Rules for buying and selling artwork.
One of the great advantages of having a self-managed superannuation fund (SMSF) is not only the control you have but the ability to buy assets that most superannuation funds don’t have access to. One great example is artwork.
There are many rules
and regulations around how to buy artwork in your SMSF and, like any investment, it’s important to do proper due diligence
before any purchases are made.
One area not covered very often is how to release or remove
artwork from an SMSF. As an unlisted asset, it’s very different to selling a share.
We explain these three aspects of art and SMSFs below.
As an SMSF investor you need to be well aware of what’s allowed and what isn’t. In a nutshell, here are the important rules to remember:
• The artwork can’t be stored at your home or the residence of a related party of the fund
• It can’t be leased to a related party of the fund
• It needs to be insured
• It needs to be purchased or sold at market price as verified by an independent valuer
These rules were introduced on 1 July 2011 and apply to all works purchased after that date. SMSFs that purchased work before then have until 1 July 2016 to comply.
You also can't sell artwork you, your relatives or related businesses own personally to your super fund.
SMSF trustees must keep a written record explaining their storage decision for the artwork and those written records need to be kept up to date for 10 years.
When it comes to the actual purchase, think very carefully about why you want to own artwork or collectables in your super fund. Don’t rush in with emotional investments. Artworks and collectables typically don’t earn income (unless you rent them out) and this aspect needs to be carefully thought about when designing your investment strategy.
When it comes to the investment decision itself, much like buying a share or a managed fund, only use reputable and long-standing dealers such as members of the Australian Antique and Art Dealers Association. http://www.aaada.org.au/
Before parting with your hard-earned super money, visit or view the prospective asset (unless it’s completely impractical or you’re thoroughly convinced it’s unnecessary).
Also consider getting an independent valuation and assessment of the asset before buying it. This may add to the costs, but it could raise issues or concerns that you hadn’t identified; you wouldn’t think twice about getting a valuation for a property, for example.
You could also ask for referrals from the dealer to former customers, especially SMSF investors in artwork.
This should be a no-brainer, but when you purchase an asset, work out all likely costs and potential sources of income.
Lastly, if you plan to rent out an artwork, make sure you know where it is at all times. On top of that, make sure you have the right to visit your artwork from time to time, just to check on how well it’s being looked after.
Removing an artwork from an SMSF
Once you reach retirement age, theoretically you can withdraw an artwork or collectable from your SMSF, which means it’s then yours to enjoy.
First of all, you must establish why you’re withdrawing the asset:
• Maybe it’s because you can’t satisfy the new super rules about artwork and collectables, which set valuation and storage requirements. If that’s the case, you have until June 2016 to remove the assets from your fund. Perhaps you can’t get appropriate insurance.
• Maybe you want to make a benefit payment to yourself. If you want to keep the artwork, you’ll have to pay yourself a lump sum because pension income payments can only be made with cash or cash equivalents (such as an electronic funds transfer). Remember that you can only pay yourself a lump sum benefit from the super fund if you satisfy a condition of release. Appropriate amounts of benefits tax – and other taxes such as capital gains tax – have to be considered at this point.
• Maybe you want to gift the asset prior to your death. It’s often advantageous to deal with your super assets prior to death because after the age of 60 you can take benefits out of your super fund tax-free, whereas after death your non-dependants will likely have to pay tax on the Taxable Component portion of the benefit.
The SMSF rules demand that when artwork or collectables are paid in specie or sold to a related party of your fund (which includes fund members, their relatives and other entities), then you must have an independent valuer assess the asset.
The valuer must provide a market value for the nominated asset, which is then used by the super fund in determining adjustments to account balances and any tax issues.
It would make sense that this valuation be provided before the ownership of the asset is transferred, but there is nothing in the super laws that specifically make this demand. In order to ensure you don’t run into problems, make sure the valuer is an independent, acknowledged expert in the particular asset class.
Once the ownership of the asset is changed into your name, then the trustees will have to consider the capital gains tax implications on the SMSF as a result of the sale or benefit payment of the artwork or collectable. (The asset will not incur any tax liability for the fund if it is being wholly used to pay a pension.)
The next step is for the trustees to amend the fund’s asset register to reflect that the asset is no longer owned by the fund.
In some cases you may need to review your fund’s investment strategy and how it has been implemented. If, after the asset is removed, the fund no longer owns any artwork or collectables but the investment strategy says that these asset classes will be held, then clearly this will need to be addressed.
Finally, if a benefit is being paid out in specie then you’ll need to make sure all trustees complete the relevant documentation, such as a Payment Summary. They will also need to make sure that member account balances are appropriately adjusted.