Rules relating to SMSF art investment were changed in 2011 following the Cooper Review into superannuation in 2010. Contrary to the claims of most poorly read advisers, a SMSF is still able to invest in art and provides a significant opportunity for trustees to hedge their positions or provide necessary diversification to the fund.
According to the Australian Tax Office (ATO) ruling, the acquisition of art in your SMSF is very straightforward, (and similar to any other asset class) subject to some clear regulations. Many accountants and financial advisers provide their clients with a blanket ‘NO’ when asked if a trustee can buy art in their fund but this is not correct. Often it is a case of ‘the unknown’ so they respond in the negative, but many times it may be the case that the adviser is not receiving any commission that they could receive by ‘keeping funds under management’ in traditional asset classes.
The key is to understand your role as a trustee of a SMSF, what the trust deed allows in terms of investments within the fund, and how the artwork is ‘used’.
When considering investing in art, as any other investment decision, you need to understand what’s involved. When buying through a SMSF, there are simple steps to follow to ensure you do not breach the SIS Act (Superannuation Industry (Supervision) Act 1993).
Understand what the fund allows you to invest in. Ask your tax accountant or financial adviser and check the trust deed of the fund. Most are quite generic which allow for art to be purchased, but some have specific investment ratios or guidelines.
Be aware of the ‘sole purpose test’ (Section 62, SIS Act). The ‘sole purpose’ of the fund is to provide retirement benefits for members, or death benefits to a member’s dependants upon the member’s death. Also, art cannot be ‘used’ by a ‘related party’ of the fund. According to the ATO ruling, for art to be ‘used’ means it is displayed for viewing or leased. A ‘related party’ of the fund includes the members of the fund, their relatives and any partnerships, partners of partnerships (if a member is in partnership with them), trusts and companies that members of the fund control.
Determine your investment strategy. Is this a one-off purchase or will you consider building a tailored portfolio? Is the artwork you are purchasing actually of investment grade, or is a gallery just using that term to try and sell more works?
Obtain insurance over the asset in the name of the fund within seven days of acquisition. Any specialist art adviser can easily facilitate a straightforward compliant solution on the funds behalf with a specialist insurer or conversely can direct the trustees, their accountant as to how to obtain a policy that is right for the fund. Indeed this often where naysayers comment as to the significant maintenance cost of art. If you are offered combined solutions for total maintenance on art of above 1.5% per annum then you are doing it wrong and get better guidance!
Ensure you comply with the ongoing maintenance of the asset within the fund. The ATO now requires decisions to invest in art to be documented and kept for a period of 10 years, plus there are specific rules relating to storage, insurance and valuation to be aware of.
Consult an art market expert. If your adviser or accountant doesn’t know or says no to art without a reason, contact a specialist – it is not your accountants or advisers fault if they know nothing about art. A specialist can put you or them in touch with the relevant ATO rulings, educate them on fine art for investment and discuss strategies available to ensure they are in line with your personal investment objectives and goals.
In short, the best advice is to invest with your eyes open. Understand the requirements, and just as importantly, understand what the asset is you’re investing in. If you’re an art lover as well as an investor don’t dismay that an artwork will be stored and not displayed – by purchasing the work, you will still be supporting the artist and thus Australian culture.
Please contact Piermarq Art Advisory to discuss in more detail. For information available on the ATO website about investing in collectables and personal use assets (including art) through an SMSF, please use the following link: ato.gov.au