Investments in collectibles and personal use assets within a Self-Managed Superannuation Fund (SMSF) are subject to specific regulations and compliance requirements, particularly during the audit process. SMSF auditors play a crucial role in ensuring that the fund adheres to these regulations. Here’s an explanation of what investments in collectibles and personal use assets mean in an SMSF audit and how auditors can comply:

1. Regulatory Framework:

Investments in collectibles and personal use assets fall under the purview of the Australian Taxation Office (ATO) guidelines. The regulatory framework is designed to ensure that such investments align with the sole purpose of providing retirement benefits to SMSF members and comply with specific investment rules. Reg 13.18AA applies to the investment in collectables and personal assets to ensure compliance with Section 62 of SISA – Sole purpose test. The primary objective of Regulation 13.18AA is to ensure that collectables or personal use assets held by an SMSF are not leased to related parties. Non-compliance with Regulation 13.18AA may result in penalties for SMSF trustees. Penalties can include fines, disqualification of trustees, or other regulatory actions.

Collectables and personal use assets :

Trustees must ensure that they must not :

  1. – Provide any present-day benefit for SMSF members or related parties
  2. – Be leased to an SMSF member or a related party
  3. – Be stored or displayed in the private residence of an SMSF member or related party. The decision on where these items are stored must be documented and kept as a record.

Say, for example, your SMSF owns a painting. You could lease it out to a gallery provided the gallery is not owned by a related party and the lease is on arm’s length terms. Or if your SMSF owns a vintage car, you or a related party can’t drive it even for maintenance or restoration work, but a non-related party could.

2. Sole Purpose Test:

Section 62 of SISA states the ‘sole purpose test’ is a critical aspect of SMSF compliance. It requires that the primary purpose of the fund is to provide retirement benefits to its members. Investments in collectibles and personal use assets must be made with this sole purpose in mind. SMSF auditors need to verify that the fund’s investments, including those in collectibles, are consistent with this requirement. Penalties for not performing thorough checks into the investments may include fines or disqualification from being an auditor.

3. Valuation, Reporting, Storage and Insurance:

Accurate valuation of collectibles is crucial for compliance. SMSF auditors need to ensure that the valuations are conducted using ATO-approved methodologies. Collectibles must be valued at their market value, reflecting the true economic worth of the asset. Auditors should scrutinize the valuation process to ensure it aligns with the ATO guidelines.

Collectables and personal use assets:

Trustees must ensure that collectables :

  • Be insured in the SMSF’s trustees name within seven days of being acquired
  • Be valued at market value when preparing your fund’s annual accounts and financial statements
  • Be valued by an independent expert if transferred or sold to a member of your SMSF or a related party.

In Part B of the Audit report (Compliance Engagement), an SMSF Auditor provides the opinion based on the fund having complied with all SISA & SISR including, Reg 8.02B – that all assets are valued at its market value. Market value is defined in subsection 10(1) of the act.

The ATO has signalled it will be intensifying its focus on SMSF asset valuations following a review that uncovered a high proportion of unchanged valuations over a two-year period. While property valuations are understood to be the main target, collectables could also be caught up in the review. As set valuations are also in the spotlight ahead of the government’s new tax on unrealized capital gain to the members having a Total Super Balance over $3 million.