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Is holding Art in your SMSF’s a dying art?

You may have read a number of recent articles and commentary proclaiming the doom of art held in SMSF’s.

See headline of “The art of retirement just got depressing with tax rules on collections” in the Sydney Morning Herald by Andrew Taylor (link here).

Essentially the argument is that the new rules regarding art (namely storage and insurance) are adding extra annual costs to the process of owning art as an investment, and this makes holding art in your SMSF unpalatable (capital growth & rental income [if available] cannot recover the annual costs of holding the investment).

Hence, SMSF’s are selling their art.  Furthermore, the vast majority of art held in SMSF’s have to begin complying with the rules in 1 July 2016, so just beforehand we’ll see a massive sell off of artwork, which will cause market to collapse (supply overwhelms demand, hence prices fall).

As support of this argument, I quote from the article “The value of art and collectables held in SMSFs in March 2014 was $589 million, according to the Australian Tax Office, far below the peak of $731 million in 2012.”  This indicates the decline of art in SMSF’s.

Yes, it all makes sense, but is this the end of the matter?  Has the ATO’s rules ruined the art market? Are we heading for a catastrophic sell off?  There is no doubt that the figures quoted above are accurate: $589m in March 2014 compared to $731m in March 2012 – seems damning……but, let’s look at the ATO statistics in more detail.

I’ve provided two graphs using the exact same ATO data, but just over two different timeframes:

The first graph shows the holding of artwork since June 2009.  You can see the peak in March 2012 of the $731m, which then falls sharply down.  Why this fall at this date?  It has to do with the rules.

The rules around storage and insurance came in 1 July 2011, but presumably it wasn’t until around Audit time and March 2012, people realised the consequences – hence a sell off (given that many wouldn’t have had to comply until 1 July 2016, maybe they were getting in ahead of the game?)

However, do you note something interesting?  Look at the period from after June 2012 to March 2014.  It’s actually risen (by about 9%).  The second graph has closer a view.

If Art held by SMSF is purportedly dying, what can explain this?

• Most people buying Art & Collectables know the rules, so if they are so detrimental, why would assets be increasing over the last 2 years?
• As an Insurance Broker responsible for placing Art Insurance for newly acquired art, we’ve never been busier.  Why?

Well, the answer is varied.   However, I make two observations:

1. Investors are factoring in the costs into their decision making process.  In otherwords, the ‘annual compliance costs’ (insurance & storage) are just an additional cost item in the mix.  No different to buying shares and paying broker commissions; buying property and paying stamp duty, rates, insurance.  Sure, the % of value is different, but similar analysis;

2. We’ve seen fewer investors with smaller holdings, but more investors with larger holdings.  Insurance and storage costs are subject to economies of scale – in otherwords, both get cheaper as a % of the asset the larger the value gets.  In storage, you may pay a cost for 1 cubic meter whether you fill it or not.  An extra painting is essentially free.  In insurance, there are some initial fixed fee costs but once you add a new asset the ‘additional cost’ is often much less – thus bring total extra cost down.  Doubling the assets does not double the insurance cost.

So, what’s my opinion?  Will the lead up to 2016 see a massive sell off like many people are predicting?  I’m sure we’ll see a sell off, but I think we’ll see a sell off at the smaller end of town, and no change to larger holdings. We’ll see a reduction in the number of SMSF’s holding Art & Collectables, but not as much a decline in asset values.  In fact, some SMSF’s may take the opportunity to buy during the price crash as they scoop up bargains. Post 1 July 2016, after a decline of indeterminate size, I predict we’ll then see a steady increase in Art held by SMSF’s.  The ATO rules won’t ruin the art market after all.

What do you think?  Let me know your thoughts.