The Cooper Review into Superannuation - What It May Mean for the Australian Rare Coin Market

The last few weeks have been rather thick with announcements from the Australian Commonwealth Government about regulatory changes in our economy - the annual budget needs no introduction now, neither does the Labour Party's proposed 40% "super" profits tax on the resources industry.

One proposed group of regulatory changes that you may or may not have heard about in recent weeks are those put forward by Mr Jeremy Cooper, head of the Commonwealth Government's "Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System." Mr Cooper is a former Deputy Chairman of the Australian Securities and Investments Commission (ASIC), and is the gent in the middle of the image below.

What in blazes does this review have to do with rare coins and notes you might well ask - it does indeed I can assure you - a not insignificant number SMSF trustees invest a portion of their retirement funds in rare coins and notes, and although the number of SMSF's investing in numismatic items may not be a statistically significant portion of the total number of collectors active in the Australian numismatic market, as the average dollar amount spent by an SMSF is surely exponentially greater than that spent by the "average" collector (whoever that person is!), any possible regulatory change that may alter the amount spent by that segment of buyers, or even the number / value of items sold by that segment of buyers, is of interest to us all, no matter if we have an SMSF ourselves or not.


Will it be catastrophic if these changes come to pass? I don't believe that will be the case at all, but I do believe that there will be consequences, and much more important than that, I don't immediately believe that all of the recommendations are an optimal solution to the situation at hand.

By way of disclaimer, I'll state from the outset of this article that not only is my business and employment in the numismatic market, but the trustees of the Crellin Family SMSF also include rare numismatic items as one of the asset classes that we choose to invest in to provide income throughout our post-retirement years.

To some observers, this may mean that any comments I make on these proposed regulatory changes are are rather biased, which may well be correct. Despite that, here are my own two cents worth on the merit of these proposed changes.

Terms Of Reference - The Cooper Review

There are 11 elements to the terms of reference for the Cooper Review, however in my opinion, prime among them is the statement that the investigations of the review panel "are to be conducted around the concepts of the best interests of the member and the maximising of retirement incomes for Australians."

When I became aware of the Cooper Review, I thought it was a splendid idea - I don't believe I'm the only consumer of financial products in this country that has experienced dissatisfaction with the transparency or level of performance of the financial products I've invested in! Any regulatory review that has the potential to address some of those issues surely has to be a positive development.

The Specific Recommendations That Have The Potential To Impact On The Australian Numismatic Market


It's when you drill down into the 60-page PDF document released by the Cooper Review "Self Managed Super Solutions" on April 29th, that the specific recommendations of the review panel regarding the rare coin market become clear. (If you're interested in reading these recommendations yourself, you can download a copy of the PDF document from the link above - flick to section 8.3, on page 32.)

The following statement is made at the beginning of section 8, covering investments: "The majority of submissions opposed any notion of restricting SMSF asset allocation or investments. The Panel generally supports this position. It believes that the government should not constrain superannuation trustees’ options on how to invest fund assets unless there are clear prudential or retirement income policy reasons to do so. Conceptually, the Panel agrees that those within the ‘self‐managed’ sector should have as much choice as members in the ‘choice’ sector. Curtailing investment options in the ‘self‐managed’ sector that are still available in the ‘choice’ sector would be illogical, counterproductive and lead to inefficiencies."

The following statement then opens section 8.3, covering Collectables and personal use assets: "While the Panel recognises and supports the freedom of investment choice that SMSFs afford their members, it believes that there are certain types of assets that should not be regarded as investments that build retirement savings and which consequently should not be available to SMSFs. Such assets are broadly equivalent to ‘collectables’ and ‘personal use assets’ for tax purposes. Examples include (but are not limited to):

•    paintings, jewellery, antiques and stamp collections ; and

•    wine, exotic cars, golf club memberships, race horses and boats.

The Panel accepts that some of these types of assets may appreciate in value over time and that investors with the appropriate specialist knowledge can profit out of them. However, the Panel points out that people who want to own such assets are free to do so outside the SMSF environment in a way that does not involve special concessions from the tax system.

Again, the Panel accepts that the proportion of SMSF sector assets invested in collectables and personal use assets is modest. While there will be some SMSFs where the concentration of such assets is quite pronounced, this is not the core issue. The principal concern is that the cumulative regulatory and compliance complexities outweigh the potential benefits of allowing such a liberal investment menu to a sector that is not directly prudentially regulated.

Preliminary recommendation of the Cooper Review

Following their own deliberations and presumably after digesting the written submissions received from interested parties between May and October 2009, the review panel has recommended (among other things of course) that:

a)    the acquisition of collectables and personal use assets by SMSF trustees be prohibited;

b)    SMSFs that own collectables or personal use assets be provided a transitional period, up to 30 June 2020, in which to dispose of those assets; and

c)    APRA‐regulated funds be exempted from these changes.

My Opinion of the Recommended Changes

My experience with the Australian superannuation and financial services industry is primarily as a consumer, coupled with a modest amount of exposure to the decision making processes of financial planners and their research advisors during my time at Monetarium in Sydney. That is to say, I'm hardly an expert in this field!

