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Investing in collectables through your Self-Managed Super Fund (SMSF) can be a unique and potentially lucrative strategy.

The physical item represents the worth of your estate without cash sitting in an account. Very often, the items collected can also increase in value over time.

Liquidity is another element to consider.

You need to be able to transform the item into cash when needed. The more difficult the item is to resell, the lower the liquidity. Evaluate potential cash flow challenges if an urgency to sell becomes apparent.

However, navigating the strict regulations the Australian Taxation Office (ATO) sets is crucial to ensure compliance and protect the fund’s assets.

One compulsory regulation is the insurance required for assets. Ensure your SMSF has the funds to maintain compliance of the asset before purchasing.

It may be very exciting to own a rare autographed photo of Olivia Newton-John, but do you have the monetary capacity to pay to store it in a moisture-proof vault and maintain the monthly insurance?

On the other hand, the limited edition Lego models you acquired might not count towards securing your wealth.

First, allow us to clarify what counts as ‘collectables’ under the ATO.

Types of Collectables

The following is just a snippet from the ATO lists of the different types of collectable and personal use assets:

  • Art collections (including paintings, sculptures and photographs)
  • Rare coins or medallions
  • Vintage cars
  • Jewellery
  • Pop culture items

Collectables range from stamps to cars, rock and roll memorabilia, and movie models. A 43-inch tall model of Star Wars R2D2 — made from parts used during filming — sold for $2.76 million in 2017.

A fully restored version of 007’s Aston Martin DB5 from the ’60s spy flicks Thunderball and Goldfinger fetched $6.4 million at an RM Sotheby’s auction in 2019.

The most highly bid collectable item in history is Elizabeth Taylor’s 33.19-carat diamond ring that sold for $8.8 million alone. You may think that the diamond and popularity of the Cleopatra actress increased the item’s value, and you would be right.

Therefore, how you value an item has its own rules and regulations.

Coins and banknotes are only collectables if their present value exceeds their face value. A sovereign coin from 1881 (equivalent to $2) can now be valued at $3,500.

Understanding ATO Regulations

As an SMSF investment, the collectable purchase must still pass the sole purpose test. Investments must align with genuine purposes of providing retirement benefits, not for present-day benefits.

Where you store the item also impacts whether they are considered collectables or personal use assets. A written record is required to demonstrate the legality of the decision. The ATO will not come to your personal residence to confirm the collectable is in the vault; therefore, there are strict storage requirements.

Collectables are not to be stored at the SMSF trustees’ residence or in the private residence of a related party. You can store collectables in a related party’s premises if it’s not their private residence, but you can’t display them there. For example, if the item is displayed at a relative’s work building, that is seen as being used by the related party.

If you don’t want your collectables gathering dust in a safe somewhere, there are other options, too.

Leasing and Selling SMSF Collectables

Leasing is allowed to unrelated parties under arm’s length terms. This means that the item must be leased at the market value and contain all regulated agreement conditions. For example, your SMSF can lease your original Disney drawings to an art gallery, provided the gallery is not owned by anyone with whom you have a work or private relationship.

The same rules apply to selling to related parties. Moreover, proof must be provided to show the sale is at market price as determined by a qualified, independent valuer.

Valuing Collectables

The ATO will generally accept your determination of an asset’s value as long as

  • it doesn’t conflict with their guide or Market valuation for tax purposes,
  • there’s no evidence that a different value was used for the corresponding capital gains tax event,
  • it was based on objective and supportable data.

You may require a valuation of assets for many reasons, from sales between related parties to insurance. Knowing the item’s market value and calculating the percentage the asset holds in the fund is important. There are tax breaks and retirement impacts, too.

You must be able to demonstrate that the valuation has been arrived at using a ‘fair and reasonable’ process. For example, a property you have had for generations can be valued by utilising various sources to substantiate the market value of the real property.

Valuations do not need to be conducted yearly. However, an external valuation of an asset may be prudent if you expect the valuation to be inaccurate or if a significant event has occurred since it was last valued. These could be natural disasters, market volatility or changes to the character of the asset.

It’s also accepted that a reasonable estimate value of the account balance can be used when calculating the value of a pension for transfer balance cap purposes.

However, you cannot rely on this reasonable estimate when preparing the SMSF’s financial accounts and calculating the SMSF’s entitlement to exempt current pension income (ECPI).

Certain benefits of investing in collectables through your self-managed super fund are only available if you have insurance. The ATO states the collectable MUST be insured by its own separate policy.

Insurance Requirements

Unlike other forms of insurance, protection of SMSF collectables is not optional. The ATO wants the items to be insured to “protect” the fund’s assets and, therefore, the member’s retirement benefits. So, if the asset is damaged, the fund is not financially exposed.

According to the latest figures from the Australian Taxation Office (ATO), at the end of June 2023, Australian SMSFs held a total of $566 million in collectable and personal use assets.

That is a lot of wealth that needs to be protected. Therefore, the ATO has strict rules to follow.

The largest is that items must be insured in the fund’s name within seven days of acquisition. You can not rely on third-party insurers, such as storage facilities, and you can not use general household insurance.

A comprehensive agreement under separate policies or collectively under one policy is needed. The SMSF trustee must control insurance negotiations, terms, and arbitration.

Arbitration is an alternative dispute resolution process where the parties present arguments and evidence to an independent third party. Arbitration is particularly useful where the parties seek greater confidentiality than in an open court.

A situation where the value of an asset is under question during a separation would be an example where arbitration may come about. The third-party may rule that the asset is valued at market price as determined by a qualified, independent valuer.

Compliance with insurance requirements is mandatory to protect the fund’s assets and members’ retirement benefits. Penalties, including fines and imprisonment, may be imposed for serious breaches.

Stay Informed About Your SMSF Collectables Investments

Investing in collectables through your SMSF can diversify your portfolio, but strict adherence to ATO regulations is imperative.

Regularly evaluate market values, ensure insurance compliance, and stay informed about legislative changes.

Seeking professional advice is recommended to navigate the complexities of collectable investments within an SMSF effectively.

Contact us by emailing us at enquiries@afpaccounting.com.au or call (02) 7804 1849.

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