|Summary: Beyond shares, property and fixed interest products, many self-managed super fund trustees have chosen to broaden their investment base by buying up collectables such as artworks, coins and even wine. But a looming Tax Office deadline, which will require all SMSFs to not only fully document the value of their collectables but store them offsite and insure them at market value, is spurring many funds trustees to sell off their precious assets – often at fire sale prices.|
|Key take-out: The collectables avalanche has already started, but there is a long way to go. From a peak value of $731 million in 2012, more than $150 million of collectables have been offloaded by SMSFs. As at the end of March, there were still $589 million of collectable assets being held by funds.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
The distorting effect of self-managed super funds on asset prices is expanding beyond shares and property.
Hundreds of millions of dollars’ worth of collectables, including artworks, stamps, coins, jewellery and vintage wine, are being pushed onto the market by trustees seeking to avoid complying with costly Australian Taxation Office (ATO) regulatory changes set to come into effect in 2016.
Unlike the upward influence over shares and property prices, the deluge is driving prices of collectables down.
Robert Jackson, a director in the national SMSF team at Deloitte, says SMSFs are selling off collectable assets now because the rules placed on the asset class will be very restrictive.
The regulations require, among other things, that any collectables purchased through a SMSF cannot be:
- leased to, or part of a lease arrangement with, a related party;
- used by a related party;
- stored or displayed in a private residence of a related party;
- The decision on where the investment item is stored must be documented and the written record kept for 10 years, and the item must be insured within seven days of the fund acquiring it. If the item is transferred to a related party, this must be at market price determined by a qualified independent valuer.
The ATO has stipulated that trustees with collectables held before July 1, 2011 have until July 1, 2016 to comply with the regulations. Any collectables bought after July 1, 2011, already must adhere to them.
But rather than comply, many SMSFs with collectables are choosing to offload their holdings rather than be burdened with storage and insurance costs.
And, compounding the problem, demand for collectables on the market is now weaker as many SMSFs are deciding not to invest in the asset class following the changes – removing a legitimate way for trustees to diversify their portfolio and reduce financial risk.
The value of collectables held by SMSFs stood at $589 million in March this year, down from a peak of $731 million in 2012. By contrast, the number of SMSF funds has actually grown by more than 25% to around 528,000 over the past four years.
With around 80% of the total collectables bought by SMSFS still being held, Jackson expects there will be a flood of these alternative assets onto the market over the next two years.
A lot of Jackson’s clients have been holding off from selling their collectables in this transition phase because of the depressed state of the market. But other funds trustees are buying them out of their funds personally, sometimes at a loss, and some retirees operating SMSFs are having to increase their pension payments to do so.
The collectable perhaps most exposed to the changes, or at least the one most referenced to by the experts, is art.
Art dealers say that almost from the moment the regulations were instigated by the ATO they have seen a pick-up in activity from SMSFs wishing to value and sell their artworks, which has created downward sentiment in the market.
“We’ve literally had people consigning pictures to auction, then standing in the room, bidding, and buying them back,” says Tim Abdallah, head of art at fine art auctioneer and valuer Menzies.
Under the regulations, the sale of art and other collectables held in SMSFs has to be conducted at arms-length. This has proved tiresome for trustees, as their accountants may have differing standards about what constitutes market value in the process.
“Clearly some people are much more particular about it,” Abdallah says. “We’ve seen a very big range of transactions – it’s almost bizarre.”
On top of impending higher costs for SMSFs, it’s believed one reason why the art market is feeling the weight is because many trustees were using their funds as a mechanism to collect art for personal pleasure – to admire the pieces hung in their homes – rather than to invest in it.
The indigenous art market is being hit hardest by the regulation. Back in 2010, it was estimated SMSFs were involved in more than half of all indigenous art sales as trustees found it appealing because of its global market.
Like with artworks, prices for rare coins are at their most depressed levels in more than a decade as the market suffers from excess supply and weaker demand from SMSFs.
“A lot of people have the perception that this [regulation] is a major issue that they need to take care of immediately, and if they don’t there will be penalties,” says Andrew Crellin, owner of Perth-based business Sterling & Currency, which specialises in rare coins and banknotes.
But Crellin maintains other factors, such as the changing demographic of SMSFs and the global financial crisis, have harmed coin prices more than the ATO’s regulation.
With many SMSF trustees ageing and more risk averse, they are less interested in the capital growth potential of coins and more focused on assets which offer income, Crellin says. And because coins aren’t a conspicuous asset to be displayed like art, SMSFs aren’t as inclined to buy them for pleasure.
However, Crellin concedes the regulations have contributed to depressing prices for coins, given trustees are faced with spending more to store coins in a safety deposit box and insure them under the fund’s name.
“If trustees are confident in the role rare coins play in a diversified portfolio, now’s the best time in 20 years to buy good-quality items at close to rock-bottom prices,” he says.
Wine auction houses have noticed more SMSFs wishing to sell their wine collection, but they say the build-up is yet to affect the overall market.
Tamara Grischy, head of auctions at Langton’s, an online fine wine auction house owned by Woolworths (WOW), dealt with one SMSF trustee last week who wished to sell his high-worth vintage wine collection because he didn’t want to move it into offsite storage. His temperature-controlled wine cellar, which had been installed in the basement of his own house to take care of the investment, no longer had any use.
“He tried to fold it into his private fund, but now the costs have become too prohibitive,” Grischy says.
While Grischy has begun to witness changes in customer behaviour first-hand from the ATO changes, she hasn’t seen any major increase in supply for wine from SMSFs yet.
This is understandable, as wine has certain characteristics which set it apart from other collectables: it has a propensity to be consumed, and it has an implicit expiry date – a point in which its quality slips.
Regardless of the type of collectable, Jackson advises SMSF trustees to allow for sufficient time to divest them, either to themselves or to a third party, or they will face strict non-compliance penalties.
“The worst position to be in would be to be caught up in a glut in the last three months,” Jackson says.