SMSF Technical Series Continued…
In this blog series, CaseWare’s SMSF Audit expert and content provider Sharlene Anderson, outlines common technical SMSF issues, and what auditors need to consider for each. This is the third issue of six.
Amongst other requirements regulation 13.18AA of the SIS Regulations requires SMSF investments in artwork and other collectable and personal use assets to be insured in the name of the fund within 7 days of acquiring the item.
The transitional period for those assets held by a SMSF on 30 June 2011 ceased on 1 July 2016. Accordingly, all investments in artwork held by an SMSF must now be insured in the name of the fund.
The auditor should obtain a copy of the relevant insurance policy to confirm compliance with the regulation. The insurance policy must include the fund as an insured party in respect of the fund’s artworks insured by the policy. No required insurance value is specified by the regulation.
Consider a scenario where an unrelated art dealer sells artworks to an SMSF and then immediately leases back the artworks from the SMSF. The artworks are then subleased by the dealer to various corporate clients / galleries.
In this arrangement some of the artworks are covered by a policy held by the art dealer with the insured party being the art dealer. However, the policy specifically notes the artworks as owned by the SMSF. Is this sufficient to confirm that the artworks are insured in the name of the fund?
It may be possible to accept that as the policy notes the SMSF as the owner the artworks are in fact ‘insured in the name of the fund’ although an alternate view would be that as the insured party is not the SMSF then a breach of the regulation has occurred.
Taking the scenario one step further, still other artworks that have been subleased by the art dealer are now insured on policies held by the sub lessee. There is no express mention of the SMSF as an insured or interested party on the policy. However, the art dealer is noted as an interested party on the policy and the art dealer’s own records ultimately identify that the SMSF is the owner of the relevant artworks. Would this be sufficient to confirm that the artwork ‘is insured in the name of the fund’?
It would be open to the auditor in this scenario to form the view that a breach of the regulation may be occurring and to then consider whether the matter should result in an audit qualification and an auditor contravention report.
Regulation 13.18AA is included in the Auditor Contravention Report as a reportable section with a statutory time limit. It should be noted that contraventions of statutory time limits that are exceeded by more than 14 days must be reported in an auditor contravention report irrespective of the value or materiality involved.
A breach of regulation 13.18AA occurs when the SMSF has owned the artworks for more than 7 days and they have not been insured in the name of the fund.
Therefore, if more than 21 days has passed and the artworks are not insured in the name of the fund an auditor contravention report is required. As the transitional provisions for Artworks acquired before 30 June 2011 ceased on 1 July 2016 we would suggest a contravention report is required for those artworks if they have not been insured in the name of the fund by 15 July 2016.
The auditor should also inform the trustee in writing that a breach of the regulations may be occurring as required by section 129 of the SIS Act.
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