At the time of writing Recommendation 8.14 relating to Section 8.3 Collectables and Personal Use Assets is the only part of the Final Report the Federal Government has ruled out. But this is with the proviso that there will be new draft guidelines in order that SMSFs may continue to invest into the art and collectables market and hold these collections until retirement of the members in due course.
I was involved in drawing up the SPAA* Best Practice Guidelines for Acquiring and Holding Artworks in an SMSF which were presented to the Ministry of Finance in late June and accepted in principle a month later, clearing the way for the rejection of Cooper’s Recommendation 8.14. These guidelines were also developed so as to allow the continued investment by SMSFs into the other collectables categories such as antiques, numismatics, jewellery, stamps, wine and the like – but for the purpose of this discussion I will focus on artwork collections.
As the campaign co-ordinator of Save Super Art I became aware of the multi-faceted nature of this contentious area. The arts industry has become reliant on SMSF investment and it now probably accounts for 15% of its annual turnover. For the Aboriginal art sector this figure could be higher. No one knows for sure how much is held in SMSF collections, the Cooper Panel estimated half a billion dollars but I think it is many times more than that. Just these facts alone made Cooper’s recommendation to have SMSFs divest their collections within 5 years not only poor public policy but potentially unconstitutional.
There are some well-known problems with SMSF investment into the arts, particularly the issue of people buying artworks and hanging them in their living room. At face value this would seem to breach the “sole purpose” test - that is, the artwork is providing an immediate benefit through its aesthetic quality whereas investments should only be made for the sole purpose of retirement. Leaving aside the valid argument that the benefit derived is really just incidental, this issue has become political and led to accusations that the art market is emotion-driven and not a legitimate area of investment.
The new guidelines were drafted with this political reality in mind and until there is a test case that overturns sole purpose any artwork collections held by SMSFs will have to be stored on an arms-length basis in the future. But for me the more important issues to address to allow SMSFs to continue their investment into the art market relate to advice, valuation and condition. In fact I believe that if these three key areas were properly maintained sole purpose would become immaterial to the bigger question of just when is it appropriate for a SMSF to invest in the art market.
If the guidelines are accepted each SMSF will have to have a SPAA Specialist Advisor who will advise on the acquisition of artworks and ensure that such purchases are within the broader investment strategy of the fund. Artwork lease or rent arrangements will be monitored. At the end of each financial year the risk and return parameters of artwork collections will be assessed to see whether the SMSF should continue with these collections.
There will have to be an annual valuation of all artworks held by SMSFs and condition reports will have to accompany these valuations. Only appropriately qualified valuers will be allowed to prepare these valuations and condition reports. Currently there is no such requirement. Further, should a SMSF wish to dispose of any of their artworks it would have to have a valuation prepared by a qualified valuer first.
There are a number of significant implications for the art industry that flow from the draft SPAA guidelines. The guidelines were drafted with the knowledge that the Resale Royalty Right for Visual Artists Act 2009 would in time provide valuers with much greater information about the resale of artwork by artists who previously would not have appeared on the secondary market.
This information will assist SMSFs wishing to buy into the contemporary and Aboriginal art markets. One of the major problems of the Cooper Report was the recommendation that SMSFs convert to Small Apra Funds (SAF) and surrender control of their investment decisions if they wished to avoid the mandatory divestment of their collections. If that happened I could envisage a much more conservative artwork purchasing strategy than is currently the case.
In saying the above, it will be much more difficult to justify riskier artwork purchasing by SMSFs. This is an important development, particularly in the less mature art markets such as Queensland which does not have a recognised secondary market. SMSF collections in the future will be encouraged to contain fewer, more valuable and better documented works.
The Federal Government has announced that those artworks which will not be able to comply with the new guidelines will have to be divested within 5 years of such legislation being passed. Although at this stage we do not know the intention of the Liberal Party in relation to this matter there is a compelling argument for SMSFs with artwork collections to start getting their house in order immediately.
Save Super Art received emails from all over the country attesting to the important role that SMSFs play in Australia’s visual arts industry. I was told that key works in the Canning Stock Route exhibition at the NGV were made available through these collections. Similarly, a $1 million collection of Aboriginal artworks set to tour Italy next year originated from a SMSF.
On the other hand I have also seen instances of inappropriate marketing of artworks to self-managed funds. As an accountant I would discourage anyone with a SMSF wishing to buy a $5,000 painting if this was to be the only artwork held amongst its other assets, whether the intention is to hang it at home or not.
In the end, I believe the Cooper Report has inadvertently created an opportunity to address issues that have been dogging the art market for too long and allowed those in the finance sector to deride it as an inappropriate area of investment. Like the controversial resale royalties legislation it will be up to the arts industry to turn the initial negative into a positive.
* SPAA is the SMSF Professionals’ Association of Australia
