Earlier this year, a prominent Sydney based art dealer was arrested and charged with numerous offences in relation to artworks. The art dealer specialised in the sale and lease of artworks in the self managed superannuation fund market. Generally, these artworks were hung in various galleries and other premises for safekeeping. The self managed superannuation funds did not have physical possession of the artworks involved and it appears that the art dealer was able to sell many of the artworks to more than one buyer.
The Cooper Review of Australia’s superannuation system recommended that self managed superannuation funds be prohibited from investing in collectables and personal use assets. However, the Federal Government bowed to pressure from the art industry and only tightened the rules that apply to such investments rather than banning them.
- The trustees enter into a lease or lease arrangement with a related party in respect of a Section 62A item;
- A Section 62A item is stored in the private residence of a related party;
- The trustees do not keep a record of the reasons for any decision about the storage of a Section 62A item;
- The trustees do not insure a Section 62A item in the name of the fund within 7 days of its acquisition; and
- The trustees dispose of a Section 62A item to a related party at a price other than a market price determined by a qualified and independent valuer.
Trustees of self managed superannuation funds that had an existing investment in a Section 62A item on 30 June 2011 have been given a five year transition period before the new rules apply to those existing investments. If trustees of such funds are unable to comply with the new rules for those assets by 30 June 2016, those existing Section 62A items must be disposed of by that date or the trustees will commit an offence.
Prior to the changes, many trustees leased artworks to related parties. Whilst the lease with a related party meant that the artwork was an in-house asset, this was fine provided that the artwork represented no more than 5% of a self managed superannuation fund’s assets. It also meant that the storage issue was also managed through the lease.
The new rules on leases with related parties and the storage of Section 62A items mean that such arrangements are not allowed for purchases on and after 1 July 2011 and will not be allowed for all such assets from 1 July 2016. Trustees will have to make alternative arrangements.
All investments by self managed superannuation funds must be permitted under the fund’s trust deed, allowed for in the investment strategy and not breach the sole purpose or other investment rules in SISA. In certain circumstances, investments by a self managed superannuation fund in Section 62A items are a legitimate means of providing retirement benefits for members.
The tightening of the rules in respect of collectables and personal use assets from 1 July 2011 mean that trustees need to be more careful then ever if such investments are made.
This guest article is written by Mark Pizzacalla, Tax Director and Neil Howard, Senior Manager Superannuation of HLB Mann Judd, Melbourne.