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Self Managed Super Funds

The ATO’s new asset rules for self-managed super funds and how to avoid penalties

On the 1 July 2011, the ATO introduced a rule concerning ‘collectible and personal assets’ (collectibles), held within a SMSF. Richard Smith best explains the new rule’s implications as being “Any trustees holding assets…in their SMSF, could be hit with significant penalties if they don’t take note of the new rules starting on the 1 July 2016.”

A collectible and personal use asset is defined in the legislation as being:

The ATO gave trustees a transition period of five years to comply with the new rule and have recently stated that they expect trustees to ensure the funds are compliant in accordance with this ruling by the 30th June 2016. The due date is fast approaching, hence why there is urgency for trustees to act now to put their affairs in order, or run the risk of receiving heavy penalties.

Key issues and compliance your auditor will be looking for

A SMSF is not allowed to formally, or informally, lease a collectible asset to a member within the fund, a relative or a related entity of the fund. Even if the asset is worth less than 5% of the fund’s total assets, this is not permitted (contrary to the in-house asset rules where there are minimum thresholds). Leasing the collectible to a non-related party is permitted; for example if artwork is leased to a gallery that is not owned by a related party, this is acceptable.

Related parties of the fund are not allowed to use the collectables. ‘Use’ can be regarded as simply displaying the asset. Continuing on with our art example, if you were to personally display the art, this is considered ‘use’ and any such use changes the collectable from being an asset, to personal possession. Most use of collectables will be caught under the leasing provisions, as most use in practice would likely create a lease or lease agreement. However, some trustee’s may not consider this use significant enough to permit a lease; therefore this provision captures those instances.

What to look out for – it is not uncommon for small business owners to lease artwork or other collectables assets, sporting memorabilia in particular, from the SMSF to display in their reception or boardroom. This will not be permitted for any collectables from 30 June 2016.

If the Trustees are likely to use the assets after the 30th of June 2016 they should definitely reconsider who holds the asset or consider selling it to the member who intends on using it if they want to escape the harsh penalties.

Storage and documentation

The collectables are no longer permitted to be stored at the private residence of any related party, including all the land on which the private residence is maintained, and includes other buildings such as sheds or cellars.

The items are permitted to be stored at a related parties business premises or storage unit, so long as they are stored away from the visible eye and not on display. On display literally means able to be seen by employees and the public. Artwork and sporting memorabilia case in point.

SMSF Trustee’s who choose to store the fund assets must document their reasons for storing this asset, either in writing or electronic form, and must keep the documentation for a minimum of ten years.

The asset must be insured in the fund’s name

Under the new rule all assets must be insured within seven days of acquisition and the insurance MUST be in the name of the fund. For pre-1 July 2011 assets this means that insurance must be in place by 30 June 2016 to comply.

Insurance is a consideration and cost that raises questions about the legitimacy of certain assets satisfying the investment objectives of the fund with regards to providing for a member’s retirement benefit. Does the cost of maintaining insurance warrant the ongoing retention of the investment or was the original investment made because of personal enjoyment?

Before the new rule came into effect, it was previously common for trustees to insure the collectables under their general household insurance policy. This is no longer permitted under any circumstances. Your auditor will request a copy of your insurance policy to identify that a) it exists, and b) that it is in the name of the fund.

Independent valuation of assets

If the SMSF sells or transfers a collectable asset to a related party, from the 30th of June 2016, you are required to have the value of the asset determined by a qualified, independent Valuer. If the collectable was acquired before the 1st of July 2011, and is sold before the 30th of June 2016, the old rules apply and the trustees do not have to use an independent valuation, provided of course that the transaction is made on arms lengths terms. You will still need to show evidence to the auditor of the valuation used. Independent valuations can be complex and could incur additional costs to the fund depending on the collectable.

The transition period is nearly over. If you have not already done so, the time to act is NOW to ensure your SMSF collectable affairs are in order by the cut off date of 30th of June 2016.

IMPORTANT:

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

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