by: Adrian Newstead published: 23rd March 2011
In April 2010, the Chairman of the Federal Government Superannuation Review, Jeremy Cooer, recommended that works of art, along with other “exotic” investments such as wine, rare cars and gold club memberships, be banned from Self-Managed Super Funds (SMSFs).
Art was, and continues to be, permitted as an investment in SMSFs as long as it satisfies the “sole purpose” and “in-house asset” requirements, as described by Deputy Commissioner Mark Jackson, 14 November 2003:
“There are no restrictions on investing in collectables such as art, per se, however, the sole purpose test means that the members cannot enjoy a benefit from the investment prior to preservation age, when they can legitimately access their benefits, if they have retired. It therefore follows that the art cannot be displayed in the trustees home or office except under very strict conditions.
“The artwork or other collectable can be leased to a member or other related party as long as the In-house Asset Rule is met. That is, that the particular investment or investments make up no more than 5% of the funds total assets and they are leased to the related party at commercial rates, satisfying the arms-length rule”.
Had the Cooper Review recommendations been adopted, paintings, jewellery, antiques, stamp collections, wine, exotic cars, golf club memberships and boats etc i.e. “collectables” would have been banned from SMSFs.
As a result those with SMSF’s would have had 5 years in which to ‘dump’ hundreds of thousands of collectables on to the open market. The resultant drop in prices due to oversupply would have had catastrophic consequences on the art market.
Cooper’s principle concern was that the cumulative regulatory and compliance complexities outweigh the potential benefits of allowing such a liberal investment menu to a sector that is not directly prudentially regulated.
The motivation behind the move to stop SMSFs from investing in “collectable and personal-use assets” in a favourable superannuation tax environment stemmed from the argument that these assets
1. May relate more to the Trustees’ personal interests, rather than a strict adherence to investment performance to provide retirement income;
2. May present personal benefits beyond the sole-purpose requirement that are difficult to detail or assess; and
3. Present a regulatory and compliance burden
Of the total assets in superannuation in Australia (estimated to be approximately $386 billion ) only about one tenth of one percent or $480 million is believed to be invested in assets such as artwork, antiques, collectables, precious metals, classic cars, coins, stamps, jewels and wine”.
The feverish growth in the art market post 2000 was fuelled by several study’s that indicated the level of risk inherent in investing in art market and the stock market were not dissimilar. According to economic forecaster Access Economics, by 2004 art had outstripped property in profit terms.
Investment in Aboriginal art
This had a profound effect on sales of Australian Aboriginal art which began to pour into personal superannuation funds a direct result of the belief that art represented an ideal opportunity for diversifying investment portfolio’s. In June 2004 Sue Neales noted in an Australian Financial Review article ‘Art Sales for Super’s Sake’ that the spiralling value of Aboriginal art in particular had ‘sparked a rush of interest from super-funds, particularly self-managed super-funds’. In addition she noted that several of Australia’s largest companies including Macquarie Bank, Wesfarmers and Rio Tinto were compiling sizable Aboriginal art collections. At the time price rises in ‘blue chip’ Aboriginal paintings by artists such as Rover Thomas, Emily Kngwarreye and Clifford Possum easily exceeded 10% per year. Melbourne Tax Accountant Arthur Roe, an avid art collector, advised investors not to ignore indigenous art as an alternative asset class in any investment portfolio, just as they would any other ‘collectable’, ‘like Grange Hermitage for instance’.
One of the major benefits of a self managed super fund is that during the accumulation phase (the period up until your retirement) the fund pays only 15% income tax and 10 % capital gains tax. Once you reach retirement the fund moves in to the pension phase and zero tax is payable on both income and capital gains within the fund. With no capital gains tax payable more money is available to spend on other, more liquid, assets.
However the ATO expects you to place the artworks into storage or lease them to an art gallery or commercial entity. You must not put them onto the walls of your home where you can enjoy them prior to retirement.
Specialist art’s accountant Tom Lowenstein has argued however, that as long as the acquisition of the artwork is based on sound investment strategies, the incidental benefit of hanging the artwork in one’s home should be considered no different to the pleasure one gets from proudly viewing an investment property as one walks past it each day. The real ‘benefit’ only accrues upon its sale. While this ‘collateral benefit’ provision of the act makes no sense at all when it comes to art, the law stands, due to the fact that no one has been prepared to allow the ATO to take them to court and seek a new ruling.
