A taste for the exotic

SMSFs have the freedom to hold assets that are considered unconventional, but as Matt Manning notes, there are very strict rules governing allocations to these types of items.

While most SMSF trustees choose to invest in traditional asset classes such as equities, property and cash, some have a taste for the exotic.

This article outlines the rules and considerations for SMSFs wishing to invest in less commonly held investments, including artwork, cryptocurrency and bullion.

General rules and considerations

The Superannuation Industry (Supervision) (SIS) Act 1993 does not explicitly prohibit an SMSF from investing in any particular asset class, however, certain types of investments are prohibited. Also, for some types of investments there are specific rules that can be onerous to follow, at times to the extent that SMSF ownership becomes impractical.

However, there are general rules and considerations that apply to all SMSF investments, including:

1. Whether the sole purpose test is satisfied, that is, the reason for the SMSF making the investment to be of benefit to members in retirement, as opposed to any other reason such as the members deriving a present-day benefit.

2. Whether holding the asset is in line with the investment strategy of the fund. If not, the SMSF trustee may change the investment strategy.

3. Whether the SMSF will be acquiring the asset from a related party. If so, this is only permitted for certain types of assets, most commonly business real property, listed securities and widely held trusts/ managed funds.

4. Whether the asset constitutes a loan to a member or a relative of a member, or upon acquisition whether it is an in-house asset. Section 65 of the SIS Act specifically prohibits an SMSF from making loans to a member or a relative of a member and, subject to the other requirements, in-house assets are permitted but broadly limited to 5 per cent of the fund’s total asset value.

5. Whether any dealings with a related party are done at arm’s length. Section 109 of the SIS Act prohibits an SMSF from dealing with related parties on terms less favourable to the SMSF than arm’s-length terms. Further, while technically an SMSF is permitted to deal with a related party on terms more favourable to the fund than arm’s length, this is best avoided as the non-arm’slength income provision would apply.

6. Whether the trustees considered the SMSF’s liquidity, diversification and ability to discharge existing and prospective liabilities, and whether the assets of the fund are kept separate from assets personally owned by the trustees.

7. Whether the asset is a collectable or personal-use asset. If so, there are additional restrictions.

8. Whether the SMSF is running a business. This is not specifically prohibited, however, the ATO has stated it will “examine the activities closely to ensure the sole purpose test is not breached”.

9. Whether the fund’s trust deed is more restrictive than the minimum standard of the law. Even if the investment is permitted under the law, an SMSF cannot make an investment that is disallowed by the trust deed.

Collectables and personal-use assets

In addition to the general rules and considerations, some exotic assets that are classified as collectables or personaluse assets are subject to additional requirements.

What are collectables and personal-use assets?

a) artwork,

b) jewellery,

c) antiques,

d) artefacts,

e) coins or medallions,

f) postage stamps or first-day covers,

g) rare folios, manuscripts or books,

h) memorabilia,

i) wine,

j) cars,

k) recreational boats,

l) memberships of sporting or social clubs, and

m) assets of a particular kind, if assets of that kind are ordinarily used or kept mainly for personal use or enjoyment (not including land).

Additional requirements for collectables and personal-use assets

Superannuation regulations impose the following additional restrictions where an SMSF wishes to purchase a collectable or personal-use asset:

1. The asset must not be leased to a related party.

2. The asset must not be stored in the private residence of a related party.

3. The SMSF trustees must make a decision relating to the storage of the asset and keep a written record of this decision for at least 10 years.

4. The asset must be insured in the name of the SMSF within seven days of the SMSF acquisition (except for membership of sporting or social clubs).

5. The asset must not be used by a related party.

6. If in the future the asset is transferred from the SMSF to a related party, the market price must be determined by a qualified independent valuer.

In practice, where an SMSF is intending to purchase a collectable/personal-use asset, prior to the purchase it is prudent to ensure these additional requirements can be satisfied.

For example, an insurance company willing to insure certain assets, or the cost to appropriately store an asset, may be cost prohibitive relative to the value of the asset.

Where SMSF trustees are unsure if either the general rules or the collectable/ personal-use assets rules will be satisfied, it would be prudent for them to seek the fund auditor’s opinion prior to the purchase. Where there is still any doubt, the SMSF may choose to apply to the ATO for specific advice.

Case studies

The following facts apply to all case studies.

• Andrew and Brooke Brown are a married couple in their 40s. They have recently established The Brown Family SMSF with Andrew and Brooke as the two members and trustees.

• The Brown Family SMSF has a current balance of $1 million, which is 100 per cent invested in the SMSF bank account.

