ATO Interpretative Decision

ATO ID 2004/248 (Withdrawn)

Superannuation

• This ATO ID is withdrawn as it is superseded by SMSFR 2008/2
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a self managed superannuation fund (SMSF) able to invest in works of art?

Decision

Yes, an SMSF is able to invest in works of art.

Facts

A self managed superannuation fund wishes to invest in works of art.

The investment strategy of the SMSF allows for such an investment.

Reasons for Decision

The duties of an SMSF's trustees regarding the investments to be made by the Fund are found in section 52 of the Superannuation Industry (Supervision) Act 1993 (SISA) as 'covenants'. These covenants are deemed to be included in the governing rules of a superannuation entity and cannot be avoided or modified. The covenants are directed at trustees and cover most aspects of the control and management of a superannuation entity. Paragraph 52(2)(f) of the SISA requires the fund to include the following covenant in its governing rules:

(f)

to formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

(i)

the risk involved in making, holding and realising, and the likely return from, the entity's investments having regard to its objectives and its expected cash flow requirements;

(ii)

the composition of the entity's investments as a whole including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification;

(iii)

the liquidity of the entity's investments having regard to its expected cash flow requirements;

(iv)

the ability of the entity to discharge its existing and proposed liabilities;

The SISA places a significant obligation on the trustees of the Fund but does not prescribe the types of assets in which it can invest. However, the Act attaches certain requirements which trustees must consider when developing and giving effect to an investment strategy. Further, it is implicit in the investment strategy requirement that fund investments are made with the fundamental objective of providing for the members' retirement.

It follows from these requirements that the trustees that make investments in alternative assets, including art, should not do so unless the trustee understands the risks and costs associated with the particular investment. In particular, a trustee should seek expert advice and be prepared for any additional procedures or requirements that might arise before acquiring any alternative assets, including art. Expert advice would include the potential income or capital growth that could be generated from the investment and the ease with which the asset could be disposed. Understanding of the asset and this advice would be essential for trustees to be in a position to demonstrate compliance with these provisions. The trustees would also need to consider the costs associated with the particular asset in question. The costs associated with appropriate storage and insurance should also be considered an integral part of an overall strategy that included investments in art.

Year of income:  Year ended 30 June 2003

Legislative References:
Superannuation Industry (Supervision) Act 1993
   section 52

Related ATO Interpretative Decisions
ATO ID 2004/249
ATO ID 2004/250
ATO ID 2004/251

Keywords
Self managed superannuation funds
SMSF investments

Business Line:  Superannuation

Date of publication:  26 March 2004

ISSN: 1445-2782