Investing in art with your SMSF

Welcome to our Australian Aboriginal art investment online gallery in Sydney, Australia

We are an investment art gallery in Sydney offering Indigenous artworks and Aboriginal art rental. Our team of art investing and art rental advisers are experts in financial planning, art wealth management and wealth creation and can help you with art and financial advice.

Video: Morningstar interview with SPAA CEO Andrew Slattery 

 

SMSF Industry Round Table - Boardroom Radio Broadcast 

Sharyn Long, SPAA Chairman; Liz Westover, Head of Superannuation for ICAA and Dr Greg Nazvanov, Founder of ArtTrust.com.au discuss and examine Phase 3 of the Cooper Review relating specifically to SMSFs.  Moderated by Ian Glenister, Principle of Glenister & Co.  Click here for the resource.

Click here to download an article about "Save Super Art" campaign in response to the Cooper SSR.

SPAA, in conjunction with the Australian Artists Association, has released best practice artwork investment guidelines for SMSF advisers and auditors and stated that "artwork is a viable investment option" for SMSFs.  Click here for the article.  Download the Lowensteins Arts Management newsletter on "Save Super Art" campaign .  

Both Senator Christine Milne and the Prime Minister Julia Gillard received ArtTrust's submission on art investment viability in superannuation and copies of Dr Greg Nazvanov's book "The Australian Aboriginal Art Investment Handbook 2010".

Labor announced on the 30th July 2010 that SMSFs would continue to invest in personal use and collectable assets provided they were held according to new legislative standards that will ensure the assets would not give rise to a personal benefit and were held solemnly for the purposes of providing retirement benefits. Read more about Australian Labor initiatives and proposals.

The Australian Greens confirmed that art works and other collectibles must continue to be legitimate investments for self-managed superannuation funds. There is a significant global market for Indigenous art, making it attractive to SMSF and therefore creating an incentive for buyers, with around 60% of Indigenous art being bought through SMSF.  The Greens believe that the benefits of the current system far outweigh the negative consequences created by the recommended changes. Read more about Greens initiatives to protect Australian culture, artists and art investors. 

 

Our understanding of the current SMSF legislative framework relating to Art Investing is summarised below.

Where will the pieces be displayed? The Sole Purpose Test prohibits trustees from making investment decisions to obtain a benefit prior to retirement:

Typically, the asset allocation within an SMSF might need to change, especially when considering using 100 percent of funds towards art using SMSF. In addition, at retirement, there may be a need to make more changes to the fund to ensure it is able to produce income, unless there is income from other sources.

When buying art as an investment, seek good financial advice.

Galleries, the primary market, are a source of information but they invariably promote their own selective artists, hence they are quite biased. Auction houses, on the other hand, are like a stock exchange where people are putting their shares back on the market for sale and the market determines how much the market is prepared to pay. They show art sales historical data and the percentage of growth in any particular artist's work. The drawback is that it may cost 15-20% extra in “buyer's premium” for the privilege of buying through an auction house.

Sole Purpose Test

If an investment provides some personal benefit, the trustee will need to consider whether that personal benefit is consistent with the sole purpose test.

As a general rule, the sole purpose test provides that the SMSF superannuation fund needs to be run exclusively for genuine retirement purposes. There are a limited number of other purposes that are allowed, such as providing against total and permanent disability, but the pleasure of looking at art is not among them. The Administrative Appeals Tribunal has indicated in previous decisions that it will look to whether the trustee has a secondary purpose to make the assets available for their own use and for the use of family and friends in determining if the investment is consistent with the sole purpose test.

Under this approach to managing the investments, the Trustee should implement a due diligence process promoting well thought-out and responsible decision making. This also protects the Trustee from action by members if the investments turn out to be disastrous.

WARNING: 

If you don't have a valid and complying "investment strategy” then the ATO may state that your self managed super fund is non-complying. You should see a qualified financial adviser to help you with the investment strategy. 

