Quiz results: Can an SMSF invest in this?

At the end of 2023, the ATO published guidance around investing in pink diamonds. The devil, it turns out, is in the detail when assessing whether a specific diamond is considered a collectable or personal use asset. And this is the case with the majority of SMSF investment decisions.

Here’s a full rundown of the answers to our ‘Can an SMSF invest in this?’ quiz and the regulatory detail that dictates each.

Before you scroll to the answers – spoilers ahead. If you haven’t already, go and do the quiz.

Are diamonds ‘collectables’?

Public Accountant February 2024: SMSF quiz results | Q1 by Hallie Donkin

Yes, they can be stored at home. Loose diamonds, pink or otherwise, are not considered collectables ​​or personal use assets; they are not subject to any specific storage requirements.

If the diamonds, again pink or otherwise, were mounted in jewellery, they would be considered collectables or personal use assets and, therefore, could not be stored at the private residence of a related party.

It may not be the best idea to store assets of significant value at home, and advisers may recommend adequate insurance in any case – but neither is a requirement under superannuation regulations.

The employer is an associate

Public Accountant February 2024: SMSF quiz results | Q2 by Hallie Donkin

No, the ATO defines an employer who contributes to a super fund for the benefit of a member as a standard employer-sponsor. A company the standard employer-sponsor controls (in this case the restaurant) is considered an associate. Both the employer and the restaurant are, therefore, considered related parties, and cannot derive a present-day benefit – leasing the sculpture –from the fund.

Can an SMSF invest in cryptocurrencies? Get the right answers. Register for the IPA’s four-part SMSF Refresher Series with Shirley Schaefer.

Collectables can’t be stored on the same land as a member’s private residence

Public Accountant February 2024: SMSF quiz results | Q3 by Hallie Donkin

No, a painting is considered a collectable, so cannot be stored or displayed in a private residence of a related party. The member is a related party, and their gallery is part of their private dwelling.

The ATO says:
“​​A private residence includes all parts of a private dwelling (above or below ground), the land on which the private residence is situated and all other buildings on that land, such as garages or sheds.”

An SMSF can lend money

Public Accountant February 2024: SMSF quiz results | Q4 by Hallie Donkin

Yes, an SMSF can lend, but there are significant restrictions.

The ATO says: “You can't lend money or provide direct or indirect financial assistance from your fund to a member, or a member’s relative. Loans made by your SMSF must be in the best interests of members and comply with your investment strategy … If you still decide to lend money from your SMSF, make sure the loan is conducted on a commercial, arm's length basis.”

But lending can’t provide a present-day benefit

Public Accountant February 2024: SMSF quiz results | Q5 by Hallie Donkin

No, an SMSF can’t invest in an unrelated trust if the unrelated trust lends to an SMSF member’s relative.

Structures involving unrelated trusts, used to circumvent SMSF restrictions, can be complex. The ATO has said that it is concerned by both superannuation regulatory issues and taxation issues arising from this arrangement.

The simplest explanation is that the fund cannot invest with the purpose of providing a present-day benefit, rather than a retirement benefit, to a member.

Other superannuation regulatory issues with such investment include:

• Fund resources cannot be loaned or given to a relative of a member.
• If a loan from an unrelated trust to a fund member is not repaid, it may be considered illegal early access to superannuation.
• SMSF funds may only be invested on an arm's length basis.
• The investment may be considered an in-house asset for the SMSF, raising concerns over the limits on investment in in-house assets and any artificial reduction of the market value ratio of the SMSF's in-house assets to avoid those limits.

You can bet the farm

Public Accountant February 2024: SMSF quiz results | Q6 by Hallie Donkin

Yes, this purchase is within the regulatory guidelines, as long as the investment is aligned with the fund’s investment strategy – with consideration for asset diversification and liquidity, as well as the maximisation of member returns.

Business real property is not subject to in-house asset rules. And while business real property would usually exclude any property with a private dwelling inhabited by a fund member, this is not the case for a farm.

The ATO explains: “The dwelling must be in an area of land no more than two hectares and the main use of the whole property can't be for domestic or private purposes.”

Are your clients asking about whether their SMSF can invest in cryptocurrencies? Or how the $3 million cap will work? Get the answers. Register for the IPA’s four-part SMSF Refresher Series with Shirley Schaefer.