the Tax Office, which regulates DIY super, has long maintained that qualified independent valuers are desirable, especially where the value of the asset represents a significant proportion of the fund’s value or where the nature of the asset indicates that the valuation is likely to be complex or difficult.
The new regulations look to be the first time where there is actual legislative compulsion to use qualified independent valuers.
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