Stable Financial has noted that the important topic of horse investment and the use of SMSF have been raised in media outlets during the past week. We feel it is time to set the record straight. In particular, the question has been raised whether the SMSF collectable and personal use asset rules apply to horse investments… THE SHORT ANSWER IS NO.
This is good news because the rules that apply to SMSF collectable and personal use assets are very restrictive and are very onerous to comply with.
Analysis of law
Since 2011, the main Act that governs superannuation funds (ie, the Superannuation Industry (Supervision) Act 1993 (Cth)) has provided that the ‘regulations may prescribe rules in relation to … self managed superannuation funds making … investments involving … ’ various kinds of assets. The kinds of assets specified in the Act include artwork, jewellery and ‘assets … ordinarily used or kept mainly for personal use or enjoyment’.
On its face, horses might be caught by this part of the Act because the ATO might view horses as ‘assets … ordinarily used or kept mainly for personal use or enjoyment’.
However, the important point is that the Act only provides that regulations may be made which prescribe rules about the kinds of assets listed above.
The actual rules covering specific types of assets are contained in the regulations themselves (ie, Superannuation Industry (Supervision) Regulations 1994 (Cth)).
Importantly, those regulations only make rules about some of the types of assets they could make rules about. More specifically, they make rules about artwork, jewellery and many other assets, but not ‘assets … ordinarily used or kept mainly for personal use or enjoyment’, even though they could have.
Accordingly, the collectable and personal use asset rules do not apply to horse investments.
For those interested in getting this ‘straight from the horse’s mouth’ the official version of the Act is available here (see section 62A) and the official version of the regulations is available here (see regulation 13.18AA).
What the ATO says
Although the ATO does not make the law, it administers the law and so its opinion is very important.
The key ATO commentary on the collectable and personal use asset rules is available here. The ATO commentary does not state that the rules extend to assets ordinarily used or kept mainly for personal use or enjoyment. Rather, consistent with the above analysis of the law, the ATO commentary says that collectable and personal use assets include only those items contained in the regulations (ie, artwork, jewellery, etc).
Can my SMSF buy a horse?
The rules that apply to SMSF collectable and personal use assets do not apply to horse investments. Accordingly, this begs the question: is it possible for an SMSF to acquire and maintain a horse investment?
The answer is that it is possible for an SMSF to invest in a horse, subject to certain criteria being satisfied. Although the SMSF collectable and personal use asset rules do not apply to a horse investment, many other rules do apply and these rules would need to be observed.
For example:
- the horse investment must be consistent with the SMSF’s investment strategy;
- the SMSF’s purpose in acquiring the horse must be consistent with certain prescribed items such as the provisions of benefits for members when they retire;
- the SMSF can’t buy the horse from a related party;
- the SMSF typically can’t lease the horse to a related party;
- the strict ‘arm’s length’ investing rules must be satisfied;
- the horse typically can’t have a charge over it; and
- the SMSF’s deed must allow for a horse investment.
Unfortunately there isn’t a plain vanilla answer or silver bullet regarding horse investment and the proper use of a SMSF. Given the novelty and the risks, Stable Financial strongly encourages any SMSF trustees thinking of making a horse investment to first seek prospective ATO input.
On questions of superannuation law, the ATO will not give a private binding ruling (they only give private binding rulings for tax law questions), however, the ATO will give non-binding SMSF specific advice. Stable Financial looks forward to discussing your planned horse investment with you and is happy to advise further and to guide taxpayers through the process of first seeking prospective ATO input.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.