Can an SMSF sell a collectable to a related party?
Can SMSF trustees a collectable (artwork) to a relative and whether it requires a valuation report?
John and Mary’s SMSF has purchased a collection of artwork as an allowable investment under s62A of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SIS Act’).
John and Mary want to know whether it is possible for their SMSF to sell the artwork to their art dealer niece and whether the sale would require the SMSF to obtain a valuation report.
Under superannuation law, an SMSF is permitted to invest in collectables and personal use assets such as artworks, jewellery, vehicles, wine and boats provided that the investment is made for genuine retirement purposes and does not provide any present-day benefit for the members of the fund, and the trust deed of the fund permits the trustee of the fund to enter into such an investment.
It is important to note that collectables and personal use assets cannot be:
- leased to, or be in a part lease arrangement with, a related party;
- be used by a related party; or
- stored or displayed in a private residence of a related party.
This means that John and Mary’s SMSF is permitted to sell the collection of artwork to their niece who is a related party of the fund.
The sale of the artwork from John and Mary’s SMSF to the related party will trigger s109 of the SIS Act. Section 109 of the SIS Act provides that an SMSF has the obligation to always deal with other parties at an arm’s length basis (i.e. commercial basis), especially when dealing with related parties.
In keeping with s109 of the SIS Act, any collectable and personal use asset that John and Mary’s SMSF sells to a related party of the fund must be sold at market price as determined by a qualified, independent valuer.
The ATO has stated that it is usually the valuation process undertaken rather than who conducted the valuation that governs the acceptability of a valuation.
In relation to collectables and personal use assets, John and Mary’s SMSF will meet its valuation requirements if the following valuation principles are satisfied, which include:
- using a qualified independent valuer to obtain a valuation report if the asset was acquired on or after 1 July 2011 and is to be transferred or sold to a related party after that date, or if the asset was acquired before 1 July 2011 and is to be transferred or sold to a related party on or after 1 July 2016.
- the person conducting the valuation must base their valuation on objective and supportable data.
- the valuation has been arrived at using a ‘fair and reasonable’ process, such as:
- it takes into account all relevant factors and considerations likely to affect the value of the asset
- it has been undertaken in good faith
- it uses a rational and reasoned process
- it is capable of explanation to a third party.
- the qualified independent valuer determines the market price.
It would also be prudent for the trustee of John and Mary’s SMSF to keep all supporting evidentiary documentation in relation to the valuation of the artwork on the fund’s register in the event that the ATO decides to conduct a review on the valuation method used to determine whether the SMSF has met its valuation requirements in accordance with superannuation laws.
For further information, please call Townsends Business & Corporate Lawyers on (02) 8296 6222 or email firstname.lastname@example.org