31/05/2011

The Government has released for public comment the regulations which are to regulate SMSFs investments in "collectibles and personal use assets".

The rules will only apply to SMSFs and will apply from 1 July 2011.  The rules will apply to affected assets first held by the fund on or after 1 July 2011.  The application of the rules to affected assets held by the fund on 30 June 2011 will be deferred for 5 years and so will not apply until 1 July 2016.

Affected assets are assets which are "collectibles or personal use assets". 

Comment - If you are minded to acquire a particular artwork (or other affected asset) as an investment in your SMSF, it is best to purchase and obtain possession of that artwork on or before 30 June 2011.  If you satisfy this cut off date the new rules relating to use, storage, insurance or disposal will not (assuming the asset is still held by the fund) apply until 1 July 2016.  Consequently if the affected asset is obtained before 1 July 2011 and disposed of on or before 30 June 2016, the asset will not be subject to the new rules.

The transitional provision uses the expression "held"; for the transitional provision to apply the relevant asset must be held by the fund.  This suggests that the fund must physically possess or control the asset.  A mere enforceable right to acquire the asset may not be sufficient.  The cautious minded will want to ensure that the contract of purchase of the asset is completed on or before 30 June 2011 and not after that date.

What are "collectibles and personal use assets"?
These are defined to be any asset from the following list:

• Artwork (within the meaning of the Income Tax Assessment Act, 1997)
• Jewellery
• Antiques
• Artefacts
• Coins or medallions
• Postage stamps or first day covers
• Rare folios, manuscripts or books
• Memorabilia
• Wine
• Cars
• Recreational boats; and
• Membership of sporting or social clubs.

Comment  - Interestingly, the definition is not open ended but closed.  Consequently an asset which is not caught by the above list will not be subject to the special investment rules.  In particular “toys” are not caught (eg model trains, lead figurines, computers, sewing machines); neither are collectibles in general (eg beer bottles –used) or recorded music - whether 78s, 45s or 33 1/3rds, CDs, or other recording media. 

What are the rules?
The rules are relatively straightforward.  The rules regulate the use and storage of the listed asset, insurance of the listed asset and the transfer of the listed asset.

Breaches of the rules will be strict liability offences (ie the ATO will simply have to establish that the rule has not been complied with and the intention of the trustee will be irrelevant).  A contravention of the rules by a trustee, or the corporate trustee or a director of the corporate trustee, will give rise to a maximum penalty of $1,100.

Use of listed assets
The listed asset must not be leased to a related party of the fund.  The concept of a lease extends to lease arrangements.  It is irrelevant whether the lease to the related party is on commercial terms or at market value.

Additionally, the listed asset must not be used by a related party of the fund.  This prohibition only applies to those listed assets which can be used – such as an item of jewellery, a car, recreational boat, or membership of a sporting or social club.

Comment -  The listed asset can be leased to and used by unrelated parties.  However the terms and conditions on which unrelated parties may lease or use listed assets will still be subject to the other SIS investment rules – eg the sole purpose test.

Storage of listed assets
The listed asset must not be stored in a private residence of a related party of the fund.

Interestingly, listed assets can be stored in the business premises of a related party.

Additionally, the trustees must make a decision relating to the storage of the listed asset and must make a written record of the decision which must be retained for 10 years following the making the decision.

Comment – This requirement may give rise to a number of difficulties.  Presumably each time the storage location changes, a new storage decision will have been made which will have to be documented and retained for 10 years.  The previous storage decision will still have to be maintained until 10 years have elapsed. 

Insurance of listed assets
The listed asset must be insured.  The insurance must be effected within 7 days of the acquisition of the asset by the fund and the insurance must be in the name of the fund.
 
This rule does not apply to listed assets which are "memberships".

Comment – Simply imposing a legal requirement that a listed asset be insured does not mean that a licensed insurer will offer that kind of insurance or offer insurance at reasonable rates.  Funds should therefore ensure that they can insure the listed asset before they acquire it.  The strict liability nature of the offence of breaching the rules means that it will not be a defence to prosecution for the Fund to simply say it could not get the necessary insurance at the time.  The requirement that newly acquired listed assets be covered within 7 days, suggests that the insurer will have to issue blanket type covers with the fund simply advising the insurer of the details of the acquisition.

Disposal of listed assets
If the listed asset is sold to a related party of the fund, the sale price must be at the market price determined by a qualified independent valuer.

It is uncertain whether disposals by way of in-specie transfers to related parties will be prohibited.  There is no express mention of in-specie transfers as being permitted if they are at market price.  Further, the draft regulation uses the expression “realised” rather than “transferred”.

Comment – the rule is that the disposal must be at the market price determined by a qualified independent valuer.  Further, depending on the nature of the listed asset, qualified independent valuers may be rather thin on the ground and may charge a significant fee for the valuation.  Market appraisals or informed guesses will not be acceptable.

SIS Regulations
The new rules as to listed assets will be imposed by proposed SIS Regulation 13.18AA.  Proposed new section 62A of the Superannuation Industry (Supervision) Act, 1993 will authorise the issue of the regulations.

The list of assets is set out in sub-regulation (1) while the various rules are set out in sub-regulations (2) to (7).  The offence provision is set out in sub-regulation (8) while the transitional period of listed assets held on 30 June 2011 is set out in sub-regulations (9) and (10).

If you have any questions in regard to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.