Art Loan

The dignity of the sole purpose test set out in section 62(1) of SIS has been strained - severely. The Tax Office has set out its thoughts in Draft Self Managed Superannuation Funds Ruling SMSFR 2007/D1 which recognises that, while a SMSF may be maintained solely for the purposes set out in section 62(1), a fund may (incidentally) provide members or other entities with benefits other than those specified.

Example A

Use of work of art at no cost: breach of section 62.

A trustee of an SMSF acquires a work of art and does not seek independent advice in relation to that investment. The investment strategy of the SMSF requires the fund to hold a certain percentage of its asset in a portfolio of listed securities. The trustee liquidates all of the listed securities that the SMSF has invested in to fund the acquisition of the work of art. Soon after the artwork is acquired, it is displayed in the home of a member at no cost to that member.

The trustee contravenes the sole purpose test in these circumstances. Where the work of art is provided for the use of the member at no cost, or at less than market value, it indicates that a purpose of the investment is to provide a benefit otherwise than in accordance with subsection 62(1). The liquidation of a class of assets forming part of the SMSF investment strategy reinforces the conclusion that the provision of the benefit outside of those stipulated in subsection 62(1) was purposeful.

Example B

Lease of work of art to member at market value: no breach of section 62.

SMSF maintains an investment in a significant art collection as part of its investment strategy, and commonly leases works of art to unrelated third parties at market rates. The trustee has expertise in investing in works of art, but nevertheless receives independent advice in relation to each of its investments.

The SMSF acquires a work of art after it has received independent advice regarding the soundness of investing in it. The SMSF then enters into an arrangement with a member whereby the member leases the work of art from the SMSF at market rates and subject to normal commercial conditions and controls. The work of art is displayed in the home of the member. There is no contravention of the sole purpose test in these circumstances. The benefit to the member is the opportunity to use the SMSF assets by paying an arm's length amount. There is no cost or financial detriment to the fund as a consequence of the use of the work of art by the member.

Nevertheless, trustees need to ensure that they do not provide a purposeful benefit to the members when undertaking SMSF activities, even if there is no net cost to the SMSF in providing the benefit. Although the impact of an arrangement on the SMSF resources is a relevant consideration, it is ultimately the objective purpose of providing the benefit rather than the net financial impact of the arrangement on the SMSF resources that determines whether the sole purpose test is contravened.

Risk Management

Trustees need to be able to demonstrate from a custodian viewpoint that they are taking adequate precautions to protect any work of art held by the fund - it should be kept in a secure location and be stored to minimise damage. The works must be adequately insured (by the fund). All these procedures need to be minuted properly.

Why does my Fund need an Investment Strategy?

Under the Superannuation Industry (Supervision) Act 1993 (“SIS Act”) the Trustee of the SMSF is solely responsible and directly accountable for the management of the members’ benefits.

The trustee has a duty to make, carry out and document decisions about investing the assets of the fund and to carefully monitor their performance. This duty involves formulating and implementing an investment strategy. This important duty is prescribed in the SIS Act as a covenant (an obligation of the trustee).

The investment strategy must have regard to the whole of the circumstances of the Super Fund, including:

  1. The risk involved in making, holding and realising the SMSF's investments, and the likely return from these investments, having regard to the SMSF’s objectives and its expected cash flow requirements;
  2. The composition of the SMSF's investments as a whole, including the extent to which the investments are diverse or involve the entity in being exposed to risks from insufficient diversification;
  3. The liquidity of the entity's investments having regard to its expected cash flow requirements, for example: payment of tax, superannuation surcharge liability of the members, lump sum benefits if a member leaves the SMSF, or regular pension payments;
  4. The ability of the SMSF to discharge its existing and prospective liabilities

The purpose of this obligation is:

  • To protect the members’ retirement benefits;
  • To minimise the risk of irresponsible or incompetent investments; and
  • To ensure investments are made in accordance with the sole purpose and investment provisions of the SIS Act.