You could just turn all of your paintings to the wall, however unlikely as that may be, though I wouldn’t recommend it. The fact remains that an officer from the tax department cannot seek entry to your home without making an appointment. This would allow more than enough time to remove art from the premises for the duration of the visit. Nevertheless, Caveat Emptor! The penalty for failing to comply with the current ATO ruling can result in fines of up to, wait for it, $220,000, regardless of the value of the work.
This leaves the option that the work be insured in the name of the fund then leased, or alternatively stored professionally or at home but not displayed. The cost of insurance is likely to be between 5 to 8 percent of the cost of the work. You can, of course, lease the art in your SMSF to your own company and install it on the walls of your office. However a fund trustee must make sure that any art that is leased back to a member of the fund must make up no more than 5% of the value of the fund. (Some art consultants recommend that the leasing terms be 20% of the value of the artwork annually, the same as Artbank). Regardless, even though your art collection may be producing an income when leased to a company other than your own this income is highly unlikely to be enough to support you in your retirement. Unless there are significant changes in the fund the only way to release money for your retirement will be to sell the art.
Collectors wishing to buy works for their super funds are best advised to prepare a written investment plan setting out their reasons for investing in art and the anticipated return from their investment. This is a point of view put strongly by Tom Lowenstein and other investment advisers. The plan should show that you understand the risks and costs involved in the investment prior to buying. This would include the not insubstantial costs involved in selling the asset.
During 2005, John Albrecht, then working with stockbrokers Bell Potter, and part of a group attempting to put together a $20 million art fund, was quoted as saying that he felt that art was not as high a risk as biotech or IT investments. London’s Fine Art Fund, launched in 2003, famously made a 51% return on sales the previous year. Noting that the trick in getting huge returns is to ‘buck the trend’, gallery director Charles Nodrum advised that it would be prudent to invest a significant amount in to blue-chip artists, whose art increases in value steadily, while watching carefully for more speculative works that are likely to fluctuate more wildly (like Aboriginal art, contemporary painting, and artists whose work was considered kitsch). He could not have given better advice on the last score. Works by David Boyd, Pro Hart, Albert Namajira and other Hermannsburg painters, long considered kitsch or romantic, have been amongst the strongest improvers since this advice was give 8 years ago.
While the Cooper recommendations in relation to ‘collectables’ was rejected by the government at the end of 2010 the Superannuation Minister Chris Bowen announced that he intended to bring in a range of new standards for storing collectables and the management of personal use assets held by self-managed superannuation funds.
Labor’s approach is broadly in line with the best practice artwork investing guidelines that were recently released by the Self Managed Super Funds Professionals Association of Australia (SPAA) and the Australian Artists Association (AAA).
The Gillard Labor Government is currently consulting with industry and community groups on the details of legislation to implement these new standards. Their recommendations are due to be released in June 2011.
As far as Aboriginal art is concerned, I would warn super funds managers of the need to be extremely well advised by art professionals. Whether you already have art in your SMSF or you seek to acquire it, seek impartial specialist expertise. While the best Aboriginal artworks have performed extremely well, the huge volume of inferior work of poor quality and provenance that will have already been collected into super funds is already proving to be a terrible disappointment for thousands of investors as they seek valuations prior to de-accession.
Anyone who was persuaded to put Aboriginal art in to SMSFs during the last 10 years should immediately seek independent expert advice from a qualified valuer who has had no interest whatsoever in the original artwork purchase. Contact a member of the Art Consulting Association of Australia http://acaa.org.au or a qualified valuer of the Art and Antiques Association of Australia.
Artworks generally fluctuate in value in line with the art market and the general economy. In order to be prudent and well informed all fund managers MUST re-value the art in their SMSF’s at least once every 2 years. Due to the substantial costs involved in selling art investors should seek expert advice on the efficacy of holding particular artworks in their fund. If they are not considered suitable long term investments get rid of these unwanted ‘house guests’ immediately.
© Adrian Newstead