Since 1 July 2011, the SIS Regulations require trustees of SMSFs to insure collectables and personal use assets owned by the fund, other than memberships of sporting or social clubs, in the name of the fund within seven days of acquiring the item.
The need to insure provides a protection mechanism for a member’s retirement benefit. If the asset is damaged or suffers some other insurable event, the expectation is that a member’s benefit will not be lost. In addition, requiring the insurance to be in the name of the fund, ensures that assets are maintained separately from other assets of the trustee which gives greater integrity to the process.
However, industry practice around insuring collectables and personal use assets continues to generate much discussion, particularly from an audit perspective. For example, some collectable items are separately identified under general household insurance and premiums proportionally paid by the member and the fund. Other trustees rely on insurance policies of third parties, such as an art gallery, to cover the SMSF’s artwork. There are even instances where trustees do not meet the insurance requirement as they struggle to find an insurer.
This discussion recently flared up at the SMSF Association’s National Conference and clarity has now been sought from the ATO to once and for all clear up any confusion and uncertainties about insuring collectables and personal use assets.
We can confirm that it is the ATO’s view that to comply with the insurance requirements for collectables and personal use assets, the insurance policy must held be in the name of the SMSF, with the trustee as the legal owner of the policy (in their capacity as trustee).
As the obligation falls on the trustee to insure the item, a trustee cannot delegate or rely on a third party to source and maintain risk cover for an asset of the fund.
Collectables and personal use assets may be insured by the trustees collectively under one policy or under separate policies. However, the policy must still be in the name of the fund, irrespective of the value of the asset.
This means that it is not acceptable for:
- the assets to be insured under a policy held in the trustee’s own personal name (for example, as part of a home and contents insurance policy); or
- the assets to be insured under a policy held by another third party (for example, a business owner or custodian who may be storing, displaying or leasing the asset); or
- the fund’s interest to simply be noted on an insurance policy owned by a third party.
It is important that the trustee is the legal owner of the policy to ensure the fund’s assets are adequately protected against financial loss or liability, the trustee can make a claim under the policy and any insurance proceeds are payable directly to the fund. This remains the case even if the item is also covered under a policy taken out by another party.
When deciding to invest in collectables, trustees need to consider their ability to comply with all the regulations prior to making the investment. However, where a fund is having difficulty obtaining insurance in the name of the SMSF trustee, it may be appropriate to contact the ATO through their voluntary disclosure service to seek some guidance on how to best to manage the situation.
This topic was covered during the SMSF Association virtual National Conference 2021 during Workshop 1: Busting the myths of SMSF accounting and auditing, presented by Mark Ellem and Shelley Banton.
Opinion piece written by
Mary Simmons, Technical Manager