The humble piece of artwork has caused much debate in superannuation investment circles.
Where a superannuation fund acquires a piece of art, the question arises as to whether it can hang in the residence of a member. This can be referred to as the “hanging dilemma”.
The only judicial decision to have specifically considered this issue found that a fund’s acquisition of artwork was justifiable because of the intrinsic value of the work and its ability to produce capital gains.
But does an art investment satisfy the sole purpose test?
This boils down to whether an investment which provides retirement benefits but confers other benefits will breach the sole purpose test. In the famous Swiss Chalet case, at one stage the exclusive purpose test was put forward as the hub of the sole purpose test. “Under the [Superannuation Industry (Supervision) Act 1993], the test requires more than the presence of a dominant or principal purpose … it requires an exclusivity of purpose”. So on this authority, if the investment satisfies any other purpose it would breach the sole purpose test.
The problems associated with the hanging of art (or other investments such as a signed football guernsey) are complex. On the one hand, a piece of art has to be stored somewhere. If the trustee would otherwise have to pay storage costs but can have it stored for free in a member’s house, is the dilemma overcome? One problem is that a court might nonetheless hold that the ability of a member to view the work is an unauthorised benefit.
It seems absurd that the resolution to the hanging dilemma lies in the covering up of the artwork or the hanging of it back-to-front so that no member can view the piece.
There are two answers to this dilemma.
The famous Swiss Chalet case found that the chalet and golf club benefits failed the test, primarily because these investments were not properly documented and maintained for fund purposes. But it was acknowledged that an investment which has more than one purpose can still satisfy the sole purpose if the other purpose is incidental.
“In the instant case, in the absence of other relevant factors, the fact that Mr A and his friend were enabled … to play golf could by itself be regarded as so incidental or remote as to not amount to an infringement of the test”.
In order to get around the hanging dilemma, one suggestion has been that the fund should not hang the painting in a member’s residence.
This is where the second factor or question needs to be considered: Is the non-retirement purpose inconsistent with the provision of retirement benefits?
For example, a fund is also able to confer benefits on a trustee in terms of payment of fees, the right of indemnity etc. Is this a breach of the sole purpose test? The argument that the fund can confer benefits on trustees but not members because the Act specifically limits benefits to members to retirement benefits is simply sophistry.
The Act does not say that members can only receive such benefits. The fact that the fund provides benefits to members other than retirement benefits cannot of itself be the litmus test. A fund has been held to be able to provide discount card benefits to members provided it is not to the financial detriment of the fund.
The fund’s purpose of providing retirement benefits would only appear to be prejudiced if the other purposes are inconsistent with this purpose.
This is in fact the litmus test which emerges from a number of cases (including some seminal High Court decisions) and makes commercial sense — one case examined whether there was a positive purpose of advantaging any one of those entities at the expense of members of the fund.
This has been the test used in relation to two situations which have held to be permissible — the discount card situation (which the fund does not pay for) and the example given in the APRA Circular on the sole purpose test of a holiday house owned by the fund which is rented from time to time to a member on commercial terms.
If the trustee receives a leasing payment from the member for that right on commercial terms, this would seem to make any viewing ability of a member incidental. In the absence of further clarification of the hanging dilemma and the sole purpose landscape, this seems a prudent course to adopt.
As to vintage cars and vintage wine, that’s probably another story!
— Michael Vrisakis is a partner at Blake Dawson Waldron
