Should your SMSF invest in a collection? The pros and cons of collectables

Collections of artworks, boats, cars, jewellery and other goods form part of the investments in many self-managed super funds (SMSF).

The Australian Taxation Office’s quarterly reporting on SMSFs shows investment in collectables and personal use assets has steadily grown over a five year period, from $351 million in June 2016 to $463 million in June 2021.

That’s still less than 1% of total SMSF investment assets held but could be worth considering if you’re interested in collecting, though there are a few rules you need to be aware of as well.

What are collectable investments

Paintings, sculptures, drawings, engravings, photographs, jewellery, medallions, antiques and artefacts are all types of collectables and personal use assets allowed in SMSF investments subject to certain rules and restrictions, as defined by the ATO.

So too are coins and banknotes, if their market value exceeds their face value.

Other collectables and personal use assets include postage stamps or first-day covers, rare folios, manuscripts or books, memorabilia, motor vehicles and motorcycles, recreational boats, wine or spirits, and even some memberships of sporting or social clubs.

Sounds great, you might think.

What you can and can’t do with your collectable investments

The ATO rules say investments in collectables via an SMSF must be made for genuine retirement purposes and can’t provide any present-day benefit.

That means they can’t be used by any member of the SMSF or any related parties, such as family or business partners.

For example, the ATO notes that if your SMSF owns a vintage car or a recreational boat, you and other fund members or related parties can’t drive it, even if it’s just occasionally to keep it in good working order, because this would be “using” the asset. But you could hire the vehicle or boat out for other people to drive (as long as it was safe to drive).

Collectables can’t be stored or displayed in the private home of any SMSF members or related parties. They can’t be displayed because this would mean they were being used, which is against the SMSF investment rules.

Collectables may be stored (but not displayed) on premises owned by a related party if that place is not their private home. For example, the ATO says you can’t hang your SMSF art collection at the workplace of a related party because other people, such as clients and employees, could see the art and that would be using the collection.

You must insure your collectables

Under the tax rules, collectables in an SMSF must be insured in the name of the SMSF fund within seven days of purchase. Unlike many forms of insurance you may choose to take out as an individual, this insurance is mandatory. In addition, as an SMSF trustee you cannot use your own personal home and contents insurance to insure your collection.

John Maroney, Chief Executive Officer of the SMSF Association, told the Australian Financial Review: “The Australian Taxation Office wants the items to be insured to ‘protect’ the fund’s assets and therefore the members’ retirement benefits. So, in case of a mishap where the asset is damaged, the fund is not financially exposed.”

Some collectables may be particularly difficult to insure, such as artefacts. If your SMSF invests in something that you can’t get insurance for, you should contact your SMSF’s auditor and the ATO immediately.

Things you can do with your collectables: lease and sell

You can lease, rent or hire out any collectables to an unrelated party of the SMSF. The lease must be “at arm’s length”, i.e. on commercial terms and not at mates’ rates.

You can also sell collectables to a related party if the sale is for the market value price, as determined by an independent valuer who has formal valuation qualifications and/or recognition from their professional community.

Potential benefits of investing in collectables

If you’re still interested in investing in collectables for your SMSF then you need to consider  some of the possible pros or cons.

Follow your passion

Do you secretly love rare books, but live in a CBD apartment with little space for your dream library?

Investing in collectables could offer the opportunity to pursue a passion in retirement that you haven’t been able to in your working life. Of course, it has to be worth the money your SMSF spends on it now – and you should only buy a collectable via an SMSF if you expect a reasonable profit on your investment.

This means it’s important to do your research before investing in any collectables, which brings us to the next point.

Possible increase in value

Depending on what they are, collectables can be a valuable investment if they are something that can reasonably be expected to appreciate in value.

There are no sure bets, but getting professional advice about what to invest in can be helpful. For example, some early Star Wars memorabilia has increased in value since it was first released. Some Lego sets are also considered a good investment.

Just remember, the rules mean you can’t make use of these items while they are part of your SMSF investment portfolio.

And remember that not everything increases in value indefinitely. For example, the Beanie Babies craze was all the rage in the late 1990s, when the cute toys rapidly became a hot commodity. But many of those who held onto their collection, hoping their value would continue to soar, eventually lost out as the end of the craze saw most of the toys crash in value (although a few apparently held their value).

Diversification

It helps to not have all your eggs in one basket, such as investing solely in property or cash. Collectables can provide some measure of diversity, if chosen wisely and purchased as part of a balanced investment strategy.

Potential disadvantages of investing in collectables

Now you’re aware of some of the potential pros of investing in collectables, you need to consider the possible cons.

It’s a long-term investment

Collectables in most categories can take a matter of years to increase in market value, and they do not provide any form of income until you sell them. Think of collectables as more of a long-term investment choice.

You can’t keep your collection for personal use

As mentioned earlier, the tax rules mean that as an SMSF investor, you cannot keep a collection for personal use. So if you’re someone who loves vintage cars, for instance, using your SMSF to invest in a collection could be challenging. It would mean you could never drive or work on the cars in the collection.

Complex tax rules

You need to make sure you keep up-to-date with, and comply with the ATO’s complex rules around ownership, storage and insurance of the collectables your SMSF owns. If you don’t, you could face substantial fines and other penalties.

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