Can the Collectables Rules be bypassed?

What is the deadline?
While superannuation funds can (if so permitted by the relevant trust deed or governing rules) invest in Collectables and Personal Use Assets – simply referred to as “collectables” - significant changes were introduced from 1 July 2011.  From that date, self managed superannuation funds could only acquire new collectables if they satisfied the “collectables” rules.  However, collectables held by self managed superannuation funds as at 30 June 2011 were subject to the “collectables” rules only after 5 years.  That 5 year reprieve is now coming to an end and will end on 30 July 2016.  Consequently, from 1 July 2016, collectables acquired on or before 30 June 2011 will then be subject to the “collectables” rules.

What are collectables?
These are exhaustively defined in the SIS Act (s62A) to be artwork, jewellery, artefacts, antiques, coins or medallions, postage stamps and first day covers, rare folios, manuscripts or books, memorabilia, wine, cars, recreational boats and membership of sporting or social clubs.  Additionally, provision is made to extend the shopping list of items by regulation – however, no additional items have so far been specified.

What is not included in the shopping list is bullion.  

What are the “Collectables” rules?
There are 6 rules applying to collectables which are set out below.

Rule No 1 – the Leasing Rule – the collectable cannot be leased to a related party of the superannuation fund.  It makes no difference if the lease is at market value or is on terms which are favourable to the superannuation fund.

Rule No 2 – the Storage Rule – the collectables cannot be stored in a private residence of a related party.  Collectables cannot be stored (even if not displayed) in the home of a member.

Rule No 3 – No Use Rule – the collectables must not be used by a related party.

Rule No 4 – Insurance Rule – each collectable must be insured in the name of the fund within 7 days of acquisition of the item.  Presumably, this means that the trustees must effect a policy of insurance which covers the collectable against theft and damage.  Given the application of the rules to pre-existing collectables from 1 July 2016, this rule presumably means that the insurance cover must be in place for pre-existing collectables by 8 July 2016.

Rule No 5 – Valuation Rule – if a collectable is sold or transferred (for example as an in specie benefit payment) to a related party, then the sale or transfer must be at market value as evidenced by a valuation provided by a qualified independent valuer.

Rule No 6 – Trustee Storage Decision Rule – the trustees must document their reasons as to their decision as to the storage of the collectables.  Documentation means reduced to writing and presumably signed by the trustees or by the chairman of trustees.  The documentation for the decision must be kept for 10 years.

Who is a related party?
A member or a relative of a member of a superannuation fund will be a related party of the superannuation fund.  

A company or trust controlled (directly or indirectly) by a member or a relative of a member will also be a related party of the superannuation fund.  

An employer who contributes to the superannuation fund for a member pursuant to an agreement between the employer and the trustee of the fund will also be a related party.  However an employer who simply contributes to the fund at the request or direction of the member will not be a related party.

Can the Collectables Rules be bypassed?
Yes and no.

Yes if the self managed superannuation fund converts to being a small APRA fund.  The “collectables” rules only apply to self managed superannuation funds.  They do not apply to any other type of regulated superannuation fund.  

This solution is not cost free: to be a small APRA fund, the existing trustees/corporate trustee must retire and be replaced by a professional licensed trustee company so there will be a loss of control and the addition of considerable expense in professional trustee fees.  Further, the licensed trustee company may not be willing to act as trustee of a fund with collectables or with certain types of collectables (given the problems of proper storage and valuation difficulties).  So while there is a theoretical solution, conversion to a small APRA fund may not be a realistic solution.

If the “collectables” are transferred to a company or unit trust controlled by a member or a relative of the member, the company or trust will be a related entity and the super fund’s interest in the company or unit trust will be an in-house asset.  So transferring the collectables to a controlled entity will not solve the problem – unless the value of the collectables is less than 5% of the market value of the superannuation fund and the superannuation fund has no other in-house assets.  

However a word of caution may be prudent.  Simply transferring the collectables to a controlled trust may not be sufficient as the ATO may argue that the trustees still “holds” an investment in collectables by means of its proprietary interest in the trust.  Given that shares in a company are an item of personal property in their own right (unlike an interest in a unit trust) the ATO may find it more difficult (but not impossible) to argue that the superannuation fund still holds the collectables after they have been transferred to a company.

Sometimes “smart” solutions seem like good solutions at the time they were first thought up.  It seems that the better solution is to either comply with the “collectables” rules or transfer the collectables out of the super system.

Of course the collectables could be sold before 1 July 2016.  In this case the superannuation fund would cease to have collectables and so the 1 July 2016 deadline will not be relevant.  While the sale must be on arm’s length terms, the rules applying from 1 July 2016 would not be applicable – in particular the Valuation Rule.  Alternatively the collectables could be transferred by in specie lump sum benefit payments at their market value.

What about collectables purchased on or after 1 July 2011?
The 6 rules already apply to these collectables and have applied to them from the date they were first acquired by the superannuation fund.

What actions must the trustee take?

1. Trustees of self managed superannuation funds must take the following actions:
2. Identify any collectables which were acquired by the super fund before 1 July 2011.
3. Decide whether to retain or dispose of all or any of those collectables.
4. For those collectables which are to be disposed of – disposal should occur before 1 July 2016 and could be made to a related party.  If disposed to a related party then the disposal must be at market value and evidence of market value should be obtained.
5. For those collectables which are to be retained after 1 July 2016, the 6 “collectables” rules must be satisfied in relation to each collectable.

What are trustees doing?
It seems trustees are removing collectables from their funds.  ATO statistics indicate that the value of collectables between June 2011 and June 2015 halved in dollar terms.  In 2011 the value of collectables was $713m while in 2015 this figure had reduced to $389m.
Anecdotal evidence (and gossip) suggests that trustees of self managed superannuation funds have materially reduced their new acquisitions of collectables since 2011 and have, over the previous 5 years, been transferring their collectables from their superannuation funds into their own ownership in anticipation of the end of the transition period.

What about the big end of town?
The collectables rules only apply to self managed superannuation funds.  Consequently the big end of town is continuing to do what the big end of town was previously doing in relation to collectables.