Can my SMSF own Pink Diamonds?
Yes, the ATO have confirmed a self-managed super fund (SMSF) can own pink diamonds. Natural, pink diamonds in loose form is not an investment in collectables or personal use assets. A pink diamond which is mounted in a pendant or a ring or otherwise integrated or used as jewellery is a collectable.
An auditor will closely review pink diamond investments, requiring proof of compliance with the sole purpose test, investment strategy, confirmation they weren’t acquired from members or related parties. If the pink diamond is jewellery the investment must also comply with the rules in relation to collectables.
An SMSF’s investment strategy should indicate the investment held in pink diamonds and how the investment aligns with the retirement goals of the members.
What are the audit issues for an SMSF owning natural pink diamonds?
The ATO’s view is that loose pink diamonds are not considered collectables under SIS legislation unless they are altered or something is added to them. Jewellery, however, is specifically defined as a collectable.
Specifically, an SMSF trustee must be able to provide independent evidence of the following:
- valuation at 30th June each year
- valuation at specific times such as a member starting a pension, death of a member and divorce
- holding adequate insurance in the name of the SMSF
- purchase documents in the name of the SMSF
- security of the diamond
- existence at 30th June
Can a pink diamond be stored at a member’s home?
Diamonds must be securely stored, which can include placement in a home safe or on the business premises of a related party. The preferred storage method is an independent vault storage facility, where the diamond remains secure under the SMSF’s name and related storage fees are paid by the SMSF.
What audit evidence is required to show the diamonds existed at 30th June?
The requirements may vary depending on the auditor. If a diamond is stored at home, an auditor might request a trustee statement and a photograph of the diamond alongside a newspaper dated 30th June or post 30 June to prove it still exists and hasn’t been sold for cash (which some trustees have been caught doing). For diamonds stored in a third-party vault, evidence may be provided directly by the storage provider such as a 30 June holding statement.
Do I need to insure a pink diamond?
Insuring the diamond satisfies the trustee’s duty to act in the best interest of the members in protecting the fund’s assets. Insurance should be arranged when storing the diamond in a vault, at home or business premises and must be in the SMSF’s name.
Pink diamonds which are collectables
An SMSF may own pink diamonds as collectables in the form of jewellery, but SIS regulations 13.18AA impose stricter rules on collectables than on loose natural diamonds.
What rules apply to owning collectables?
- cannot be used or leased to a member or related party
- cannot be stored in the private residence of the member or related party
- can be stored in the business premises of a related party BUT cannot be on display
- a formal written statement recording the reasons the trustee chose to store the jewellery in a particular place must be kept for 10 years i.e. a trustee minute
- the item must be insured in the fund’s name
- the insurance must be taken out within 7 days of purchase
- disposal of the jewellery to a related party must be determined by a qualified independent valuer
As with any SMSF investment, ensure pink diamonds align with the fund’s strategy and are solely for retirement or beneficiary purposes. Consider the fund’s cashflow needs and the liquidity of the diamonds, particularly if providing pensions to ageing members or likely paying out death benefits.