Many people are attracted to owning artwork not just for the visual value but also for the investment potential. This type of investment product if selected correctly can be a great diversification from the listed investment markets that we see a lot of capital volatility in.
If you have a Self Managed Super Fund (SMSF) you could consider an investment into the art space but there are some issues you need to consider. There are no specific restrictions on an SMSF investing in artwork or other collectibles; however the Sole Purpose Test and the fund_s Investment Strategy are two that you need to be mindful of.
The sole purpose test is to ensure that self managed superannuation funds are maintained to provide retirement benefits to members upon retirement. Where a member receives a benefit before retirement, the fund could be in breach of the sole purpose test.
Investment in art can cause issues with the application of the sole purpose test as this art ownership could lead to personal enjoyment. An example is where a fund displays the artwork in a member_s home or office at no or little payment to the fund.
Great care needs to be taken in relation to how the artwork is maintained or stored to avoid any potential immediate benefit being received by a member. Even if the member pays a market rent, there may still be a breach of the sole purpose test. There are no set rules about this and each case will be considered on its merits. Involving an arm_s length third party in the storage or maintenance of the artwork, on commercial terms, would be the best way to satisfy the regulators in this area.
The next issue to consider is that trustees of all superannuation funds are required to formulate and monitor an investment strategy. This should set out the objectives of the fund and provide the methods the fund will employ to achieve these objectives.
With artwork as a more specialised area of investment, trustees may be required to demonstrate why it is a good investment. This may require expert opinion as to the growth and income potential of a particular piece of work. This is where I must disclose that apart from knowing what I personally like and don_t like, I have no tried and tested history in picking the next Picasso. But I know people who _do know_ if this is something that interests you!
As with any investment product for a super fund the investment should be appropriate given the fund and its members need for income or growth returns.
You will need to consider your back-up plan and as a trustee should ensure the artwork is properly insured against damage, destruction or theft and that it is maintained in a suitable environment.
Provided you feel comfortable about staying within the legislation it is then time to start the research process!
Investment in artwork can be a valid strategy for a self managed superannuation fund, or for those who want to invest outside of superannuation, however as with all investment before proceeding, seek advice to avoid any pitfalls as penalties can be severe.
If you would like to discuss this or any other aspect of your Superannuation, Self Managed or otherwise, contact the team at Money Mechanics today.
Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.