Bitcoin’s continuous increase has attracted a lot of interest, notably from SMSF investors who are starting to take cryptocurrencies more seriously as despite the economic downturn, the crypto revenue has been on a steady rise.
So how can one invest in crypto assets through their SMSF? To answer this, we have identified several important factors for trustees and advisers of self-managed superannuation funds to think about before investing in cryptocurrencies like Bitcoin.
Table of Contents
Acquiring Crypto Assets
The Australian Taxation Office (ATO) has approved the investment of SMSFs in cryptocurrency assets and classify them as capital gain tax (CGT) assets. However, there are still required to:
- be allowed under the fund’s trust deed. Check the fund’s Trust Deed, some Trust Deed may disallow this type of investments.
- be in accordance with the fund’s investment strategy
- conform to the same regulatory standards as other investments, per SISA and SISR.
- Keep full records of your crypto transactions
- Eg: Receipts, record of transaction, digital wallet, a record of software costs that related to managing your tax affairs. You can consider using the tools such as Syla
Ownership & separation of assets
The trustees and members of an SMSF are required to hold and manage their personal and business investments in a manner that is distinct from how they handle the SMSFs digital assets. This involves making sure that the SMSF can unequivocally claim ownership of the cryptocurrency assets.
Indicating funds must be kept in a distinct cryptocurrency wallet for the SMSF from the one used by trustees and members on a personal level, and it must be able to give documentation of having such a wallet.
Valuation of crypto assets
SMSFs are required to ensure that their investments in cryptocurrency assets are valued in conformity with these standards as issued by ATO’s valuation guidelines. The value expressed in Australian dollars will reflect the current value of the digital currency on the open market, which may be obtained through a credible digital currency exchange or website that makes its rates publicly available.
The value of crypto assets can change all the time. For the purpose of figuring out member balances as of 30 June, the Australian Taxation Office (ATO) will accept the closing value listed on the website of a cryptocurrency exchange that shows historical cryptocurrency prices as of 30 June.
Compliance issues when SMSFs invest in cryptocurrency
| Governing rules of the SMSF | SMSF trustees should check the fund’s governing rules (including the deed) to make sure the fund can invest in cryptocurrency. If the rules of an SMSF don’t specifically allow it, a trustee who invests in cryptocurrency may be breaking their duties as trustee. For example, trustees usually have a duty to invest wisely, so if a trust (which includes an SMSF) is set up to make a risky investment in cryptocurrency, there would usually need to be a specific power to allow that. |
| Sole purpose test | When “current day benefits” are given to members and/or other related parties, it is likely that the “sole purpose” test has been broken. In the case of cryptocurrency, this problem can happen when affiliate fees or commissions from a fund’s cryptocurrency investment are paid directly to a member or a related party. |
| Investment strategy | SMSF trustees must come up with and follow an investment strategy that takes into account all of the fund’s circumstances, such as the level of risk in the fund’s investments, how the investments are put together as a whole, and how liquid the SMSF’s investments are. Specifically, SMSF trustees should think about how risky cryptocurrency investments are and decide if they are a good idea given the retirement goals of the fund members. If the SMSF has a lot of cryptocurrency investments, the fund’s investment strategy should show that the trustees have thought about the risks that come with not having enough different types of investments. Also, the trustees should look at the fund’s investment strategy and, if necessary, change or update it to make sure that the investment being considered is a good one. |
| Ownership andseparation ofassets | SMSF trustees must make sure that the fund’s assets are kept separate from the trustee’s own assets. This means that the trustees of an SMSF must hold and manage their cryptocurrency investments separately from their personal and business investments. So, the fund must be able to prove that it owns the cryptocurrency. The ATO recommends that an SMSF keep and be able to show proof of a separate cryptocurrency “wallet” for the SMSF. This will show that the SMSF clearly owns the cryptocurrency (i.e., separate from any wallet used by trustees and members personally). |
| Valuation of cryptocurrency investments | The ATO has rules about how to value cryptocurrency investments made by SMSFs. For the purpose of figuring out member balances as of 30 June, the ATO will use the 30 June closing value (in Australian dollars) posted on the website of a crypto exchange that shows historical crypto values. |
| Acquisitions from related parties | Aside from a few exceptions, SMSFs are not allowed to buy assets on purpose from a “related party” (e.g., a member of the fund). In this case, none of the exceptions apply to cryptocurrency. Due to this, any of the following actions will be a violation of S.66(1): An SMSF buys cryptocurrency from a member or someone else connected to the fund, even if the market value is paid for by the fund. A member or another person with ties to the member makes a contribution in the form of cryptocurrency to an SMSF. A member or a related party buys an asset from an SMSF with cryptocurrency, even if the member or related party gives market value consideration in the form of cryptocurrency. |
| Borrowings within an SMSF | With a few exceptions, SMSFs aren’t allowed to borrow money or keep money they already borrowed. SMSFs can enter into an LRBA that meets the requirements of S.67A as an exception. However, the condition in S.67A(1)(d), which says that the lender’s (or anyone else’s) rights must be limited to the underlying asset, is a big problem (i.e., the cryptocurrency). Due to how volatile and risky cryptocurrency is, most lenders who are not related to the borrower are not willing to let it be the only security for a loan. |
| Liens/mortgages or charges held on fund assets | SMSFs that want to invest in cryptocurrencies must make sure that their investment (or any other asset of the fund) is not subject to a charge, lien, or mortgage. Some cryptocurrency exchanges let investors buy insurance against the risk of their investments. But SMSFs that use hedging or derivatives will often break the rules in SIS Reg 13.14 about liens, mortgages, or charges. |
| Superannuation benefit payment standards | When superannuation benefits are paid to members of a fund or to the beneficiaries of a death benefit, cryptocurrency can only be transferred as an in-kind lump sum. On the other hand, you can’t get your pension through an in-kind transfer of cryptocurrency. SIS Reg 6.17 says that an SMSF is in violation if it transfers cryptocurrency to a member who has either: not met a condition of release; or has met a release condition that lets them only get an income stream benefit (For example, the member has reached the age of preservation and is eligible for a transition to retirement income stream, but no other release condition has been met). |
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