You get a knock at the door. They flash their badge. It is the ATO coming to “help” you with your Self Managed Super Fund. The first thing they look at is your Investment Strategy. Is it up to date? Is it complying with all the latest rules for this year?

What is an Investment Strategy?

It is a strategy which is aimed at the investments of the Self Managed Super Fund (“SMSF”) to achieve a desired outcome and a minimum level of performance. It is a plan for making, holding and realising the Fund’s assets, consistent with the Investment Objective of the Fund.

In the event the trustee stores artwork on their wall at home, they may be considered to be deriving personal use or enjoyment from the asset. It is not the storing of the artwork on the wall that is the issue; it is the trustee deriving personal use or enjoyment from the asset, such as looking at it.  To avoid any doubt, the trustee may need to put it into storage or even place it on loan to an art gallery in return for the gallery providing storage.

Contact us for more information

Example C

Loan of work of art to an unrelated party: no breach of section 62

Following on from Example A, the SMSF provides, at no cost, the work of art to a local gallery for display in a special exhibition that is run for a period of two months. The artwork provides a benefit for the community at large.  However, the facts given in this example establish that there is not a contravention of the sole purpose test as the cost or financial detriment to the fund and the benefits provided by the SMSF outside of those specified by subsection 62(1) are remote and insignificant. The display of the work of art at the exhibition may in fact enhance its future value.

Example D

Loan of work of art to a related party: breach of section 62

Following on from Example A, a related party of the SMSF owns a gallery. The related party charges the general public an admission fee for viewing the works of art at the gallery. It also sells picture cards and pens in the gallery gift store, promoting the paintings currently on display.  The SMSF regularly loans its works of art to the gallery at no cost. Its investment choices are also largely determined by the art gallery's desire to acquire certain paintings. In this example, there is a pattern of events that result, when viewed in their entirety, in a contravention of the sole purpose test.

Purchasing art in self-managed fund has the same concerns and benefits as purchasing art through any other kind of superannuation fund. The investment in art and paintings purchased in this way should meet the given criteria and strategy as laid out by the fund. If there are any questions or concerns, they should be addressed to the fund’s accountant.

In general, art purchased through the fund cannot be displayed privately by members, since the fund’s assets and members’ assets must be separated. The main objective of this fund is to provide benefits to its members after retirement and not before they retire.

However, if the art satisfies the investment strategy of the fund, it may be possible to store and display it in a public gallery to promote the work of art as well as the artist. This kind of display will increase the worth of the piece of art.  Proper paperwork and fair commercial terms must be met to display the art.

In context of the investment strategy of the superannuation fund, it may also be possible to lease the piece of art to a third party on commercial terms. The fund’s accountant can provide advice prior to entering such an arrangement to make sure that it is documented properly.

An art bought by the superannuation fund must be valued and completely insured against any kind of damage or loss. The piece of art should be re-valued occasionally to ensure that it has adequate insurance coverage.

Self-Managed Superannuation Funds are primarily governed by the rules contained within the Superannuation Industry (Supervision) Act 1993. The relevant sections:

  • Section 52(2) (f) - requires Trustees to formulate and give effect to an Investment Strategy that has regard to the whole circumstances of the fund including risk, diversification, liquidity and solvency.
  • Section 66 - subject to certain exceptions, the Trustee is prohibited from intentionally acquiring assets from related parties of the fund.
  • Sections 69-85 - outlines the In House Asset rules.
  • Section 109 - requires the Trustee to operate on commercial terms.
  • Section 62 - essentially requires the Sole Purpose of the fund to be the provision of retirement benefits and/or death benefits.
  • § ATO ID 2004/248 Investment in Art by a SMSF
  • § ATO ID 2004/249 Investment in Art by a SMSF and its display
  • § ATO ID 2004/250 Investment in Art by a SMSF - in house asset
  • § ATO ID 2004/251 Retirement Income Entities - arms length arrangement

