SMSF collectors still on ATO notice

The word from the Australian Tax Office is that it will work with you if you have not yet got your collectables act into gear.

But make no mistake, if you hold collectable assets within your self-managed super fund and have somehow missed the ATO's repeated warnings since 2011, time is rapidly running out because you must have your house in order by the time you lodge your next audited annual accounts. In fact, the clock actually hit midnight on June 30.

That being said, it seems most SMSF trustees have got things right. Four-and-a-half months after the ATO tightened its rules governing the ownership of collectables in SMSFs, industry experts say that compliance among trustees largely appears to be in check and any flow-through effects to collectables markets – such as the art market – seem contained.

Much of that can be put down to the five-year gap between the rule announcement, made in 2011, and this year's July 1 implementation. But SMSF trustees still with collectables are being urged to have that asset class in order well ahead of March's annual accounts deadline, or they risk facing stiff financial penalties.

Under its guidelines the ATO will fine any SMSF 10 penalty points, equal to $1800, for every breach by an SMSF.

Still a sizeable collectables cache

While collectables as a portion of total Australian SMSF holdings has fallen 67 per cent, to just 0.06 per cent, of all holdings across those five years to June 30, there was still $375 million in collectables in SMSFs at the cut-off date. It's highly likely that figure has dropped, but that a large number of super funds are still exposed to collectable assets including coins, artworks, cars and bullion.

The ATO this week said it was willing to “work with them (SMSF accountholders) to rectify any issues”.

“SMSFs who are concerned that they may have investments in collectables that do not comply with the new rules are encouraged to approach the ATO through our SMSF early engagement and voluntary disclosure service,” a spokeswoman told Eureka Report.

The rules were designed to close off the loophole that allowed the purchase of collectable assets through funds for personal enjoyment and use – namely protecting the integrity of superannuation's sole purpose test. 

Understanding the rules

The rule changes tighten the conditions around having collectables stored with “related parties” -  they can only store, but not display, collectables in premises owned by a related party, and only provided it is not their private residence. Trustees must also keep a record of the reasons for deciding where to store assets.

However, this change is tempered – especially for large funds – by SMSF in-house assets rules, which allow up to 5 per cent of a fund's total assets to be leased to a related party.

On the insurance front, collectables must not be be insured under their household policies but rather a policy in the name of the fund (collectively or individually), and within seven days of purchase.

The availability and cost of insurance must also be considered by trustees as part of the decision to invest in collectables and personal use assets.

The changes have made the asset class more restrictive and costly for SMSF accountholders.

While industry figures say there has not been any noticeable panic on the front since June 30 among the owners of those $375m in SMSF collectables, there could be situations where people have been caught out. For example, sellers transferring collectables out of SMSFs who hadn't met a condition of release and then found the collectables market had dropped, and thus decided to hold onto the assets. One potential workaround in this scenario is for SMSF trustees to buy their own collectables back should they have the cash on hand.

Art market not impacted

Collectables market figures say the rule changes has had a negligible effect on prices, with Sotheby's auction house's Australian chief executive Gary Singer saying the deadline passed unnoticed, as had the five-year transition.

“In terms of the Australian art, we haven't seen any change in that, we've had very strong sales in August. We're not getting called into appraise works for sales because super rules are changing – as much as we'd love to,” Mr Singer said.

“And that's the same with jewellery, where we are also the market leader.”

Mr Singer said the indigenous art market – in which reports said half of all sales in 2010 were linked to SMSFs – was struggling, but weakness there was being driven by export-restriction rules from government, not SMSF activity.

"That's still a very tough market," he said.

Sydney based art collector and art investor Durva Gandhi doused worries from some in the SMSF industry that the new insurance requirements would be prohibitive, at least on the art front.

“I think it is easy to insure Australian art in Australia. International art is a little harder, but I think it wouldn't even be such a big deal for a global insurance company to find counterparts in other parts of the world to get valuations done – but yes, more difficult than Australian art,” she said.

The Tax Office will publish fresh figures on collectables holdings later this month.