• The Browns have a taste for the exotic and seek advice regarding various proposed investment options for their SMSF.

Case study 1 – artwork

The Brown Family SMSF is considering investing in two valuable artworks.

Artwork 1 – currently owned by Brooke The Brown Family SMSF cannot purchase artwork 1. Artwork is not exempt from the general prohibition of assets that can be acquired from a related party and as Brooke is a related party, the transaction cannot be executed.

Artwork 2 – currently owned by an unrelated party and will be available for sale at an upcoming auction

The Brown Family SMSF may purchase artwork 2 as this is currently owned by a third party. However, in addition to the general rules and consideration, as art is considered a collectable/personal-use asset, the additional requirements relating to elements such as storage and insurance will apply.

Case study 2 – loans

The Brown Family SMSF is considering making the loans below.

Loan 1 – $40,000 loan to Andrew’s brother, Charles

The Brown Family SMSF cannot make this loan. Despite satisfying the in-house restriction as the value of the loan is below 5 per cent of the fund’s total assets, an SMSF is specifically prohibited from making a loan to a member or a relative of a member.

Loan 2 – $30,000 loan to a company Charles owns

Unlike loan 1, as the borrower of loan 2 is a related company rather than a related individual, this is not specifically prohibited.

In addition to ensuring the loan is always within the 5 per cent in-house assets restriction, Andrew and Brooke must ensure this loan satisfies the general rules such as the terms of the loan including having an arm’s-length interest rate.

Loan 3 - $60,000 loan to an unrelated company

Subject to the general rules, loan 3 is permitted. Despite the value of the loan being greater than 5 per cent of the SMSF total balance, the in-house assets restriction does not apply as the borrower is an unrelated party.

Case study 3 – bullion

The Brown Family SMSF is considering investing in two precious metal investments.

A 10-ounce Perth mint gold bullion cast bar – 99.9 per cent pure gold

Subject to the general rules, the Brown Family SMSF may purchase this bar. This bullion will not be subject to the collectables/personal-use assets rules as the bar trades at a value close to the spot price of its precious metal content.

However, it should be noted:

• some types of bullion, for example, limited edition bars, may still be subject to the collectables/personal-use asset rules if, aside from fabrication and retail costs, the bullion trades at above the spot value of its precious metal content, and

• given the value of the bullion, a prudent trustee would likely decide to follow many or all of the collectables/personal-use assets rules to ensure the sole purpose test is satisfied.

A 0.2355 ounce sovereign gold coin –91.7 per cent gold content

Subject to the general rules, the Brown Family SMSF may purchase this coin. However, unlike standard gold bullion, the market value of this coin is more than its precious metal weight. As such, the collectables/personal-use assets additional requirements apply.

Case study 4 – cryptocurrency

The Brown Family SMSF is considering investing in cryptocurrency and storing the crypto coin in a physical cold wallet. Subject to the general rules, the Brown Family SMSF may purchase cryptocurrency. Also, this type of asset class is not subject to the collectables/personal-use assets additional requirements.

The main consideration for an SMSF owning cryptocurrency is how to store the coins in a secure manner with the two broad options being:

• hot storage: where the crypto wallet is connected to the internet and accessed via an application or platform, or

• cold storage: where the crypto wallet is not connected to the internet and is usually held on a hardware device such as a USB stick that is designed to store cryptocurrency.

Whichever method of storage the trustees choose, they must comply with SIS regulation 4.09A, which requires that money and assets of an SMSF must be kept separate from any other money and assets that are held by trustees personally.

If Andrew and Brooke choose the cold storage option, it would be prudent to ensure that the crypto coins owned by the SMSF:

• are stored on a cold storage device owned by the fund,

• the cold storage device only contains crypto coins owned the SMSF, and

• the cold storage wallet is stored in a very secure place.

Case study 5 – Lego

The Brown Family SMSF is considering investing in a Millennium Falcon 10179 Star Wars Lego set.

Subject to the general rules, the Brown Family SMSF may purchase this rare and valuable Lego set. Although the collectables/personal-use assets definition does not specifically include Lego, the additional requirements would apply. This is because section 62A(m) of the SIS Act includes, as a collectable/personal-use asset, those “assets kept mainly for personal use or enjoyment”.

Where an SMSF wishes to invest in Lego, or equivalent toys, in addition to the collectables/personal-use assets additional requirements, it is important SMSF trustees also understand that in order to satisfy the sole purpose test, such assets must not be used for personal enjoyment. The trustees would also be prohibited from reducing the value of the asset. For an unopened Lego set, this would include opening the box.