Author: Emma Partenza, Manger, TAG Financial Services
Crypto-currency is an eligible investment for an SMSF. However, there are certain conditions and restrictions trustees must be aware of prior to any investment in crypto-currency is made to avoid falling foul of the SIS legislation.
Crypto-currency is not classified as a foreign currency (per TD 2014/25). Crypto-currency is not a monetary unit recognised and adopted by the laws of any State as the means for discharging monetary obligations for transactions and payments, therefore it is not a foreign currency, nor is it a regulated online currency.
Crypto-currency is a CGT asset (TD 2014/26) as it constitutes ‘any kind of property’. It is a unitised investment, and each unit is valued at market value – the value that people assign it. As a capital gains tax asset, sales of crypto-currency investments give rise to a capital gains tax event and a capital gain or loss is made on disposal.
Certain types of crypto-currency exchanges allow hedging against standard currencies or other crypto-currency assets. An SMSF is prohibited from having a charge over its assets per SIS Regulation 13.14. A crypto-currency exchange is not an exemption to this as a charge is provided over Fund assets (the wallet) to undertake hedging activities or make margin deposits to the exchange to eliminate counterparty risk. An exception is derivatives, of which crypto-currency is not classified. This does not preclude an SMSF investing in crypto on such an exchange, however, the trustees cannot use this facility the exchange provides.
As crypto-currency assets are a CGT asset and not classified as currency, the related party acquisition rules come into play. Acquisition of crypto-currency assets from a related party are prohibited and the SMSF cannot purchase them directly from a related party nor can they be contributed to the Fund by a member.
Trustees may enter into a limited recourse borrowing arrangement to purchase crypto-currency assets as it constitutes a single acquirable asset (money is excluded as a single acquirable asset). A collection of assets (i.e. a parcel of Bitcoins) may qualify as a single asset if the assets in the collection have the same market value as each other and the assets are identical to each other. All limited recourse borrowing rules apply.
Trading crypto-currencies or any asset held under LRBA is not permitted under the replacement asset rules of limited recourse borrowing arrangements. Replacement asset rules are strict as they only allow replacement assets or asset substitution when they are identical and of the same market value. A bare trust collapses upon the investment being sold or when a loan has been fully repaid and the investment transferred to the real beneficial owner.
Other matters to consider when investing in crypto-currency
Sole Purpose Test
An SMSF must be maintained for the sole purpose of providing retirement benefits to its members or to their dependants where a member dies before retirement. The sole purpose test will be contravened if the trustees/members obtain a financial benefit when making investment decisions and arrangements (either directly or indirectly).
Any investment in crypto-currency must be considered in light of this test to not breach the golden rule of SMSFs.
Separation of assets
SIS Regulation 4.09A requires money and other assets to be kept separate from member’s personal assets. Trustees must ensure money and other assets of the Fund are kept separate from any money and assets that are held personally by the trustee.
Crypto-currency investments must be held and managed separately from the personal or business investments of the trustee and Fund members. Trustees must be able to show clear ownership of crypto-currency. That is, the exchange account and the wallet are held in the name of the SMSF Trustees as trustee for the SMSF (or the bare trustee as custodian for the SMSF).
Appropriate record-keeping requirements must be met, and documentation must be retained for audit purposes.
Acknowledgement of Trust
Where the exchange account and the wallet are held in the trustee’s names personally, an acknowledgement of trust must be signed and on file.
The auditor will need to see the investments of the Fund are being kept separate to trustee’s personal assets. The trustee must also be able to prove buying and selling of crypto-currencies via the SMSF’s own bank account at all times to prove its an asset of the Fund.
Storage
Crypto-currency assets must be stored on the relevant exchange in their own wallet that belongs to the SMSF. Where this cannot happen (where the exchange does not recognise an SMSF and an acknowledgement of trust is in place) digital assets must be kept separate from other assets held.
Investment Strategy
The trustee must always consider the Fund’s investment strategy before making any decisions regarding the investments of the Fund or undertaking an investment transaction. Therefore, the Fund’s investment strategy must allow for investment in digital assets.
The investment strategy must take into consideration the best investment mix to ensure risk is minimised and the Fund has adequate diversity, liquidity and can discharge liabilities as they fall due.
Purchasing and holding crypto-currency assets must be considered in light of the Fund’s investment strategy to ensure the investment fits in with the overall investment objectives of the Fund. Any investment that steps outside the formulated investment strategy of the Fund may be subject to increased scrutiny from the ATO. The Fund’s investment strategy must be updated if required to address specific issues relating to such an investment.
Trust Deed
Trustees are governed by the Fund’s trust deed. The trust deed must specifically provide for crypto-currency assets as an allowable investment (deeds typically allow for prudent investments to be made). Trustees must update the Fund’s current trust deed if crypto-currency is not specifically provided for before it may invest in the digital currency.
If you have any questions about crypto-currency in superannuation, please contact us on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2021. Please do not reproduce without the expressed written consent of the author.