The ATO regularly warns self-managed superannuation funds (SMSFs) of the perils of investing in artwork, but do trustees know about the significant risks of motor vehicle investments?
Common questions SMSF trustees need answers to include:
• is a vehicle such as a Harley Davidson considered a motor vehicle under the government’s new Superannuation Industry (Supervision) Amendment Regulations 2011 (No.2)?
• are you allowed to take your motor vehicle investment out for a ride to keep it in good health?, and
• can you keep it in your garage if you buy it as an SMSF investment?
Trustees will find that motor vehicles include, but are not limited to, motor cars and motorcycles such as the Harley Davidson. As for taking the motor vehicle out for a run to maintain its value and storing it in a personal garage, neither is permitted under new regulations.
Maintenance drive for a motor vehicle investment
The ATO states that: “The regulations do not allow for any use of the motor vehicle by a related party of the fund regardless of the purpose for that use. This means you cannot drive the vehicle for any reason, including taking it for a maintenance drive or to have restoration work undertaken.” That aside, a person who is not a member of an SMSF or a related party is allowed to drive the motor vehicle for maintenance purposes.
Storage of motor vehicle investment
A motor vehicle cannot be stored or displayed in the “private residence” of any related party of the fund – including all above and below ground premises of a private dwelling due to it being considered a personal use asset under SMSF regulations. The definition of “private residence” was expanded under new regulations to include land on which the private residence is situated and all other buildings on that land, such as garages or sheds.
There is an exception to that rule. SMSF trustees are permitted to store personal use assets in premises owned by a related party, such as a purpose-built storage facility, provided the premises are not part of the private residence of the related party.
Buyers will have to have storage arranged before they add a motor vehicle to the fund however, and a written record of the decision related to the storage is mandatory and must be kept for 10 years. The written record could be documented in the minutes of a meeting of the trustees and can be either in hard copy or electronic format.
Regulations dictate that the asset cannot be displayed in any way if it is stored at a related party’s business premises. Displaying a Harley Davidson in the foyer of a related party’s office where it is visible to clients and employees is therefore strictly prohibited, similar to how a painting cannot be displayed in a company boardroom.
Who is a related party?
A related party of a fund is defined to include:
1) members of the fund
2) relatives and any partnerships of member, including other partners in a partnership. Relatives are further divided into:
e) uncles and aunts
f) nephews and nieces
g) lineal descendants
h) adopted children of a fund member or a fund member’s spouse
i) spouse of any individual (other than a member).
Such exhaustive definitions ensure any personal use of a collectable investment is strictly prohibited.
Additional features of the new regulations
Below is a list of the other important requirements SMSF motor vehicle investors should take heed of:
• Leeway period. If a fund owned a motor vehicle acquired before the new regime came into effect on July 1, 2011, the trustees have until July 1, 2016 to comply with the new rules.
• Ensure your asset is professionally valued. This is important if a fund wishes to sell an asset, including to a related party, which it can do. The transfer of ownership of collectables and personal use assets to a related party of an SMSF must be done at a market price determined by a qualified independent valuer – usually a member of a relevant professional body or trade association.
• Immediate insurance of DIY fund collectables. While a fund is permitted to lease a collectable such as a Harley to a showroom, so long as there is no member or related party link and the lease is on arm’s length terms, the Harley is still required to be insured in the name of the SMSF fund. An SMSF fund is unable to rely on the insurance policy held by a showroom. The new regulations state that a trustee must ensure that the Harley is insured within seven days of the date of purchase by the fund. If an unexpected problem occurs, trustees either need to sell out of the investment or they will commit an offence that leaves them personally liable to a $2,200 fine. Artwork that is not insured may also end in the ATO declaring the fund to be non-compliant.
Consult this office to ensure your SMSF stays compliant with the plethora of rules and regulations that pertain to motor vehicles as well as artwork investments.