Cryptocurrency and SMSF’s – What to look out for

Many Australians are increasingly incorporating cryptocurrency into their Self-Managed Super Funds. (SMSF’s), but there are complexities to look out for. According to the ATO, SMSF’s held $227 million AUD in cryptocurrency assets on 31 December 2021, with forecasts that this amount continues to grow.

Investing cryptocurrency in SMSF’s is an emerging trend and there are important things to look out for. Providing evidence asset ownership and activity for the purposes of satisfying the sole purpose test can be complicated and investors should be aware of the nuances involved. If you are considering incorporating Cryptocurrency into your SMSF, you should be aware of the following and obtain advice from your accountant and financial planner.

SMSF’s & Crypto Assets (Cryptocurrency)

While SMSFs are not prohibited from investing in crypto assets, the investment must:

• be allowed under the fund’s trust deed
• be in accordance with the fund’s investment strategy
• comply with the same regulatory requirements as apply to other investments – as set out in the Superannuation Industry (Supervision) Act (SISA) and Superannuation Industry (Supervision Regulations (SISR).

For tax purposes, crypto assets are not a form of money but are capital gains tax (CGT) assets. It is important for SMSF’s holders to seek independent professional advice before investing in crypto assets. When acquiring or disposing of crypto assets, SMSFs must also keep full records of their crypto transactions.

SMSF Investment Strategies and governing rules

An SMSF’s investment strategy outlines its investment objectives and specifies the types of investments it can make. Before investing in crypto assets, 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 crypto assets are allowed under the SMSF’s trust deed.

Ownership and separation of assets

To trade in cryptocurrency, you need a unique encrypted code, known as a wallet. The wallet essentially acts as the address which transactions are sent between. An SMSF needs its own wallet, entirely separate to any that you may have in your name for personal cryptocurrency investing.

Any investments made into cryptocurrencies must be identified as belonging solely to the SMSF, and not mixed in with personal assets.

As wallets are virtual and only identifiable via an IP address, it can be difficult for the fund to have the asset registered in any name. Trustees wanting to invest in cryptocurrencies need to make sure the auditors of the SMSF can identify the following:

• Trading history for the wallet at the IP address. This needs to match up precisely with the transactions from the bank account of the fund
• To ensure the accounts are easily traceable, it’s recommended the SMSF opens a separate bank account for cryptocurrency trading. Auditors will check that the transactions are for the sole benefit of the SMSF, and not an individual
• As the wallet can’t demonstrate that the investment is held for the SMSF only, a deed of trust or similar document confirming the fund is the beneficial owner of the cryptocurrency, is required.

Valuation of crypto assets

SMSFs must ensure their investments in crypto assets are valued in accordance with ATO valuation guidelines for SMSFs. 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 crypto assets 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 crypto exchange that reports on historical crypto values.

Related-party transactions

SMSFs are prohibited from intentionally acquiring assets from related parties with a few exceptions. The exceptions include listed securities and business real property, when acquired at market value. Crypto assets are not ‘listed securities’ so don’t fall within the exceptions. Therefore, crypto assets cannot be acquired from a related party. It follows that SMSF trustees and members – being related parties of the fund – can’t make in specie contributions or other transfers of crypto assets 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 dependants 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 crypto asset 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 crypto. The transfer of crypto assets amounts to a crypto transaction and a CGT event happens.

Pension payments to trustees or members, however, must be made in cash. Trustees and members will need to consider the fund’s trust deed and any CGT implications associated with the transfer of assets such as crypto assets. If the bitcoin is sold while members of the SMSF are in pension phase, the gain is exempt from any tax consequences.

If you would like further advice about cryptocurrency and SMSF, please contact our office for assistance.

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