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Self Managed Super Fund (SMSF) Article
SMSFs Dabbling in Artwork
By Tony Negline.
This article may be out of date.
14th April 2004
Buying artwork in a Self Managed Super Fund is becoming increasingly popular.
Many art galleries and auction houses are targeting SMSFs because they are one of the richest sources of available capital.
In four recently released Interpretative Decisions (2004/248, 249, 250 and 251) the Australian Taxation Office has shown how a SMSF can invest in as much artwork as a trustee wishes and still avoid getting into trouble.
IDs are documents released by the ATO from time to time that discuss how the ATO interprets various tax laws. They are often broad summaries of very complex issues.
This means that important information vital to a transaction may not be discussed. Penalties may apply if a taxpayer relies on an ID but their circumstances are materially different to that described in an ID. An ID might cease to apply if the law is changed.
Most importantly an ID is not binding on the ATO. This means that at some stage the ATO might change its views. A Court might decide that the law should be interpreted in a different way. If either of these circumstances occurred then an ID would be withdrawn. Penalties might not apply but outstanding tax and interest might be payable.
Despite all these problems, IDs give us a very good guide as to what the ATO think about various issues. The four IDs issued in relation to artwork are a case in point.
Before a trustee invests in anything, it is essential to consider how a particular asset fits within the overall investment strategy of the SMSF. As previously noted in this DIY Super column, trustees of SMSFs find drafting and implementing Investment Strategies quite difficult. Nevertheless it is something which has to be done.
ID 2004/248 points out that a SMSF should only invest in artwork if the trustee “understands the risks and costs associated with the particular investment … a trustee should seek expert advice and be prepared for any additional procedures or requirements that might arise before acquiring [the artwork]. Expert advice would include the potential income or capital growth that could be generated from the investment and the ease with which the asset could be disposed …The trustees would also need to consider the costs associated with the particular asset in question. The costs associated with appropriate storage and insurance should also be considered an integral part of an overall strategy that included investments in art.”
Logically before a SMSF trustee buys a piece of artwork, it also needs to decide where it will be displayed or stored.
Many trustees deliberately decide to display the SMSF’s artwork at their home rent free. ccording to ID 2004/249, this is not acceptable. The ATO takes the view that this type of action breaches the sole purpose test. The SPT attempts to ensure that trustees run their SMSF with the single objective of ultimately providing benefits to the fund’s members and possibly their relatives. Other benefits received from a fund by anyone (directly or indirectly) associated with the fund may only occur incidentally to this sole purpose.
Some accept the ATO’s view but also believe this SPT limitation only applies to a financial benefit obtained and not the emotional enjoyment artwork can bring. Only a Court case would clarify this uncertainty.
Is it therefore acceptable to display artwork at the member’s home if an arm’s length lease agreement is in place between the SMSF and the member? In short, yes, but ID 2004/250 points out that any super fund asset used by a member or a member’s relatives or companies or trusts which the member (or their relatives) control will be deemed to be an “in house asset” of the fund.
In general, only 5% of the market value of a SMSF’s assets may be in house assets. However there are some important exemptions which may be available for some SMSFs which existed before August 1999. Some will argue that these restrictions do not apply where a trustee stores artwork at their home or business premises “as long as they are not on display.”
However they might caution that “Conservators agree that hanging a painting on a wall and looking after it is preferable to storing it in bubble wrap”.
Susan Orchard, Superannuation Technical Consultant for the Institute of Chartered Accountants said, “a fund’s auditor should expect a written lease agreement to confirm ownership of the item and the rate of lease payments.” Professional help should be sought in the drafting of the lease arrangement she said.
Finally ID 2004/251 points out that any lease agreement between a member or their relatives or associated businesses and a trustee needs to set at arm’s length rate.
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