“Anything that discourages the buying of artwork is stupid”
Colin Lanceley, July 2010
One year ago the former Federal Arts Minister, Peter Garrett, unwittingly provided support for self-managed superannuation fund (SMSF) investment in the arts, at a talk at Melbourne University.
Referring to an image of an Eubena Nampitjin painting which had been left on screen by the previous speaker, Garrett remarked on the beauty of the work as well as the importance of investing in the Aboriginal art market.
Unknown to Garrett, that particular artwork belonged to an SMSF collection at a time the Government was proposing to prohibit such future acquisitions. Less than a month later during the 2011 election campaign this proposal was abandoned following a concerted campaign against it by the Save Super Art campaign led by Tom Lowenstein and run by the author.
Instead of banning SMSF investment in the arts the Gillard administration pledged to introduce new regulations by 30 June 2011 and indeed that is what was delivered via the Superannuation Industry (Supervision) Amendment Regulations 2011 (No.2) legislated on that day.
These new laws are certainly more onerous than the previous regulations, however, they do not represent “the arts end of superannuation”, as a certain academic described it in April this year.
So what are the new regulations and what are the most important aspects of the changes? In the absence of an official education campaign to inform the art market about these new laws I make the following comments:
- The new regulations do not apply to collections held at 30 June 2011 for another five years. In other words, collectors may rely on the previous regulations concerning SMSF artworks acquired on or before 30 June 2011 until 30 June 2016. If these artworks are still held on 1 July 2016 without complying with the new regulations, the SMSF will find itself in breach and this will have consequences for all of its investments.
- “Related party transactions” are now outlawed. A good example of a related party transaction is where SMSF artworks are displayed and leased to a company or individual associated with the SMSF. Under the new regulations, these arrangements will not be allowed. Further, the definition of private residence has been expanded to include land used for private purpose and buildings on that land, such as a garage or shed.
- These provisions also capture same-sex couples through legislation that was passed in 2008, which amended the definition of a “spouse”. A spouse is now defined as “another individual who, although not legally married to an individual, lives with them on a genuine domestic basis as a couple”.
- The “in-house asset” rule has been scrapped. As it applies to artworks, the old regulations allowed an SMSF to hold five per cent of its total asset value in the form of art in the private residence of a trustee or member. (Of course this became a political hot-potato due to the perception that wealthy collectors were enjoying SMSF-financed artworks in their own homes while the less fortunate could not. It also led to a position adopted by the ATO but never tested in a court room that the mere enjoyment of such artworks was some form of pre-retirement benefit!)
- There are new requirements for storage. Effectively, collectors should note that storage solutions should be at hand even before the decision is made to buy a new artwork. There will need to be a written record of the decision relating to storing the artwork and this record must be kept for at least ten years after the decision is made.
- There are new requirements for insurance. Collectors will need to have ready access to art insurance because the SMSF has no more than seven days to insure new artwork acquisitions and failure to do so will result in the SMSF being in breach of the new regulations. Insurance firms will have certain expectations concerning the way artworks are stored. For example, the building would have to be secure and weatherproofed, artworks must be professionally stored and they would likely insist a monitored alarm system linked to a security service be put in place.
- Artworks may only be transferred out of the SMSF at a value determined by a qualified independent valuer.
- The new regulations also apply to jewellery, antiques, coins, manuscripts and certain other collectables with the proviso that such collectables cannot be used by related parties of the SMSF.
In summary, SMSF artwork investment is still alive, albeit a more conservative strategy may now be warranted. In these new circumstances acquiring works through the secondary market will have more upside than down.
