Navigating the Intricacies of Bullion Investments in SMSFs

For those who include gold or silver in their Self-Managed Superannuation Fund (SMSF) portfolios, a web of questions often unravels during the auditing process. Nobody wants their SMSF investment journey to derail unexpectedly, especially when it involves precious metals like gold and silver. While the rules surrounding some investment products are straightforward, the waters get murkier when it comes to bullion. Is bullion considered a collectable asset, and what are the audit requirements tied to this classification? The answers might surprise you.

The Collectables Route

If the physical gold or silver held within your SMSF is deemed a collectable or personal use asset, it falls under the strict regulations of the Superannuation Industry (Supervision) Regulation 13.18AA. This means the auditor must gather sufficient and appropriate evidence to ensure that the fund trustee:

1. Does not lease the asset to a related party: Note that even related-party use of the investment qualifies as a "lease."
2. Does not store the asset in a related party’s residence: To avoid this, it is generally required to store the asset in a commercial storage facility, ensuring there is no private use.
3. Documents storage decisions in writing: These decisions must be retained for at least a decade.
4. Insures the item in the fund’s name within seven days of acquisition: This is a crucial step to secure the investment.
5. Arranges for the asset to be valued by a qualified, independent person before any transfer to a related party: Independent valuation is essential to maintain transparency.

The Non-Collectables Route

In contrast, if your gold or silver is not classified as a collectable or personal use asset, the auditor focuses on assessing:

1. Value at year-end: This is usually verifiable against prices published by the bullion provider.
2. Ownership: Confirmed through a storage facility’s annual holding statement or the initial invoice.
3. Storage and physical evidence: If the investment is not held within a commercial storage facility, the auditor will examine the security measures implemented by the trustee, including whether an independent physical check of the precious metal is warranted.
4. Insurance: It's important to note that precious metals stored in a home safe can be insured. In cases where precious metals make up a significant portion of the SMSF’s total investment, the auditor may recommend insurance in the fund’s best interest. Bullion stored with a provider typically includes insurance coverage.

Is Bullion a Collectable?

The question that marks the divide between these two routes is whether bullion is considered a collectable. Collectable and personal use assets encompass various investments, such as jewellery, antiques, and artefacts. The Australian Taxation Office (ATO) provides some guidance, clarifying that coins and banknotes are deemed collectables if their value exceeds their face value. This includes collector coins, specimen coins, and proofs. However, it's important to distinguish between bullion coins and numismatic coins.

Bullion Coins vs. Numismatic Coins

The ATO suggests that bullion coins are collectables if their value exceeds their face value and they trade at a price above the spot price of their metal content. This might initially seem confusing. Bullion coins often trade at a premium above the spot price due to fabrication and retailing costs. However, when bullion bars or coins derive their value primarily from the spot price and trade at that amount plus a standard mark-up for metal preparation, they are typically not considered collectable assets. This view is supported by GST Ruling 2003/10, which creates a tax exemption for precious metals, provided they meet certain purity requirements and exist in a tradable form.

In summary, if bullion bars or coins derive their value as a tradable form of precious metal in the marketplace, they are less likely to be classified as collectable assets.

Annual Monitoring and Flexibility

It's important to note that auditors will annually monitor all forms of bullion held within the SMSF. If an investment is found to have acquired intrinsic value apart from its status as a tradable precious metal, it may be reclassified as a collectable, subject to Regulation 13.18AA.

In conclusion, if you aim to avoid the collectables classification when holding gold or silver bullion in your SMSF, consider selecting bullion with minimal numismatic value. This approach not only minimizes costs but also maximizes returns on your precious metal investment within your SMSF. Remember, the collectable status of gold and silver bullion in your SMSF can change over time, so it's essential to stay informed and adapt as needed.