We are often asked how Self Managed Super Funds can be used to invest in Cryptocurrency. As Caleb and Brown is not able to provide SMSF advice, we have invited Olivia Long, Managing Director - SMSF, Expert Super to provide her qualified insights into Cryptocurrency and SMSFs in a blog post below.
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.
We strongly encourage SMSF trustees to seek independent professional advice before undertaking any new investment in their SMSF, including investments in cryptocurrencies.
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.
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.
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.
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.
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.
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.
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 andBrown 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.
Self-Managed Super Funds (SMSFs) are a growing, popular and significant sector in Australia’s superannuation industry– and here’s why!
Many of Australia’s superannuants have little understanding as to what their superannuation balance is or even how their superannuation is performing. For many, superannuation continues to be a great mystery. One of the key benefits of running an SMSF is that you can be more engaged with your superannuation. SMSF trustees are accountable for the running of their fund. As a result of increased attention and engagement, SMSFs could outperform other superannuation products.
As a trustee of your own fund, you have complete control over the decisions made in the fund.
SMSFs can invest in traditional investments such as direct shares, international investments, bonds, cash and managed funds. Unlike other superannuation vehicles, SMSF’s provide the ability to invest in direct property or ‘business real property’. SMSFs can even invest in precious metal, collectibles or cryptocurrency.
Members in accumulation mode are subject to 15% tax. Members in pension mode enjoy an entirely tax-free environment on balances up to $1.6 million. Further, by structuring your investment portfolio, you have the ability to access franking credits – enjoying a tax refund from the ATO for any excess imputation credits.
SMSFs have the ability to accept ‘in-specie’ contributions which allow members to not only contribute cash to their SMSF but also other investments they hold personally such as listed security and ‘business real property’. For those in the highest income tax bracket of 47% (including Medicare levy), the benefits of a 15% tax bracket in an SMSF is a significant reason to establish an SMSF.
You have the ultimate control and flexibility over the payment of pensions as the Trustees have direct control over the bank account. Unlike some superannuation vehicles, you can move from accumulation mode to pension mode without the need to sell down assets and realise capital gains. SMSF members can run multiple pensions within their fund maximising strategic tax planning opportunities.
SMSFs are able to borrow funds to increase the overall amount for investing within the superannuation environment.
SMSFs provide control and flexibility over estate planning, enabling members to ensure investments transfer from members to their beneficiaries in a tax-effective manner. Further to this, SMSFs provide the flexibility of splitting contributions between members.
For balances above $300,000 running an SMSF can actually be most cost-effective than other superannuation vehicles. Even better – your children can utilise the SMSF for their superannuation savings splitting the cost up to 4 ways*.
Many SMSF Trustees enjoy the decision making that comes with running their own fund.
To find out more about if an SMSF is appropriate for you, contact:
Olivia Long at Expert Super on 1800 370 734.