How to buy cryptocurrencies in your SMSF and satisfy your annual audit
You can buy cryptocurrency in your SMSF, however, there are many things to keep in mind. If an SMSF transacts in cryptocurrencies, SMSF trustees and members need to be aware of the tax consequences; in each case, these will depend on the nature of the SMSF’s circumstances. SMSFs involved in acquiring or disposing of cryptocurrency must keep records in relation to their cryptocurrency transactions. There are also super regulatory considerations for SMSF trustees, members and SMSF auditors.
While SMSFs are not prohibited from investing in cryptocurrencies, the investment must:
- Be allowed for under the fund’s trust deed
- Be in accordance with the fund’s investment strategy
- Comply with SISA and SISR regulatory requirements concerning investment restrictions.
We strongly encourage SMSF trustees to seek independent professional advice before undertaking any new investment in their SMSF, including investments in cryptocurrencies.
Investment strategy and a fund’s governing rules
An SMSF investment strategy outlines its investment objectives and specifies the types of investments it can make. Before investing in cryptocurrency, SMSF trustees and members should consider the level of risk of the investment. Trustees and members may then review and, if necessary, update their fund’s investment strategy to ensure the investment being considered is permitted. Trustees and members also need to ensure that investments in cryptocurrency are allowed under the SMSF’s deed.
Ownership and separation of assets
The super laws require trustees and members to ensure their fund’s assets are held separately from personal assets. An SMSF’s cryptocurrency investments must be held and managed separately from the personal or business investments of trustees and members. This includes ensuring the SMSF has clear ownership of the cryptocurrency. This means the fund must maintain and be able to provide evidence of a separate cryptocurrency wallet for the SMSF from that used by trustees and members personally.
Valuation
SMSFs must ensure their investments in cryptocurrency are valued in accordance with ATO valuation guidelines. The value in Australian dollars will be the fair market value which can be obtained from a reputable digital currency exchange or website that publishes its rates publicly. The value of cryptocurrency can change constantly. For the purpose of calculating member balances at 30 June, the ATO will accept the 30 June closing value published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.
Related-party transactions
With certain exceptions, SMSFs are prohibited from intentionally acquiring assets from related parties. The exceptions include listed securities and business real property when acquired at market value. Cryptocurrencies such as bitcoin are not ‘listed securities’ so do not fall within the exceptions. They, therefore, cannot be acquired from a related party. It follows that SMSF trustees and members, being related parties of the fund, cannot make in-specie contributions or other transfers of cryptocurrency to the fund.
Sole-purpose test
An SMSF must be maintained for the sole purpose of providing retirement benefits to trustees and members, or to their dependents if a member or trustee dies before retirement. It is unlikely that an SMSF will meet the sole-purpose test if trustees or members, directly or indirectly, obtain a financial benefit when making investment decisions and arrangements. For example, it may be a breach of the sole-purpose test where affiliate fees or commissions associated with the fund’s cryptocurrency investment are paid to a trustee or member personally.
Pension or benefit payments
Where a trustee or member satisfies a condition of release, the SMSF can make an in-specie lump sum payment by way of transfer of cryptocurrency. However, pension payments must be made in cash.
Satisfying your SMSF annual audit
One of the first things an SMSF Auditor will review is the Investment Strategy to ensure the asset is documented accordingly and the level of risk is acknowledged. In addition, an SMSF trustee needs to consider diversification. Next, the Auditor needs to establish that the cryptocurrency actually exists and what the value is as at 30 June. If you hold cryptocurrency in your own personal name in a wallet, this will not be treated as an asset of the SMSF. Despite your intent to hold the investment on your name on behalf of the fund, this is not sufficient to satisfy audit requirements. Caleb and Brown and some cryptocurrency firms now have established protocols for SMSFs where it is clearly documented that the investment is acquired by the SMSF trustee in the name of the super fund. If you currently hold your cryptocurrency in your own name we recommend you contact us for advice on how to rectify the inadvertent breach.
Written by Olivia Long, Managing Director – SMSF
The information in this article contains general advice and is provided by ExpertSuper™ Pty Ltd as an authorised representative of Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (available here) for contact information and information about remuneration and associations with product issuers.This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article (12 November 2020) and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.