Case Study - A DIY super way to reduce Capital Gains Tax
 
Following a successful working life, John (61) and Mary (62) have decided to retire and enjoy a new lifestyle. One of the first steps was to sell their Aboriginal Art collection, which they created by buying Aboriginal art pieces since 2006 and invested a total of $350,000, as they wanted to have a flexible income stream and be able to draw down capital during retirement. After placing them with Art Auction Houses, John and Mary found a buyer who made an offer of $850,000. Before papers were signed, and the deal was done, John and Mary were happy with the deal. Although they made a profit of $500,000 within their DIY super fund by placing the fund to a pension phase and proceeding with the sale after, the happy couple were not liable for the Capital Gains Tax. From 1 July 2007, all superannuation and pension payments made to members aged 60 and over are tax-free and earnings inside the fund also tax-free.
If art is managed correctly, it could be of benefit to generations. Art can make an excellent addition to a self-managed superannuation fund, but fund managers need to keep a close eye on the rules. Whether the purchase is for love of art or investment purposes, the same capital gains tax (CGT) is applied, just as when one purchases and sells shares, property, or ownership in a business.
 
Investment in art for super funds is growing, becoming more common and more widely discussed. But it does not yet have the profile of more traditional areas of investment. When it does achieve the profile of the more traditional areas of investment, prices may skyrocket.
 
Inheritance and Continuity
 
After a lifetime spent gathering a collection, what will happen to it after the owner passes on? Strangely, art institutions aren't that keen to be given bequests because of the costs involved in maintaining them. Likewise, bequeathing a valuable painting to family or friends could be saddling them with a tax liability should they choose to sell it. If a work of art was bought before the capital gains tax was introduced in September 1985, generally, it would not be subject to the tax. If someone inherits a work of art, however, then capital gains begins from the date he or she inherited. If the piece was bought after 1985, the capital gain is based on the difference between the purchase and sale price. Fifty per cent of that gain is then assessable and added onto the vendor's income in that financial year. As a result, clients who may have been in a lower tax bracket are pushed up into the higher marginal tax bracket and can lose a large part of the gain in tax. That's where a self-managed superannuation fund (SMSF) can be very useful.
 
SMSF is probably the most effective estate planning vehicle that is available to Australians today. Among other benefits, SMSF allows art collections to be maintained. One of the major benefits of an SMSF is that during the accumulation phase and up until retirement, the fund pays the lower 15 percent income tax and 10 percent capital gains tax. After retirement, the fund moves into pension phase and zero tax is payable on both income and capital gains within the fund.
 
Clients can buy works of art through their SMSF during the accumulation phase, sell it during the retirement phase and have no capital gains tax implications. Then retirees have cash reserves to diversify into other types of assets to fund happy retirements.
 
SMSF: Taking care of rules and regulations
While any collectable or unique investment can be in an SMSF, the asset has to be valued every year. However, these are illiquid assets. Once a client reaches retirement, the question changes to, “If the works of art are still in the fund at retirement; how will the clients provide for their retirements?”
 
The trustees are required to make sure the assets are being cared for and insured. To accomplish this, the ATO recommends that the collection is placed in storage or leased to an art gallery or commercial premises. If the collection is leased, it will be producing an income. But it's rare where leased works of art manage to produce sufficient income to sustain someone in retirement.
 
Restrictions
 
Provided the Investment Strategy permits the investment in works of art, the following additional factors must then be considered:
  • if a member obtains the benefit at no cost, then the sole purpose test may be breached; or
  • if a member or related party obtains a benefit, but pays a commercial lease entered into after 23/12/99, then the   Agreement must be documented and the In House Asset rules must be considered (ensure the art work is less than 5% of the market value of the fund's assets).
  • detailed expert advice should be sought if the artworks will be held for capital appreciation purposes (as opposed to deriving an income stream), documentation recorded and kept regarding annual costs such as insurance and storage and valuation costs.

 

 

 

Can you invest in art using Superannuation? 

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