Going pink in your SMSF has its limitations
IT's an interesting idea - diversifying a self-managed super fund to include collectibles such as jewellery, but is it possible?
Jewellery is defined as a collectible under superannuation law. The rules that apply to collectibles and personal use assets owned by a SMSF apply to assets purchased on or after July 1, 2011.
The definition of 'collectibles' includes the following; artwork, jewellery (including gemstones), antiques, artefacts, coins, postage stamps, manuscripts or books, memorabilia, wine or spirits, automobiles and boats.
There are important restrictions that apply to ownership via a SMSF. The asset -
- can't be leased to a related party.
- can't be stored in a private residence of a related party (a member of the fund or related party).
- must be insured within seven days of acquisition in the SMSF's name.
- can't be used by a related party. If the asset is disposed of to a related party, it must occur at market price assessed by an independent valuer.
The law applies a set of rules of how you document ownership, prove the purchase, seek independent valuation and proof/recognition of ownership.
Should you lease the asset to a third party, copies of lease arrangement when generating income and evidence of investment returns to the fund are obliged to be maintained. Likewise, evidence of expenses incurred for the costs of maintaining the assets.
You need to affirm that super laws are satisfied, the investment complies with your fund's Investment Strategy and an independent valuation is obtained (at least every three years or when the asset is sold or transferred).
This is a complex area of investment for SMSF trustees and the penalties for making a mistake are severe.
Given the complexity, trustees should seek expert advice and expect careful scrutiny by both SMSF auditors and the Australian Tax Office.
Investing in pink diamonds
Pink Diamonds have received considerable media attention due to the record prices being attained for some stones at auction.
As an investment asset class, the annual rate of return for the past 15 years has been reportedly more than 13 per cent per annum. The key drivers of the price increase have been a combination of the demand for pink diamonds and the scarcity of supply.
Western Australia's Argyle Diamond mine produces 90 per cent of the world production of pink diamonds. Less than 1 per cent of the diamonds mined from Argyle are pink, demonstrating the rarity of these diamonds and the scarcity of current supply.
With the Argyle mine foreshadowed to close in 2021, both investors and speculators are driving up the price of available diamond stock.
Pink diamonds can be bought from a dealer or at auction.
An entry level investment grade pink diamond will cost in the vicinity of $20,000. Like any collectible, the challenge is understanding if you are paying fair value for the diamond. Whether it be from a dealer or an auction house, you should insist that the diamond is independently certified and valued.
The auction or dealer fees to trade diamonds will range up to 10 per cent for both the buyer and the seller. Ongoing management costs may include secure storage, insurance and regular valuation.
Diamonds and collectibles are characterised as an 'alternative investment'. For diversification and risk management purposes, they should represent a relatively small portion of your investment portfolio.
Like any investment, there are risks - prices may fall if buyer interest wanes or new sources of pink diamonds are found. You could lose or have your diamonds stolen.
Be wary of any advertising promising vast returns or focussing on past performance. Be wary of those promoting pink diamonds as being suitable for all investment portfolios or as a substitute for mainstream asset classes such as shares, property or bonds. They are not easily traded as there is no centralised diamond exchange or market to trade.
They are an illiquid niche investment that should only be considered by those who can afford to take the risk and have the time to wait to sell.
The pleasure in owning collectibles is to appreciate and enjoy the asset; whether it be a painting on a wall or a wearing a beautiful gemstone.
The rules of ownership of collectibles inside a SMSF specifically prohibit you from doing this.
I personally don't think pink diamonds, or any other collectibles, should be bought inside an SMSF.
Q&A with The Coach first appeared on www.wealthpartners.net.au. Any general advice in this story doesn't take account of personal objectives, financial situation and needs.