It is obvious many Australians wish to invest in the art market. One of the reasons why is a nervousness and distrust of financial markets – ironically this is the exact opposite to the reasoning behind The Cooper Report - which advocated that only prudentially-regulated investments would be allowed in order to protect retirement savings.
When the Cooper Report was released two years ago the all ordinaries index stood at 4350 – today it is actually 200 points lower. Super funds have responded to the disappointing performance of the stock market by reallocating their assets into cash at record levels and this has led to a growing desire by investors to diversify their investments into other areas like artworks.
During this same period the Australian art market has held its ground and continues to turn over approximately $100 million per year at auction. This is a tremendous cultural and economic achievement and places Australia ahead of similar nations like Canada – who have an extra few centuries of history and a French heritage in their favour!
It is important to recognise that superannuation investments by their nature are held for long periods and this seems to be a good fit with the art market where artists can produce works over their lifetime. At the same time the ability of self-managed funds to continue to invest in the art market has become a deeply political issue.
There is a mystique around the activities of artists, dealers and valuers but the public should be made aware that acquisitions of art, although a very enjoyable past-time, are also investment-driven and not just a personal folly.
Unfortunately the financial services industry groups art with other collectables like antiques and coins and describes these types of investments as “exotics”.
The danger of the term “exotics” can be seen in a recent edition of the Super Made Easy magazine which illustrates an article on buying artworks and collectables through super funds with images of retired people on yachts.
Artworks are a very different class of asset to yachts and memberships in social clubs for three main reasons:
(a) The art market has a very long history and it is integrated on a global level
(b) The creation of art itself is part of a broader arts industry that supports communities all over the country and is part of the cultural fabric of Australia
(c) Art is now defined separately in the resale royalty legislation
However not all art is suitable for investment by super funds – particularly now that the super art laws have been changed. Art investments in super funds should be a considered part of the entire portfolio of investments and not isolated to a single painting or a single sculpture.
What makes a super fund unique is the “sole purpose test” – the fund must meet the requirement that it exists solely to provide benefits to its members in the event of retirement.
In relation to artworks and the sole purpose test the ATO argues that hanging artworks at the home of a member immediately confers a benefit to that member pre-retirement and therefore breaches the sole purpose test. This proposition has not been tested in court but it is the rationale behind the new super art laws.
However if art was seen as a legitimate investment class – separated away from the other “exotics” that constitute the ATO definition of a collectable - the problems associated with hanging super art at home would mainly go away.
Roger Dedman analysed the art market in 2009 and concluded that carefully chosen Australian paintings bought at auction with the intention of being held for at least 5 years and preferably 10 can confidently be expected to produce a satisfactory rate of return when viewed purely as an investment.
Artworks can be very suitable for SMSFs. They are more likely to return growth with a long-term strategy which suits many in the accumulation phase of their investment strategy. It is also a more personal form of investment as you can follow the career of the artist you have invested in and in this way it can be seen as a form of “ethical investing”.
The Cooper Report changed the landscape for super art investing. Central to understanding this are the rule changes to in-house assets and related party transactions – which are no longer allowed.
Previously the in-house asset rule with respect to artworks meant that you could keep and display artworks in your house – up to a value of 5% of the assets held by the fund – without breaching sole purpose.
The related party rules pre-Cooper meant that super art could be displayed and leased to a company or individual associated with the SMSF. This is no longer the case nor can artworks owned by the member of a SMSF be bought by that SMSF or transferred across as a contribution.
But importantly investor choice has been maintained. The new rules encourage collectors to think about their artworks as a collection or an investment within a portfolio of other investments – this is positive. What is now needed is to have the super art laws modified so they do not create disincentives in the future – and before the five-year transition period from the old to new rules ends on 30 June 2016.
So what should these amendments be?
Suggested amendments to the super art laws
1. The rules for SMSF artwork investment should be separated from the rules for other forms of collectables.
2. Artworks should be defined by reference to the Resale Royalty Right definition and not by reference to the old ATO definition.
3. Capital gains or losses on the sale of artworks should be permitted to be offset against capital losses or gains on other classes of assets except for personal use assets.
4. The in-house asset rule should be reintroduced for artworks.
5. Storage requirements should be modified so that artworks would be permitted on the premises of the member provided they are not on display (except for the in-house asset rule). Such an arrangement could be satisfied by a Statutory Declaration by the SMSF trustee to the Fund’s auditor.
6. Cost of the Insurance requirements would be eased by modifying the storage measures.
One of the reasons behind the success of the Australian art market over the last twenty years has been the role of superannuation, particularly in the self-managed sector, to provide liquidity and certainty to the market. It is a world-class system that deserves its place in the retirement policies of the country.
