How to avoid penalties with the ATO’s new asset rules

How to avoid penalties with the ATO’s new asset rules

Any trustees holding assets such as artwork, jewellery or motor vehicles in their SMSF could be hit with significant penalties if they don’t take note of the new rules starting 1 July.

How time flies when you are having fun. It is almost five years since the rules surrounding ‘collectable and personal use assets’ – let’s just call them ‘collectables’ for simplicity – came into effect. This means the transition period is almost at an end and by 30 June 2016 all SMSFs with collectables will need to fully comply with the relevant rules. While the asset class is relatively small as a percentage of overall SMSF assets, there are still a lot of funds who acquired collectables prior to 1 July 2011 (when the rules changed) that may not comply if they do not act soon.

The ATO recently stated that they expect trustees to ensure they comply by 30 June 2016 and believe the five-year transition period has given trustees ample opportunity to put their affairs in order. Therefore any funds who do not comply by this date run the risk of penalties being applied, highlighting the importance of acting now.

 

So what do you have to do to ensure they comply, and what are some key issues your auditor will be looking for?

Let us first identify what assets are deemed to be collectables and then go through the rules which must be complied with from 1 July 2016 (Note: all collectables acquired from 1 July 2011 have been required to comply with the rules since that date).

The legislation defines Collectable and Personal Use Assets as:

• Artwork – including paintings, sculptures, drawings, engravings and photographs
• Jewellery
• Antiques
• Artefacts
• Coins, medallions or bank notes – Coins and banknotes are collectables if their value exceeds their face value bullion coins are collectables if their value exceeds their face value and they are traded at a price above the spot price of their metal content
• Postage stamps or first-day covers
• Rare folios, manuscripts or books
• Memorabilia
• Wine or spirits
• Motor vehicles and motorcycles
• Recreational boats
• Memberships of sporting or social clubs.

Collectables must not be leased to or used by a related party.

An SMSF is unable to lease a collectable asset to a related party (that is, a member, relative or other related entity) including informal lease arrangements. Unlike the in-house asset rules, there are no minimum thresholds, therefore even if the asset is worth less than five per cent of the fund’s total assets, it is still not permitted.

There is no issue with an SMSF owning and leasing collectable assets, for example, artwork leased to a gallery, so long as the lease is not to a related party (so the gallery in question cannot be owned by a related party).

Related parties are prohibited from using collectables, even if that use is insignificant or incidental. Displaying an asset, such as a piece of art or an antique item is considered use. In practice, ‘use’ of an asset would likely constitute a lease or lease arrangement so most use will be caught under the leasing provisions. However, some trustees may not consider the use significant enough to warrant a lease so this provision captures those instances.

Trustees holding these assets need to ask themselves if there is any likelihood that they, or a related party, are likely to use the asset beyond 30 June 2016, even if that use is incidental or insignificant. If the answer is yes, then they should reconsider who holds the asset and perhaps consider selling it to themselves or to the related party who intends to use it.

What to look out for – it is not uncommon for small business owners to lease artwork or other collectable assets, such as sporting memorabilia, from their SMSF to display in their reception or boardroom. This will not be permitted for any collectables from 30 June 2016.

Storage and documentation

Collectables are not permitted to be stored in a private residence of a related party. A private residence incorporates all the land on which the private residence is maintained and any other building on that land such as sheds or cellars.

The regulations do not prohibit these assets from being stored at other premises owned by a related party such as business premises or a storage facility. However, storing an asset does not allow an asset to be displayed where it can be viewed by the public or employees. So again by using artwork as an example, it is not considered ‘stored’ if it is on display in the office reception or boardroom.

The legislation also requires trustees to maintain a written record which documents the reason for how the assets is stored.

What to look out for – SMSF trustees who elect to store fund assets must document their reasons for storing the assets. This documentation may be either in writing or electronic form but must be kept for at least 10 years.

Item must be insured in fund’s name

Assets, excluding memberships, must be insured within seven days of acquisition and the insurance must be in the name of the fund. For pre-1 July 2011 assets this means that insurance must be in place by 30 June 2016 to comply.

Insurance is a consideration and cost that raises questions about the legitimacy of certain assets satisfying the investment objectives of the fund with regards to providing for a member’s retirement benefit. Does the cost of maintaining insurance warrant the ongoing retention of the investment or was the original investment made because of personal enjoyment?

What to look out for: it is not acceptable to insure the assets under the member’s general household insurance policy, which was historically the common practice, even if the asset is separately listed on the policy. The auditor will require a copy of the insurance policy to identify that a) it exists and b) that it is in the name of the fund.

Independent valuation of assets

When an SMSF sells or transfers a collectable asset to a related party it is required to have the value of the asset determined by a qualified, independent valuer.

Under the transitional rules, for assets acquired before 1 July 2011 and sold before 30 June 2016, the trustees are not required to obtain an independent valuation, provided the transaction is completed on arm’s length terms. The trustees will need to retain and provide evidence to the auditor that supports the valuation used.

After 30 June 2016, a sale of a collectable asset to related party will need to be supported by an independent valuation, which depending on the type of asset may be complex and could incur additional costs to the fund.

Now is the time to act

Time can pass quickly and with less than three months, trustees should not leave it until June to make decisions regarding collectables within their fund. They should act now to ensure they comply by the time the bell tolls on 30 June 2016.

Richard Smith, partner, ASF Audits

How to avoid penalties with the ATO’s new asset rules
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