Institute of Chartered Accountants in Australia

							                          The Institute of Chartered Accountants in Australia                   1

             Self-Managed Superannuation Fund Independent Auditor’s Report




14 June, 2011


Ms Louise Lilley
Manager
Benefits and Regulation Unit
Personal and Retirement Income Division
The Treasury
Langton Crescent
PARKES ACT 2600

By email: strongersuperSMSFs@treasury.gov.au

Dear Ms Lilley,

Exposure Draft – Regulations - SMSF Investment in Collectables and Personal
Use Assets

Thank you for the opportunity to make comments on the Exposure Draft – Regulations -
SMSF Investment in Collectables and Personal Use Assets. The Institute of Chartered
Accountants in Australia (the Institute) would like to make the following comments in
relation to the exposure draft.

The Institute is concerned that the prescriptive nature of the regulations combined with a
strict liability offence penalty regime will cause confusion and not meet the objective to
place appropriate parameters around investments in collectables and personal use assets
by SMSF trustees to prevent the personal use and enjoyment of those assets by related
parties.

The regulations are quite specific about the types of assets to which the new rules will
apply. It may be appropriate for other assets not listed in the regulations to be subject to
the same rules as those included, for example, motor vehicles other than cars.

Conversely, the regulations do not contemplate difficulties that trustees may encounter in
meeting some of the regulations and therefore may subject trustees to penalties under
circumstances beyond their control.

The Institute also notes that the regulations appear to only contemplate direct investment in
collectables and personal use assets. This may give rise to arrangements to circumvent
the new regulations, for example investment activity through certain types of trusts or
companies. Consideration may need to be given to further application of the regulations.

Detailed comments

Regulation 13.18AA (1) Section 62A Items

Despite the list provided in this section for types of assets that are viewed to be
collectables and personal use assets being quite comprehensive, the prescriptive nature of
the list will result in a number of assets being excluded from the new provisions. Such
assets might otherwise be viewed by a reasonable person as being of a similar type to
those prescribed but would not be subjected to the provisions of the new regulations, for
example motor bikes and office equipment. Although, it is helpful to include examples of
particular assets that are contemplated as being subjected to the new rules, the regulations
should consider either classes of assets (eg motor vehicles), or include an additional
clause that would encompass types of assets that a reasonable person would consider to
be a collectable or personal use asset.
                         The Institute of Chartered Accountants in Australia                         2

  Exposure Draft - SMSF Investment in Collectables and Personal Use Assets



Furthermore, the list does not contemplate the circumstances or intent behind the purchase
of the assets. For example, if the trustee of the fund buys a book on running a self-
managed superannuation fund, they will offend the new provisions, with a strict liability
offence, by storing the book in their private residence. Furthermore, another offence
occurs if they haven’t documented their reasons for holding the book in their private
residence. While it would not seem logical that the book would be caught up in these
provisions, it is possible that it would.


Regulation 13.18AA (2) Asset must not be leased to related party

Some assets may be caught up by the new regulations where it was not envisaged that
they be so, for example farm vehicles. A farm vehicle being a car may be used by a
related party for business purposes and subject to commercial lease arrangements. This
type of arrangement is not an offence to the sole purpose test but would offend the
proposed regulations. Similar commercial arrangements existing for office furniture or a
telephone system would be allowable (subject to being conducted on an arms length
basis). Inconsistent treatment arises therefore depending on the type of asset rather than
the usage.


Regulation 13.18AA (3) Item must not be stored in private residence of related party

Often, collectors and investors will have specific and/or custom made facilities within which
to hold certain types of assets. For example, they may have a safe to hold a stamp
collection or jewellery, refrigeration facilities to hold wine or storage cases to hold artefacts.
Frequently, these may be available in the private residence of the trustee and provide the
most appropriate and cost effective means of storing particular assets. An arbitrary ban on
storage within a private residence may result in inferior or more expensive options for
storage being undertaken which are not in the best interest of members. Furthermore, it
may prove to be an obstacle in obtaining appropriate and affordable insurance where, for
example assets do not have the protection of a home alarm.

A requirement for offsite storage of assets with a third party is not necessarily in the best
interests of fund members. Examples of fraud by gallery owners selling assets ‘many
times over’ are available and highlight the difficulties that may be encountered by trustees
under this provision. Such cases of fraud may not be covered by insurance.

‘Private residence’ is not clearly defined. Difficulties may arise in determining exactly what
is included as a ‘private residence’. For example, determining whether a garage is
contemplated as being captured by this provision, which would be particularly relevant
when considering the storage of cars. Would it make a difference if the garage was
attached to a house or not? The appropriate storage of cars may be in a garage forming
part of a private residence.


Regulation 13.18AA (4) – Decision on storage of item must be documented

Trustees should be encouraged to give due consideration to the storage of assets held by
the fund. This is best provided through education and guidance to assist trustees on what
needs to be considered and the value of different options.

