Opinion piece written by John Maroney, CEO, SMSF Association
First published in The Financial Review on 21 April 2021. Licensed by Copyright Agency.
Got art, jewellery or cars in your collection? Watch out for how they’re insured, where you store them and who uses them.
The rules around the holding of collectables and personal-use assets owned by self-managed super funds are quite straightforward – and have been for more than a decade. Yet confusion still reigns, especially with insurance.
Since July 1, 2011, the rules have required trustees of SMSFs to insure these assets within seven days of acquiring them in the name of the fund. The only exceptions are memberships of sporting or social clubs – and yes, these can be owned by SMSFs.
Unlike other forms of insurance, it’s not optional. The Australian Taxation Office wants the items to be insured to “protect” the fund’s assets and therefore the members’ retirement benefits. So, in case of a mishap where the asset is damaged, the fund is not financially exposed.
The ATO also insists the insurance is in the fund’s name to ensure assets are kept separately from the trustee’s other assets, thereby giving the process more transparency and greater integrity.
It all seems quite simple. Yet it’s surprising how much confusion still surrounds the insuring of collectables and personal-use assets, particularly from an audit perspective.
Some trustees are still under the misapprehension that collectable items can be covered under general household insurance provided the premiums are proportionally paid by the member and the fund. Others falsely believe they can rely on insurance policies of third parties, such as an art gallery, to cover an SMSF’s artwork. Some SMSFs don’t even have insurance, in direct contravention of the rules, either because they can’t find an insurer or they simply don’t see the need.
So what is the ATO’s view? Simply put, for an SMSF to comply with the insurance requirements for collectables and personal-use assets, the policy must held be in the name of the SMSF, with the trustee as the legal owner of the policy (in their capacity as trustee).
As the obligation falls on the trustee to insure the item, a trustee cannot delegate or rely on a third party to source and maintain risk cover for an asset of the fund.
Collectables and personal-use assets may be insured by the trustees collectively under one policy or under separate policies. However, the policy must still be in the name of the fund, irrespective of the value of the asset.
This means it is unacceptable for:
- The assets to be insured under a policy held in the trustee’s own personal name (for example, as part of a home and contents insurance policy); or
- The assets to be insured under a policy held by another third party (for example, a business owner or custodian who may be storing, displaying or leasing the asset); or
- The fund’s interest to simply be noted on an insurance policy owned by a third party.
Insurance is not the only issue where SMSF trustees can fall foul of the rules when investing in collectables and personal-use assets. There are also strict rules around usage and the display and storage of these assets.
Collectable and personal-use assets cannot be used by members or related parties. So if your SMSF owns a vintage car, neither you nor a related party can drive the car even if it is just for maintenance purposes. Only a person who is not a related party can drive the vehicle for that purpose.
Collectables and personal-use assets owned by an SMSF are also not able to be stored in the private residence of a related party. However, it is possible to store collectables and personal-use assets in premises owned by a related party if it is not their private residence, but under no circumstances can they be displayed in that premise. So if your SMSF owns artwork, it can be stored in the business premises of a related party, but it cannot be hung in those premises where it would be visible to clients and employees.
It is also against the rules for collectables and personal-use assets owned by an SMSF to be leased to a related party, and they can only be sold to a related party at market value as determined by a qualified, independent valuer.
When the Cooper review into superannuation was hearing evidence, there was a concerted effort to stop SMSFs investing in these assets. The final report, handed down in 2010, did not agree, although it did recommend strict guidelines about how SMSFs could invest in collectables and personal-use assets. For those who still want to do so, it is essential to be across the fine print.