Michelle Bromley CFP®, Director – Strategy & Advice

A Self-Managed Superannuation Fund (SMSF) allows trustees to take control of their retirement savings by managing their own superannuation investments. However, with greater control comes greater responsibility—SMSFs are subject to strict rules about what types of assets they can own and how those assets are used.

The Sole Purpose Test

One of the key principles guiding SMSF investments is the Sole Purpose Test, which obliges trustees to maintain all fund assets solely to provide benefits to members upon retirement or to their dependents in case of death. This rule is at the heart of ensuring compliance, but many trustees overlook the implications for certain types of assets.

Restrictions on Personal Use of Assets

While SMSFs can invest in a wide range of assets, including property, there are limitations on how these assets can be used. Trustees and members must ensure that assets are used for investment purposes only and not for personal enjoyment. This is particularly relevant when SMSFs invest in assets such as holiday homes or collectables.

The SMSF Trust Deed may contain clauses that further limit what types of assets SMSF Trustees are allowed to acquire on behalf of the Fund.

ATO Rules for SMSF Collectables:

The Australian Taxation Office (ATO) classifies certain assets as collectables and imposes specific rules on how they are acquired, stored, and used within an SMSF. According to the ATO, collectables include Artwork, Jewellery, Antiques, Coins and Medals, Stamps, Rare Books, Memorabilia, Wine and Spirits, Cars and Motorcycles, and recreational Boats.

The ATO imposes strict rules for collectables held within an SMSF to ensure they are not used for personal enjoyment:

• No Personal Use or Display: Collectables cannot be used by SMSF trustees or related parties. For example, artwork cannot be hung in a trustee’s home, and jewellery cannot be worn.
• Storage: Collectables must be stored securely, separate from personal assets. Trustees must document the decision regarding where and how the collectables will be stored.
• Insurance: Collectables must be insured in the name of the SMSF within seven days of purchase.
• No Leasing to Related Parties: Collectables and personal use assets cannot be leased or rented to SMSF members or related parties.

These rules are in place to ensure that SMSF investments in collectables serve the sole purpose of building retirement savings, not providing personal enjoyment.

Real World Examples

Over the years I’ve come across a few memorable cases, which highlight how non-traditional assets can be successfully owned in an SMSF provided the rules are followed.

Real-World Example 1: Collectables

One of the more unusual cases I encountered involved a Trustee who was a prominent jeweller and had invested in a rare and extremely valuable watch through his SMSF. He stored the watch in the safe at his business premises, a high-end jewellery store with significant security in place. The Trustee did not have the watch on display in the jewellery store and the watch was never worn. This arrangement, although unusual, is allowable – you can store collectables in premises owned by a related party, provided it is not their private residence. For the arrangement to be allowable, the watch must be valued at its market price by a qualified independent valuer and insured in the name of the Fund separately from the insurance covering the business premises.

Real-World Example 2: Holiday Homes and Incidental Stays

In this case, while the Trustees intended that the holiday home would be rented out via a professional manager to unrelated parties for short-term holiday stays, they also floated the idea of staying there "for maintenance" during the off-season. Generally, allowing related parties to stay in SMSF-owned residential properties is not allowed, even if market-rate rent is paid. However, a short-term stay for the purpose of carrying out maintenance may be viewed as merely an incidental benefit, provided the Trustees pay the market rate for their stay. However, a short-term stay at a reduced rent or free is considered a material benefit and disallowed, even though the property could not be rented out while maintenance is being carried out.

Real-World Example 3: Artwork Displayed at Home

Artworks and other collectables are also popular investments within SMSFs, but they come with their own unique challenges. I’ve encountered a few Trustees who had invested in high-value artwork, which seemed like a great way to diversify their retirement portfolio. The problem arises in where to securely store such artwork, which can be costly. The artwork hung on the walls of the Trustees' home office from which they operate their business; however, the ATO would see this as a clear case of personal use, which breaches the strict rules around how SMSF-owned collectables must be stored. One solution is to lease the Artwork on third-party terms to a business that operates from commercial premises.

Real-World Example 4: Commercial Property – Keeping it Arm’s Length

While residential properties come with restrictions, commercial properties offer more flexibility under certain conditions.

Under the “business real property” exemption, an SMSF is allowed to lease commercial property to a business owned or operated by a related party, such as the Trustee or their family, provided the lease is conducted on a strictly commercial, arms-length basis with a formal written lease agreement at commercial market rates and rent payments made promptly.

The Consequences of Non-Compliance

As these examples show, the lines between personal and investment use can easily blur, but trustees need to be aware that even small indiscretions can have consequences, which may include:

• The Trustees providing a commitment to the ATO to stop the behaviour
• The Trustees' undertaking to rectify the contravention
• The Trustees being disqualified from acting as a Trustee or director of a corporate trustee
• The Trustees being directed to wind up the SMSF
• Freezing of the SMSF’s assets
• The SMSF was deemed non-compliant, resulting in a loss of concessional tax treatment
• The imposition of additional tax penalties on the trustees
• Civil or criminal penalties in extreme cases

Conclusion: Best Practice to Protect Your SMSF from Costly Mistakes

SMSFs provide great flexibility for building retirement savings, but trustees need to be careful not to let personal benefits creep into their investment decisions. Whether it’s a holiday home, artwork, or an unusual collectable like a rare watch, the key is to ensure these assets serve their intended purpose—securing retirement benefits—rather than personal enjoyment. 

Ensuring your SMSF remains compliant with regulations is crucial to safeguarding your retirement savings. Here are some key practices to follow to avoid costly mistakes:

• ‍Adhere to the Sole Purpose Test: All assets owned by your SMSF must strictly serve the purpose of providing retirement benefits. Trustees should ensure there is no personal use of fund assets, even in minor ways.
• ‍Keep Residential Properties at Arms-Length: If your SMSF owns a residential property, you or any related parties cannot live in it, even temporarily, or stay for any purpose, including "maintenance."
• ‍Ensure Business Real Property is on Commercial Terms: SMSFs are allowed to lease commercial properties to a related business under the business real property exemption, but you must ensure that a formal written lease is in place, the lease is conducted at market value, and rent is paid on time.
• ‍Comply with Collectable and Personal Use Asset Rules: If your SMSF invests in collectables—such as artwork, jewellery, or vintage cars—ensure they are stored securely and separate from personal use assets, are not displayed in a personal residence or used by a related party and are insured in the name of the SMSF.

The complexity of SMSF rules means it’s easy to make mistakes, even with the best intentions. Always seek professional advice if you're unsure whether an investment or action might breach regulations. Staying informed will help protect your SMSF from unnecessary risks.

Contact one of our Wealth Advisers at clientservices@primefinancial.com.au or complete the form below for tailored financial solutions, utilising our strategic knowledge and investment acumen to help you and your family with long-term financial aspirations.

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