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Smart strategies… to get debt in order

Trustees of Self-Managed Superannuation Funds (SMSFs) looking to diversify their investment strategy may consider artwork as a viable alternative asset class. Artwork for such superannuation purposes includes paintings, sculpture, drawings, engravings, photographs and reproductions.

There are several issues trustees should address before purchasing. There are rules which came into effect from 1 July 2011 which tightened requirements for holding artwork in a SMSF if purchased after this date. If a SMSF held artwork before 1 July 2011, trustees still have until 30 June 2016 to comply with new requirements. Trustees should seek specific advice about holding artwork in their SMSF to ensure they are compliant with the rules.

SMSF trustees must invest in assets for the purpose of providing retirement benefits for members. Generally, when people buy artwork, it is often for the purpose of exhibiting the art either in their home or place of business to gain enjoyment from owning it. However, if a SMSF trustee invests in artwork, the purpose of the purchase must be for an investment return as it can’t be used by a member or a related party of the fund.

Alice Kase, partner at PricewaterhouseCoopers, provides five tips for trustees considering an art investment for their SMSF:

1. Have a Plan

Firstly, artwork must be an allowable investment in accordance with the rules of the particular fund, as outlined in the SMSF trust deed. Trustees should include artwork in the investment strategy which must endorse artwork as an asset class and have the objective of providing benefits for members’ retirement.

Trustees should have a clear understanding of the risks and costs associated with investing in artwork. Expert advice should be sought on the potential income or capital growth which could be generated from an investment in artwork, the ease with which it could be disposed of, and the costs involved.

2. Don’t display artwork at home

Artwork can’t be displayed or stored in a private residence belonging to a member of the SMSF or related party. The private residence includes associated land, garage, shed or den/poolroom. A related party of a SMSF includes the members, their relatives and any partnerships, trusts and companies that the members of the SMSF control.

Artwork can be stored in the business premises of a related party of the SMSF, such as a storage facility, provided it is not part of the private residence of a related party of the SMSF.

Any artwork purchased since 1 July 2011 cannot be displayed in the business premises of a related party. For artwork purchased before 1 July 2011, trustees have until 30 June 2016 to display artwork in the business premises of a related party provided appropriate arrangements were in place prior to 1 July 2011.

A written storage declaration must be completed and kept for 10 years by the SMSF trustees. The declaration should include the reasons for the decisions relating to storage. This may be achieved in minutes of a meeting of the trustees.

3. Lease art for an investment return

Whilst artwork can’t be leased to or be part of a lease arrangement by a related party of the SMSF, the artwork can be leased to independent third parties for an investment return. Trustees should assess the investment return on a lease arrangement in line with their overall investment strategy.

Trustees can therefore lease the artwork to galleries, corporations and other unrelated parties on an arm’s length basis. Whilst lease arrangements may be formal or informal, it’s a good idea to make sure the lease is documented. The auditor of the SMSF may ask for a copy of the lease to evidence the arrangement.

4. Insure artwork in the name of the SMSF

Artwork must be insured in the name of the SMSF and be clearly identifiable in the insurance documentation within seven days of purchase. Trustees should ensure they arrange for a cover note/insurance policy so they are compliant with these requirements.

If the SMSF leases artwork to a gallery, the SMSF’s insurance policy is still needed. The policy must be a separate policy to a home and contents policy. The SMSF can arrange one collective policy to cover the artwork.

If trustees find they can’t obtain insurance for any reason, they should contact their SMSF adviser and auditor in the first instance to work through another course of action.

5. Transfer artwork out of the SMSF prudently

Trustees must consider the best approach for their fund to comply with the tightened rules. One such strategy may be to transfer the artwork out of the SMSF to a related party. Artwork may be transferred or sold to a related party of the SMSF, provided it is at the market value as calculated by a qualified independent valuer.

The trustee will therefore need to arrange for an independent valuation to be completed at the time of the transfer. A qualified valuer is someone who holds formal qualifications and is considered to have specific knowledge, experience and judgment by their professional community. This is best demonstrated by being a current member of a relevant professional body or trade association. A valuer is independent if they are independent of the interests of the SMSF.


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