28 August 2003

Collectables: Art & Super Funds

Hanging offence: To hang or not to hang. That is the crucial question confronting today's super fund trustee, reports Michael Hutak

FINE ART has long been considered a legitimate asset class within the investment strategy of some of Australia's biggest superannuation funds. C+BUS for example, the building industry fund, counts its important art collection housed in regional galleries around Australia among assets of more than $3.5 billion.

But the most action in this area in recent years has been at the other end of the market, as private collectors rush to purchase art as part of their Self-Managed Superannuation Fund.

SMSFs have been the fastest growing sector of the super industry with approximately AUD$95 billion under management out of a total $530bn. The Australian Tax Office says SMSFs have grown by almost 25 per cent over the last three years to around 240,000 funds. It receives 1,000 new registrations each month and there are around 408,000 people with accounts, with an average balance of $234,000.

With the total secondary auction market in fine art in Australia at just $80 million per annum, the art trade understandably sees a great opportunity to grab a bigger slice of the estimated $10 billion that flowed into SMSFs during 2001-02.

The art market has a good story to tell potential investors: that $80 million already represents a quintupling of the auction market in just a decade. And headline-grabbing sales of telling of 100, 200 even 300 per cent returns for works by artists across all sectors of the market – traditional & modern, contemporary, and aboriginal art – make investing in art an easy, even sexy, sell.

Targeting the small investor, many galleries and art “consultants” are currently spruiking art in an SMSF as making “more sense than other assets in that you can hang it on your wall at home or office and have the visual pleasure of your own work of art.” One gallery’s web site even states: “It is a little known fact that it is perfectly legal to purchase investment artworks, acquired through your super fund, hanging on your wall at home.”

In fact this is not ‘little known’. It’s also not true. The big art-super push has hit a big snag called the ATO. “We’ve gone through this already with people trying to claim anything from Swiss chalets to Coles-Myer cards,” says Matt Frost, superannuation spokesperson for the ATO.

“The bottom line is yes, you CAN certainly invest in art for your fund, but when people ask us ‘can we put it on our wall’ the short answer is, ‘no you can’t.’”

Any investment for the purposes of a SMSF cannot contravene the so-called ‘sole purpose test’: it must only fulfil one purpose and that it is to provide a benefit on retirement. “And any investment that also provides any ancilliary benefit clearly fails the test,” says the ATO’s Frost.

Prominent Melbourne collector and art world accountant Tom Lowenstein isn’t taking the ruling lying down.

“I completely disagree with the Tax Office’s view and I’ve put a submission to them putting that case,” he told The Bulletin. “If the work has been bought for investment and fulfils the aims of the fund’s investment strategy then what does it matter where it is stored? My argument is the asset is just as safe on your wall at home as in storage, and is probably even safer.”

Lowenstein said cost of setting up even a small SMSF were not inconsiderable. With a modest investment of $100,000 “you’d still be looking at $2000 to $3000 in legal, accounting and auditing expenses. Add $5000 to $6000 per annum to insure and then store the works and you’ve probably wiped out any capital gains right there.”

Lowenstein argues, rather facetiously, that he is currently advising clients to either not hang their artworks, or to make sure they don’t enjoy them if they do. Which makes for a bizarre twist on an old adage: I don’t much about art but I know what I don’t like.

He predicts one of two outcomes to the controversy: “Either the ATO will back down, or it will be decided in the courts.”

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Abridged version published in The Bulletin

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