 Over the past 15 years, I've seen a good number of people involved in the financial services industry make an earnest effort to come to terms with the Australian numismatic market, and how it may, can and does play a role in the portfolio of many Australian investors. I've also seen more than a few SMSF trustees spend their scarce (finite is perhaps a more accurate term) SMSF funds in what I would describe is a rather foolish manner - in assets that I don't believe are best positioned to reach the objectives presumably set by any prudent SMSF trustee - to solely allocate SMSF funds towards assets that appreciate in value. Let me clarify this - the people that I see mis-spending their SMSF dollars are not simply buying items that they like the look of and enjoy - I haven't oberved any "imprudent" distribution of SMSF funds in that manner, but what I have observed is less than best-practice decision making when it comes to the type of numismatic items that some SMSF trustees acquire, and the prices they have paid for them. In my opinion, these errors are fundamental in nature, rather than being an error regarding the type of item acquired - they may in fact be an indicator that the trustees concerned have less financial literacy than may be desired of an SMSF trustee. If they've been imprudent, it's due to of an error of omission (due diligence mosty), rather than any attempt at using SMSF funds for purposes they are not intended to fulfil.

To propose that SMSF trustees only take a lax approach to asset allocation when it comes to the acquisition of collectables or "personal use assets" through their SMSF is I believe simply inaccurate. There is a quote attributed to Vince Lombardi (a hugely successful and revered coach in the American NFL) that I believe expresses this sentiment best: "Success is a habit. Unfortunately, so is failure." A trustee that is likely to make imprudent decisions about the type of tangible asset they add to their SMSF portfolio is surely pre-disposed to making imprudent decisions when it comes to acquiring what some may regard as more conventional assets.

Activity in the investment world in the past decade is littered with numerous examples of investors of every stripe making rather foolish decisions when it comes to the type of investments they've made for their future. If institutional investors across the world can continue to operate unhindered after the widespread acquisition of certain CDO's offering apparently attractive rates of return yet with significant inherent risk, then it seems rather harsh that SMSF trustees are to be precluded from investing in an asset class (tangible assets) that has been favoured by sections of the community since the very invention of money itself!

Despite the fact that news of the existence of the Cooper Review didn't surface widely in the mainstream media until late April 2010, I was heartened to hear that "...the majority of submissions [received by the Cooper Review] opposed any restriction of SMSF asset allocation...", and further that "...the Panel accepts that the proportion of SMSF sector assets invested in collectables and personal use assets is modest."

Despite both of these facts being evident, it does seem that the review panel concluded that because SMSF's are not "prudentially regulated", the "cumulative regulatory and compliance complexities" involved with overseeing SMSF investment in collectables and personal use assets outweigh the benefits to be gained from allowing them to do so.

The review essentially states that  the term "prudential regulation" is used to ensure that "...trustees are acting in members’ best interests at all times." In more detail, "Prudential supervision is designed to ensure, so far as is reasonably possible, that the trustee operates the fund in such a way as to meet its financial promise to members while also observing the government’s retirement income policy objectives reflected in the SIS legislation. The logic is that SMSFs do not require prudential oversight because the trustees and members are one and the same people who have the incentive and responsibility to protect their own interests."

Based on these statements, it seems that the review panel concludes that although SMSF's do not require prudential regulation, collectables and personal use assets do. It seems that a blanket ban on investment in these assets is the easy way of solving the situation, as opposed to imposing prudential regulation, even if only on investment in these assets.

The logic behind these conclusions seems to be that because investment in these items might or can be used by people seeking to use SMSF funds to purchase assets they might otherwise not acquire with their disposable income, it should be banned altogether.

As someone that uses hard-gained knowledge and experience to buy and sell assets with the sole purpose in mind of building wealth to provide an income in retirement, I certainly don't draw the same conclusions regarding the merit of numismatic items as an investment class, much less the opinion that I may instead be acquiring them for personal use reasons. A review of the ATO's definitions of the terms "collectables" and "personal use assets" confirms my opinions:

Collectables include the following items that are used or kept mainly for the personal use or enjoyment of you or your associate(s): paintings, sculptures, drawings, engravings or photographs; reproductions of these items or property of a similar description or use; jewellery; antiques; coins or medallions; rare folios, manuscripts or books, and postage stamps or first day covers.

A personal use asset is: a CGT asset, other than a collectable, that is used or kept mainly for the personal use or enjoyment of you or your associate(s). Personal use assets may include such items as boats, furniture, electrical goods and household items. Land and buildings are not personal use assets.

I certainly don't regard my spending on numismatic items through my SMSF as personal use in any way - the only use I have for them is to turn a profit!

Apart from the status quo being maintained, the only other possible options I can see to a blanket ban being imposed on SMSF's trading in "collectables" and "personal use assets" is for prudential regulation of some kind to be introduced, or for the ATO treatment of collectables for capital gains purposes being changed. Both of the latter two options would appear to be rather complex, and as such have little chance of being introduced. It would seem that the status quo of apparently imprudent SMSF trustees purchasing golf club memberships and the like is unpalatable, which would appear to mean that the ban may be imposed sooner or later.

The distance between the recommendations of a review panel and actual legislation is not short, so there is some water to go under the bridge yet before this comes to pass.

I would certainly suggest that if you have strong feelings on this subject, you make them known to the review panel by submitting them in email via this page on the Cooper Review website.

Although you may not believe the chances of effecting change via a simple at this late stage of the consultation process are great, it certainly must be higher than if we take no action at all.

Category: Market News