05 July 2010

Unfair coin ban for SMSFs

The Cooper Super System Review has been looking at the issue of collectables held in SMSFs and has a preliminary recommendation that:

a) the acquisition of collectables and personal use assets by SMSF trustees be prohibited;
b) SMSFs that own collectables or personal use assets be provided a transitional period,
up to 30 June 2020, in which to dispose of those assets; and
c) APRA‐regulated funds be exempted from these changes.

Their examples include paintings, jewellery, antiques, stamp collections, wine, exotic cars, golf club memberships, race horses and boats. The list is based on and makes reference to the ATO's definition of ‘collectables’ and ‘personal use assets’ and this definition includes “coins or medallions”.

The inclusion of coins, stamps and medallions and the requirement they be sold within 10 years has caused great concern within the numismatic community. It is the view of coin dealers that the market cannot absorb disposal of the volume of numismatic product held in SMSF over 10 years, resulting in a negative impact on market prices.

Now it is possible for a SMSF to “sell” their collection to the individual(s) who benefit from the SMSF, thereby avoiding any impact in the market. However this assumes that such individuals have the cash to pay their SMSF. In addition, the book sale would result in tax consequences for the SMSF.

I would note at this point that those who hold bullion coins through their SMSF should not have anything to worry about. The super review's reliance on the ATO's definitions for tax purposes means that bullion should be excluded due to the very clear difference the ATO makes between bullion and collectables for GST purposes in this ruling. I cannot see the super review going against this because it would result in the super treatment conflicting and disagreeing with the ATO's arguments around bullion/collectables, opening up all sorts of issues for the ATO. The primary problem would be that individual bullion items under $500 would not attract capital gains tax! I can't see the ATO letting that happen.

So on what basis has the super review determined that collectables are not a suitable investment? Initially they say that they believe “that there are certain types of assets that should not be regarded as investments that build retirement savings”.

Now this is contradicted by the fact that their recommendation excludes APRA regulated funds. If collectables were not good enough for SMSF to “build retirement savings” then logically they should also not be good enough for APRA regulated funds. The fact that they make this illogical statement indicates to me they are clutching at justifications for their position.

Later in their document they give the real reason: “The principal concern is that the cumulative regulatory and compliance complexities outweigh the potential benefits of allowing such a liberal investment menu to a sector that is not directly prudentially regulated.”

Now what this is really saying is that they suspect people are abusing the system but it is too much trouble to enforce compliance with the rules so lets just punish everyone and ban it all outright. But what really gets to me is that they are making this ban retrospective. They could have recommended disallowing further investment in collectables rather than forcing the liquidation of existing collections. There is no justice in retrospective law.

The fact is that it is bureaucrats who drafted the detailed legislation that allowed the loophole but instead of admitting their mistake and living with it, they want to perform a 1984 Orwellian expunging of collectable from SMSFs so they can pretend the whole thing never happened.

And the result? Forced sales that will depress prices and thus the value of those SMSFs. So much for helping people “build retirement savings”, Mr Cooper.

10 comments:

Justin said...

Or possibly they don't want people holding anything but dollar denominated instruments that they
can devalue at will?

Gordon said...

I have a coin collection outside of my SMSF. I was contemplating buying some coins within the fund but my accountant advised me against for reasons other than this retrospective ban (although that too might have been anticipated).

The reasons he gave were:
1) The collection would have to be held outside of my own control, such as in a bank vault.
2) Every year, the entire collection would need to be valued by an expert at my expense.

His own comment was that essentially can have anything you want within your SMSF so long as you do not enjoy any pleasure from it.

Chris Polis said...

In someways the 'do not derive pleasure from it' condition is the problem, not the enforcement of it.

Change it to 'do not undertake activities likely to reduce the value of the collectible' may well be a better option.

Chris Polis said...

On a related issue, are there any Australian super funds (i.e. non-SMSF) that provide a physical gold exposure?

Anonymous said...

Good post Bron,

That is always the issue with SMSF's, having the governement change the rules on you, sometimes retrospectively. As we speak there probably aren't too many threats to the holding of bullion products in SMSF's but in a pinch I really wonder what the federal government is capable of, the RSPT being a good insight into the thinking in Canberra.

re: question about options for investing in gold in non-SMSF funds: you can buy GOLD on ASX, the Perth Mint Product ZAUWBA, gold miner shares directly or managed funds of gold miners. None of the above allow for direct physical gold ownership in a retail fund, the primary reason why I have an SMSF. These options would probably be OK for most.

Chris Polis said...

Just was thinking - given gold has a ~14% return over ten years, physical gold has to be able to be 'sold' as a viable superannuation investment option. And that rate is going to continue, unlike a number of other asset classes which are likely to tank going forward.

As it is, I've put the question to my super fund to see if they will offer physical gold as an investment option. Doesn't hurt to ask...

I suppose the only question then is if a super fund scale investment would stretch the mint's capacity or need for unallocated gold?

Bron said...

Spectrum Super http://www.spectrumsuper.com.au/ for Perth Mint employees lists the Perth Mint ASX product ZAUWBA on its "direct shares" options.

Logically, if any super fund that allows direct share investments and lists miners, then they should list our product because a miner is a leveraged play on gold whereas our product is non-leveraged, so less risky.

I can't see any super fund trustee/administrator going for a physical option due to the admin cost involved when gold ETFs on the ASX are available.

It would be great if super funds in general had a gold option, but there is a lot of work you have to put in to convince a trustee it is a "safe" asset class - eg back testing of portfolios with gold etc.

Bron said...

See update to this at http://goldchat.blogspot.com/2010/08/smsf-coin-ban-update.html

Anonymous said...

I think the ATO has allowed bullion coins because bullion coins are monitized .. they are legal tender.
I wonder though, if you buy in gold nuggets with a $200 face value which currently cost $1700+, when you draw a pension from the fund, can you then count it as $200 considering it is a legal coin or would the fund have to sell it first then pay you?

Bron said...

The ATO values the coins at market value if that exceeds their legal tender status, so no benefit if the super fund returns the actual coins to you rather than sell them for cash and give you the cash.