The strategy: To invest in art for my self-managed super fund.
Am I really allowed to do that?
Think of it this way. Your self-managed fund is an investment vehicle for your retirement - not a slush fund to improve your current lifestyle. Any assets bought by the fund must be purchased with your retirement benefit in mind. But that said, art can be a profitable investment. Just look at the recent auction sales of multi-million dollar works by John Brack and Fred Williams. There's no law stating your self-managed fund can't participate in that market, so long as you play by the rules.
What rules?
According to Shaun Berg, a partner with the law firm Hunt & Hunt, the first test is whether the fund's investment strategy allows it. All funds are required by law to have a written investment strategy, and, more importantly, to follow it. (The second bit's what many funds fall foul of.) The Tax Office, which regulates self-managed funds, isn't prescriptive about what the strategy must say, though it must consider risk, diversification, and liquidity. It must also state what it's objectives are and how they will be met. Berg says if you want your fund to invest in art, the strategy should allow for a portion of the funds' assets to be invested in alternative assets such as art and collectables. It should also state the objective of having such investments. The Tax Office says trustees should seek expert advice on the potential income, capital growth and liquidity of the asset before acquiring any non-traditional asset including art. While not compulsory, Berg says trustees should ideally back up their decision to buy a particular artwork with an independent valuation report. But that's not all that's required. The big test with any super fund is the sole purpose test - which says super funds must be run for the sole purpose of generating retirement benefits for members. Investments that provide members with current benefits can fall foul of that test. As Berg points out, that can be a problem if you want to hang the art on your walls. The Tax Office can deem your enjoyment of the painting to be a breach of the sole purpose test - even if the work is still a good investment.
So what do I do - stick it into a cupboard?
Putting the art into storage is definitely an option. Another is to loan or lease the artwork to an unrelated party. But Berg says you may also be able to hang it in your home or office if you make appropriate commercial arrangements.
How does that work?
Berg says a carefully-structured lease arrangement may allow you - or a related party such as your family business- to lease the painting from the fund. He says such arrangements must be made and maintained at arms' length. So the lease should be in writing, on strict commercial terms, and adhere to true market values. Even then, it must also adhere to the in-house assets rules which limited related-party assets to 5 per cent of the fund. Berg says this means self-managed funds are prevented from lending or leasing more than 5 per cent of the funds' assets to a related party such as a fund member, their relatives, partners, or any vehicle such as a trust or company that they control. So if you buy a $10,000 painting, and want to lease it from your fund, you'll need a fund worth at least $200,000 to avoid breaching the in-house assets rule. The bottom line is that if you treat the artwork as an investment asset, it may have a place in your super fund. But you could be running into problems if you see your super as simply a means to buy something to hang on the living-room wall. |