Investing in art with your SMSF

Investing in art with your SMSF

Andrew Lewis, CPA, has provided us with his opinion on the appropriateness of art investment in SMSFs in more detail.

“Many investors are attracted to owning artwork in their Self Managed Super Fund (SMSF).  Before an SMSF invests in artwork, however, there are some issues to consider.

There are no specific restrictions on an SMSF investing in artwork or other collectibles; however the Sole Purpose Test and the fund’s Investment Strategy are two areas of particular importance.

The object of the sole purpose test is to ensure that self managed superannuation funds are maintained to provide retirement benefits to members upon retirement.  Where a member receives a benefit before retirement, this can mean the fund is in breach of the sole purpose test. 

Investment in works of art poses particular issues to the application of the sole purpose test as they lend themselves to personal enjoyment.  The most obvious example is where a fund displays the artwork in the fund member’s home or office at no cost or little cost.  Great care needs to be taken in relation to how the artwork is maintained or stored to avoid any potential immediate benefit being received by the member.  Even if the member pays a market rent, there may still be a breach of the sole purpose test. 

Of course, there are no set rules about this and each case will be considered on its merits.  Involving an arm’s length third party in the storage or maintenance of the artwork, on commercial terms, would be the best way to satisfy the regulators in this area.

Next, trustees of all superannuation funds are required to formulate and monitor an investment strategy, which should set out the objectives of the fund and detail the methods the fund will employ to achieve these objectives. 

For example:

* As artwork is a more specialised area of investment, trustees may be required to demonstrate why it is a good investment.  This may be through reference to expert advice indicating expected future income and capital growth.

• * The investment should be appropriate given the objectives of the fund.  For example if an income stream is required, is this investment appropriate?
• * Trustees should ensure the artwork is properly insured against damage, destruction or theft and that it is maintained in a suitable environment.
• * Any arrangements should be on commercial terms and a documented lease or rental arrangement is advisable.

Providing the fund properly addresses these and other issues, an investment in artwork can be a valid strategy for a self managed superannuation fund.  Before proceeding, however, seek advice to avoid any pitfalls as penalties can be severe.”

Andrew is a Certified Practicing Accountant and an authorised representative of Futuro Financial Services (AFSL No.238478).  If you would like to contact Andrew, his practice telephone number is +61 2 9817 2266.

The information in this article is general in nature and should not be taken as personal advice.