Shortly after the GFC, SMSF trustees allocated higher amounts to collectibles: artworks, vintage cars, rare stamps and coins. Perhaps investing in a vintage Aston Martin and roaring down Victoria’s Great Ocean Road made perfect sense when sharemarkets were on fire and crashing everywhere.
But because SMSFs were buying collectibles for personal use and not for the sole purpose of providing members with an income in retirement, the federal government introduced tough new rules in July 2011. SMSFs that had invested in collectibles before this date were given a generous transitional period, which ends in July next year. That means they will soon need to decide whether they comply with the rules or should adjust their portfolios.
The rules force trustees to focus purely on investment merits. The assets must be kept in storage, insured within seven days of acquisition and independently valued. It means SMSFs cannot use or display their collectibles in their homes, businesses or the properties of relatives or business partners.
“Assets within the SMSF should be there for the purpose of ultimately providing an income for a member’s retirement. They are not there to provide a present-day benefit to members,” says SMSF adviser Monica Rule, who wrote The Self-Managed Super Handbook – Superannuation Law for SMSFs in Plain English.
However, she says the government recognises these assets can be legitimate investments, which is why it merely tightened rules so that the collectibles cannot used for personal enjoyment.
“Although July 1, 2016, is some 16 months away, SMSFs that qualified for the five-year transition period will need to consider whether to sell the asset prior to July 1, 2016, or maintain it and comply with the rules,” says Rule.
One of the main problems with collectibles is that a valuation can be hard to pin down and that means they may not be as easy to sell as shares or property. Graeme Colley, the director of technical and professional standards at the SMSF Professionals’ Association of Australia, says the value of collectibles fell almost $300 million from $776 million in December, 2012 to $482 million in September last year.
Collectibles currently make up less than 1% of the $557 billion in SMSFs.
“It’s quite a significant drop [close to 40%] over a relatively short period,” says Colley. “So people are moving artworks and collectibles out of their super funds.
“It’s certainly one of the more risky investment areas. I think that’s why such a small proportion of SMSFs invest in it, although I do know of some funds, where you’ve got people with certain expertise, that have done well.”
Colley says insurance and storage can also be barriers to investing. “Whether it’s wine, artworks, stamps or coins, it needs to be insured and one of the problems with that is getting insurance within seven days because their value may be debatable. So the first thing is getting a valuation and then working out whether someone is prepared to take the risks and insure it for the super fund.
“Storing artworks can be significant. If it’s wine, it needs the right temperature, so it needs special conditions and that can be relatively expensive. If you have rare coins or stamps, you could use a bank vault but it might not have the right conditions to ensure they don’t deteriorate.”
Values bounce around
Investing in collectibles may not be appropriate for an SMSF, warns director of WLM Financial Services Laura Menschik.
“If you needed to start paying out some money from the fund for a pension or death benefit and needed to sell a piece of artwork quickly to realise the money, it could be difficult. It’s a very illiquid asset.”
Advisers like to look at the estimated income and capital growth of an asset based on various criteria over time, she says.
“With shares or property or term deposits, we can anticipate an income of this amount and growth of that amount to work out what you could take out as a pension payment for your retirement. How do you do that with a piece of art or vintage car?”
Collectibles include: Artworks • Jewellery • Antiques • Coins, bank notes, medallions • Stamps, first day covers • Rare folios, manuscripts, books • Memorabilia • Wine, spirits • Motor vehicles • Recreational boats • Memberships of sporting or social clubs.