A requirement for written documentation of the reasons for decisions on storage does not
provide guidance on matters for consideration and it does not promote good or appropriate
decisions, only that a reason for a decision is documented. That is, a trustee could
conceivably comply with the legislation with a ‘reason’ as simple as “It was the cheapest
option”.
                         The Institute of Chartered Accountants in Australia                         3

  Exposure Draft - SMSF Investment in Collectables and Personal Use Assets



Presumably, the intent of this requirement is to encourage considerations to be made
which result in appropriate decisions being made. A requirement for documentation will
not achieve this objective. A provision for due consideration of storage could be included
as part of the development of the fund’s investment strategy which would better meet the
objective of suitable consideration of storage options.

The Institute does not believe it is reasonable or practical to impose a strict liability offence
where a trustee fails to document their reasons for a decision on asset storage. Failure to
document a decision does not mean consideration has not been duly undertaken by a
trustee and will only foster compliance activity rather than educating trustees in the
considerations to be undertaken in the decision making process.


Regulation 13.18AA (5) Item must be insured in fund’s name

This clause fails to accommodate the difficulties that may be incurred by trustees
attempting to obtain insurance. For example, what would happen if:
    a) A trustee was unable to obtain insurance for a particular asset
    b) Insurance was prohibitively costly
    c) Difficulties arose in agreeing on valuations for insurance
    d) Delays in insurance beyond the 7 day requirement occurred that were caused by
        third parties, which may include valuers or the insurer
    e) An insurer required the asset to be held in joint names with the owner of the
        premises (related or not) in which the asset was stored
    f) Insurance arrangements are already in place with the entity who is holding the
        asset (for example, an art gallery holding a piece of artwork may have insurance in
        place for the asset already)

Furthermore, the legislation does not allow for a decision by the trustee that insurance is
not in the best interests of members. It will compel a trustee to take out insurance,
regardless of its appropriateness for the fund or indeed if it is not in the best interests of the
members. For example, insurers often have a minimum premium requirement. If the value
of the asset is low, the cost of insurance will be comparatively exorbitant. A trustee should
be able to make a conscious decision not to insure an asset.

The Institute believes that further guidance for trustees on the benefits of insurance and
considerations that need to be made will provide a better outcome than simply requiring
trustees to take out insurance in the name of the fund.

Regulation 13.18AA (6) Item must not be used by related party

If the intention of the regulations is to restrict or prohibit the personal use of assets owned
by an SMSF, we would question why the use of assets has been limited to those included
in this section. Why for example would wine or books not be included in this list when
clearly a personal benefit could be derived from their use by a related party.

The restrictive nature of this clause may also result in a detrimental effect on the
investment value of assets. For example, a vintage car may need to be driven to keep the
engine in prime condition or to obtain repairs/maintenance or it may need to be driven to be
exhibited at a show to increase its value. These activities could offend this clause and
would subject trustees to a monetary penalty. Clearly, such activities are in the best
interests of the members of the fund to enhance (or maintain) the value of the investment.
It may not be practical for trustees to obtain the services of a third party to undertake such
activities.

The Institute would encourage consideration of provisions in the regulations to
accommodate such circumstances.
                         The Institute of Chartered Accountants in Australia                      4

  Exposure Draft - SMSF Investment in Collectables and Personal Use Assets



Regulation 13.18AA (7) Transfer of asset to related party requires independent
valuation

The Institute supports the use of independent valuations where assets are transferred to a
related party. However, we are concerned at the lack of provision where independent
valuations are difficult or unable to be obtained.

Provisions should be made to accommodate circumstances in which the trustees have
simply been unable to obtain a valuation or a valuation was prohibitively expensive. Such
circumstances could be appropriately documented and evidenced and details provided to
fund auditors.


Regulation 13.18AA (8) Offences are strict liability offences

The Institute believes it is not appropriate to include all subregulations (2) to (7) as strict
liability offences, subject to 10 penalty units, particularly when the subregulations are so
prescriptive and do not accommodate difficulties that trustees may face in adhering to
them.

Strict liability offences may be appropriate for offences that occur that are at the heart of
what his legislation is trying to achieve, which is to ensure SMSFs comply with the sole
purpose test and prevent the personal use and enjoyment of assets held by SMSFs by
related parties.

Consideration should be given to removing the strict liability offence from a number of the
subregulations, including (4), (5), (6) and (7).


Regulation 13.18AA (9) and (10) Transitional period for existing assets

The Institute agrees with transitional arrangements being made available for SMSFs
currently holding assets that may otherwise be caught up by the regulations


I am happy to discuss the above further, should you require and can be contacted on 02
9290 5704 or via email at liz.westover@charteredaccountants.com.au

Yours sincerely,




LIZ WESTOVER CA
Head of Superannuation