There are a myriad of rules surrounding superannuation generally and self-managed super funds (SMSFs) are not immune from them. Strict rules attempt to ensure these types of super funds are directed towards the sole purpose of providing benefits to members in retirement, are correctly administered and comply with the law.
Of course, those rules come with some cost to the fund but the federal government sees them as being important and not to be abused.
A number of rules and restrictions apply, such as the sole purpose test, restrictions on acquiring assets from fund members or related parties and the in-house assets rule. For example, SMSFs are generally restricted from holding more than 5% of their total assets invested in in-house assets, such as a loan to a related party. Other restrictions and rules apply to borrowing and artwork, collectables and personal use assets.
These rules basically seek to prevent SMSF trustees from gaining current day benefit from prescribed lifestyle assets and to ensure that such investments are made for genuine retirement income purposes.
Nonetheless, they have from time to time been critcised for being too restrictive and too harsh. The rules, however, have not been changed.
Compliance deadline looms
The Australian Tax Office has recently reminded trustees of SMSFs trustees with investments in collectables or personal-use assets that were acquired before July 1, 2011, that time is running out to ensure their fund meets the requirements of the law for these assets, specifically those contained in Superannuation Industry (Supervision) Regulations 1994.
Since July 1, 2011, investments in collectables and personal-use assets have been subject to strict rules under the regulations.
Assets considered collectables and personal-use assets include things such as artwork, jewellery, antiques, vehicles, boats, postage stamps, coins and bank notes, memorabilia, manuscripts or books, and wine. They even include memberships of sporting and social clubs. Under the rules:
- items cannot be leased to or used by a related party;
- items cannot be stored or displayed in a private residence of a related party;
- decisions about storage must be documented and the written record kept; and
- items must be insured in the fund’s name within seven days of acquisition.
As I noted above, the rules concerning the use of an asset can seem rather restrictive and at times quite arbitrary. For example, if an SMSF owns a vintage car, related parties can’t drive it for any reason – not even for maintenance purposes or to have restoration work done – because this constitutes use of the asset. However, a person who is not a related party can drive the vehicle for such a purpose.
In addition, if the item is transferred or sold to a related party, this must be done at market price as determined by a qualified independent valuer.
Investments held before July 1, 2011, have until July 1, 2016, to comply with the rules. The ATO has said SMSFs trustees need to consider what actions are appropriate. This may include reviewing current leasing agreements, making decisions about storage and arranging insurance cover.
If a fund trustee is considering disposing the item, the ATO has said the item can be transferred to a related party without a qualified independent valuation, but only if the transfer takes place before July 1, 2016, and the transaction is made on arm’s-length terms.
From July 1, 2016, all SMSF investments in collectables and personal use assets (including those acquired before July 1, 2011) must comply with the rules noted above.
Since trustees have had since July 2011 to make the appropriate arrangements, the ATO expects they will have ensured the requirements are met before the deadline. If not, then penalties will apply.
SMSFs certainly feature prominently in the raging debate about tax and superannuation reform. What change may be announced by the government is under constant speculation. All this however should not deflect SMSF trustees’ attention from ensuring their funds comply with the law. The ATO’s latest reminder is but one of those compliance requirements.
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