5 common mistakes SMSF make in relation to Art & Collectables
Having helped hundreds of Art & Collectables collectors, we have identified 5 common misperceptions, misunderstandings or mistakes made by SMSF’s
a) Storing the assets at home. If you acquire Art or Collectables in your SMSF after 1 July 2011, you are not allowed to store them at your home. Where clients often get confused is when they have a split portfolio – i.e. assets acquired before 1 July 2011 and after 1 July 2011. Whilst the assets bought pre 1 July 2011 can be stored, but not displayed, at home (at least until 1 July 2016) the post 1 July 2011 assets cannot. (more…)
Why buy insurance to cover my Art or Collectables?
In discussions with clients I often hear the anguish in their voice about being ‘forced’ to purchase insurance to cover their asset. They argue that this is the only asset class out of all the options available to them (equity, property, cash etc) that requires draconian insurance arrangements.
However, this is not entirely true. It’s not the only asset where insurance plays a part. In fact, its the only asset class that often doesn’t have insurance (which is why the rules now require it). Let me explain. (more…)
Getting into compliance trouble with Art & Collectables
You’re a SMSF and you want to buy Art & Collectables. You’ve done the research and know your obligations: if you acquire art work or collectables after the 1 July 2011 then you must have arranged insurance in the name of your fund within 7 days.
Fortunately for you the people you have acquired the artwork from, or the people you store your artwork or collectables with, have a solution for you. They say “Don’t bother getting a separate insurance policy – just pay us a contribution/admin fee/premium to be part of our group policy and, here is the best part, we’ll issue you with a certificate of currency specifically noting your fund’s interest in your assets – it’s ‘insurance in the name of your fund’ just like the ATO wants”.
You take that certificate of currency to your Auditor and they look at it and go “great, looks like insurance in name of your fund” so big tick.
However, it’s all wrong! (more…)
Storage of Art and Collectables
Art & Collectable Insurance covers loss or damage to your asset, which typically means destruction by fire, water damage and even theft. What insurance does not cover is loss caused by Wear and Tear, Gradual Deterioration or Moth / Vermin. Therefore how do you avoid your asset being destroyed (or its value being reduced) by these things? The answer lies in the way your item is packed and stored.
Firstly it’s worth noting that each type of Art or Collectable has its own unique ‘optimal’ storage condition. Therefore ideally you should speak to an expert in your particular type of asset. What follows are some general comments: (more…)
Should I still buy Art and Collectables in my SMSF?
If you’ve considered buying Art and Collectables in your SMSF then you will be aware of the new rules around storage and insurance – namely you can’t store them at home and you must buy insurance within 7 days.
Immediately this raises some important issues. Given that you can’t get any personal use (i.e. enjoyment) from your asset, it must all be about the investment return. You start with the initial capital outlay for the asset, and then the costs of storage and the costs of insurance are on-going annual costs (‘holding costs’). This all impacts your ultimate investment return. Therefore, is it still worth buying Art & Collectables in your SMSF?
The answer is, of course, maybe! You can only answer the question if you know what the annual holdings costs are, how long you hold it for, do you get any annual rental returns on the item and what do you get for the asset at the end. That’s allot of unknowns – particularly the final sale price.
However, there are a few things to be aware of that may help you. (more…)
What does Art & Collectable Insurance cover?
You’ve made the decision to buy Art & Collectable Insurance, but what do you actually get for your money?
The way to understand an insurance policy is to think of it in two parts:
- Part A: what ‘gets in’ to the policy i.e. falls within the ‘Insuring Clause’; and
- Part B: what gets ‘knocked out’ of the policy i.e. the policy exclusions.
So, with that in mind:
What is covered by Art Insurance?
All Risks of Physical Loss or Damage of whatsoever nature occurring during the period of insurance.
This is a broad description, and includes loss caused by fire, flood, accidental damage and theft. Most way’s a painting or collectable could be damaged would be covered.
What is not covered? (more…)
What does Art Insurance cost?
The first thing to know is that Art Insurance is hard to get.
Insurance Companies like to deal in large numbers – the premium of many pay for the losses of a few. As a general rule if there are not many potential customers then the Insurance Company can’t make money out of it – one loss can wipe out the entire premium pool. That’s the state of play for Art Insurance. There are not that many people (relatively speaking) who need stand alone Art Insurance (as opposed to those that can tuck it under their Home & Contents). What’s the Insurer’s solution – most don’t offer the cover, and the few that do need to charge higher premium to cover their risk.
We put together a deal through London, but it was not easy. We prepared a comprehensive submission on the SMSF market, risks, opportunity etc. Eventually they supported us with a great deal.
The minimum cost of our policy, once you factor in premium, fees and government charges is about (more…)
Art theft and damage – why insurance makes sense
Art Insurance is there to cover damage and theft, but a key question many art owners ask themselves is whether their art work is really at risk of being stolen or damaged?
Art theft is typically for
- the purpose of resale; or
- for ransom (sometimes called artnapping).
- use by criminals as collateral to secure loans.
According to some reports, only a small percentage of stolen art is recovered—estimates range from 5 to 10%.
One reason that art is a good target for theft is simple logistics. The valuable art pieces are worth allot of money but weigh only a few kilograms at most, with transport for the stolen items being relatively easy. For example, the thief could simply cut it off the frame and roll it up into a tube carrier.
What are Art, Collectables and Personal Use Assets?
The rules applying to Art & Collectables held within your SMSF are important to understand, but as a starting point it’s worth noting that the ATO actually refers to collectables and ‘personal use assets’. So, what exactly is a personal use asset?
Superannuation Industry (Supervision) Act 1993 (SIS Act) Regulation 13.18AA (1) specifies the assets that are taken to be collectables and personal use assets as:
- artwork (within the meaning of the Income Tax Assessment Act 1997 (ITAA97)). Artwork is defined as a painting, sculpture, drawing, engraving or photograph, a reproduction of such a thing, or property of a similar description or use
- antiques (more…)
The law governing Insurance for Art & Collectables
Lets start at the start.
If you have art or collectables within your SMSF, then you need to be aware of, and comply with, the new rules that govern them, otherwise you’ll be in trouble (e.g fines, fund’s complying status etc). One of the new rules relates to insurance.
The regulations require that all art and collectables are insured in the name of the fund within seven days of acquisition:
- The rules apply immediately to all new investments in these assets made on or after 1 July 2011.
- If your SMSF held an investment prior to 1 July 2011, it has until 1 July 2016 to comply with the rules. (more…)