SMSF + Investing In Cryptocurrency
Written by: Canny Advisory
Presently Self-Managed Super Funds (SMSFs) are not prohibited from investing in Cryptocurrency. In fact, cryptocurrency appears to be a fast-growing alternative for SMSFs that are looking to diversify their fund’s investment portfolio. This space is definitely one to keep an eye on.
Australian Cryptocurrency trading platform BTC Markets has recently analysed their trading data from the 2021 financial year and found Self-Managed Super Funds trading in cryptocurrency on their platform increased by 95% from the year before. Their data also indicated that significant investment amounts are being made and that SMSF investors seem to be embracing the rather volatile crypto market and are investing for long-term growth.
Further, Cointree CEO has found that SMSFs in the accumulation phase are more prepared to take a bigger risk, as their focus is on growing their funds, while for funds in the retirement phase, it’s a far more cautious investment.
It is important to note, however, that the cryptocurrency market is currently unregulated and crypto is not yet seen as a “financial product”. Therefore, financial advisers are unable to provide financial advice in this space. It is therefore prudent that Self-Managed Super Fund’s trustees looking to invest in cryptocurrency do their due diligence before making any investments. Along with SMSF trustees needing to do their own thorough investment research, it is also important that they are aware of the rules and regulations according to the Superannuation Industry (Supervision) Act, ATO guidelines and other potential risks such as falling into an investment scam or losing their investment due to hackers obtaining their digital wallet.
So, For Tax Planning Purposes… What Does The ATO Say?
In 2014 the ATO issued guidelines around Self-Managed Super Funds investing in cryptocurrency and it is important SMSF investors read these guidelines published being TD 2014/15 and TD 2014/26.
It might surprise you to know that these guidelines make it clear that even though the term ‘currency’ is included in the name, that cryptocurrency is in fact not cash or a form of foreign currency but is in fact a Capital Gains Tax (CGT) Asset. Therefore, for tax purposes disposals of cryptocurrency will either result in a capital gain or a capital loss. Any capital gains made on the disposal of cryptocurrency will in fact be taxed in the Self-Managed Super Fund.
Looking for more information on Capital Gains Tax? Check out this information we’ve previously put together to help you wrap your head around it and don’t forget the downloadable guide with extra information!
Financial Planning… What Superannuation Rules + Regulations You Need To Consider?
The same provisions from the Superannuation Industry (Supervision) Act and Regulations will apply to cryptocurrency as they do to any other fund’s investments. Some of the main regulations which will apply to cryptocurrency are the following:
- Super Trust Deed
As with any investment made by the Self-Managed Super Fund, it is important trustees review the trust deed first to ensure that the investment in cryptocurrency is allowed under the SMSF governing rules contained in the Trust Deed.
If you are not sure if your Trust Deed allows you to invest in cryptocurrency, you should engage an SMSF Profession, like our team at Canny Advisory to review the deed on your behalf, prior to making any investments.
- Sole Purpose Test
The SIS Act requires that the Self-Managed Super Fund must be maintained solely for providing retirement benefits to members and that SMSF trustees are to act in the best interest of the fund members in all decisions. It is therefore important that SMSF members do not obtain a financial benefit when investing in cryptocurrency.
- Investment Strategy
Self-Managed Super Fund trustees are required to have an investment strategy documented to show they have considered all investment risks, diversification and cash flow of the fund. You will need to ensure you have an updated investment strategy when investing in cryptocurrency, especially given the risky and volatile environment of the crypto market.
- Ownership + Separation of Assets
To invest in cryptocurrency, a Self-Managed Super Fund will need a secure digital wallet. You will also need an account with a crypto exchange or trading platform.
Superannuation Regulation 4.09A required SMSF trustees to ensure that Self-Managed Super Fund assets are held separately from members’ and trustees’ own personal assets. This is especially important for cryptocurrency. Therefore, SMSF trustees must be able to show they have clear ownership of their cryptocurrency investment meaning the Self-Managed Super Fund must have a digital wallet in the name of the SMSF clearly held separately to any personal cryptocurrency digital wallets.
A large number of cryptocurrency trading platforms now allow you to open up a digital wallet in the name of an SMSF.
Given the nature of a digital wallet, it is really important that clear and accurate records are retained by the Self-Managed Super Fund trustees to ensure investment trades can be tied back to SMSF bank account transactions.
If SMSF ownership is not clear, a Declaration of Trust will be required by the Self-Managed Super Fund trustees to confirm investment is held by the SMSF.
- Valuation
For financial reporting purposes, Self-Managed Super Fund trustees must ensure cryptocurrency investments are appropriately valued in line with the ATO guidelines which state that the ATO will accept the 30 June closing price published on the website of a cryptocurrency exchange that reports historical values. It is therefore also important for the SMSF trustees to have accurate records clearly identifying the balance help in cryptocurrency at the end of 30 June each year so they can be appropriately valued.
- Acquisition From Related Parties
Self-Managed Super Funds are prohibited from acquiring assets from related parties of the fund except where the asset is a ‘listed security’ or a ‘business real property’. Cryptocurrency does not fall within either of these asset categories therefore, SMSFs are strictly prohibited from acquiring this type of investment from a related party.
- Pensions
SMSF trustees need to understand that while cryptocurrency is held in a separate digital wallet, the proceeds from disposals of crypto either need to be retained in the digital wallet or need to be transferred back to the Self-Managed Super Fund bank account and not transferred back to the member personally. SMSF members are not able to access the proceeds until members reach their preservation ages or a condition of release.
Where a Self-Managed Super Fund member has reached a condition of release, the SMSF can then make an in-specie lump sum payment only by the way of transferring cryptocurrency to a member. However, as pension payments to the SMSF member must be paid in cash, a transfer of crypto to a member would not constitute a pension payment.
Setting Your Financial Goals with Canny Group
Overall, it is crucial that Self-Managed Super Fund trustees are comfortable with their technical knowledge of the crypto environment. Do they actually understand what cryptocurrency is and do they also understand the technology behind it? SMSF trustees should also make themselves fully aware of all their obligations before making such an investment and they should also ensure that they have fully considered the high-risk and volatile nature of crypto, which could lead to losses in the fund.
It should also be noted too that crypto is also a space that the ATO have their eye on with the possibility of more regulation to come. The ATO does now collect data on crypto and has started doing data matching, so it is important for Self-Managed Super Funds to be correctly reporting cryptocurrency for tax purposes and to ensure accurate and clear records are kept.
If you currently invest in cryptocurrency within your Self-Managed Super Fund or are looking to get into crypto for your SMSF, it is best to speak to our team to make sure you have a full understanding of the road that lies ahead and how best to travel down that road. We have a team dedicated to Self-Managed Super Funds, and we also have Helen Yau on our team who is an Accredited SMSF Association Specialist, get in touch today to find out how we can help you make the most of your self-managed super fund.
