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The mistake many Accountants, Auditors and SMFS’s are about to make

By now you know that any SMSF that holds Art or Collectables must have the assets insured in the name of the SMSF itself.

Post 1 July 2016, here is what we see:

  1. SMSF’s that comply
  2. SMSF’s that don’t comply
  3. SMSF’s that think they comply but don’t

The SMSF’s that comply have an Insurance Policy in place in the name of the SMSF to cover their assets.  Easy – job done.

The SMSF’s that don’t comply may be deliberate or ignorance, but come audit time this will no doubt be identified and consequences of some sort will flow.  Hopefully these SMSF’s fix the issue and at least the Auditor can go to the ATO with contravention but solution in hand.

The dangerous category is the 3rd one: those SMSF’s that think they comply but don’t.  This is the problem for the Auditor, Accountant and SMSF.

These are SMFS’s who have acquired Art Insurance that ‘looks’ like it’s in the name of the SMSF but really it isn’t.  The trouble for everyone involved is that to the non-insurance person (i.e. SMSF, Accountant, Auditor) the documents may convince you that they comply when in fact its false.

So, what are we talking about?

A Gallery or Storage Facility typically buys an insurance policy to cover stock/assets they hold / store.  These policies are purchased by and in name of the Gallery / Storage Facility.  However, on request they can add the SMSF to the policy – the SMSF becomes an additional named insured and is noted for its respective interest in its assets.  This may be a group policy or master policy.

The attraction to the SMSF is obvious: it’s cheap and easy to do this.  They may just pay a small fraction of cost to have their interest noted.  This is very common.

However, we spoke to the ATO and they confirmed to us that this type of solution does not satisfy the ATO’s requirements.  If a SMSF is currently relying on the situation described above its a compliance breach.

Here is the problem for Auditors.  You may well know that this solution is not correct, but how will you identify it?

The Gallery or Storage Facility (or their Broker/Insurer) will issue the SMSF with a document that actually states that the ‘Insured’ is the SMSF in respect of their asset.  In other words, the documents are prepared in such a way that they may look like they comply with the ATO requirements.  So you will essentially be fooled.

So, how would you know?  Here are 5 items to watch for:

  1. Additional Named Insured:

If the SMSF is listed as an ‘Additional Named Insured’ as opposed to just ‘Insured’, then it’s a problem.

  1. Cost:

If the cost of the insurance is really low, it’s a red flag.  A standalone policy is unlikely to be much cheaper than $400 / $500.  If your client is paying less than $400, then it’s probably not right

  1. Insurance contribution:

If the cost the SMSF pays is called something other than ‘Insurance Premium’, such as Insurance Expense, Admin Charge; Insurance recovery, then it likely to be a group policy or shared policy.

  1. Policy document:

If the SMSF is not issued its own full policy wording and schedule, then its unusual.  You may find that group or master policies only issue certificates of currency or schedules and not the full wording.

  1. Who arranged the policy?

If the Storage Company or Gallery arranged the cover (i.e. they said ‘we’ve done this on your behalf’) then it’s likely to be problematic.

What would we suggest:

If the SMSF has Art or Collectibles, then I would ask the following questions:

  1. Who arranged the insurance policy?  If they say the Storage Facility or Gallery organised it, then it needs further investigation.
  2. Ask the SMSF (your client) to confirm with the person who arranged the policy
  • Are we (the SMSF) sharing this policy limit with any other party / entity? [you want to see the words ‘no’]
  • Does this satisfy the ATO [you want to see the words ‘yes’]
  • Do we (the SMSF) have full control over this policy or can its efficacy be jeopardised by any other unrelated party / entity (For example under group or master policies, what if the Gallery or Storage company doesn’t pay the bills; doesn’t comply with the policy terms & conditions – will the policy be voided?) [you want to see the words ‘yes, you have full independent control over the policy and are the only entity that has access to the policy limit’]