- Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act);
- Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regs).
Legal Consolidated SMSF Deeds allow for the investment of Cryptocurrency. But, whether you should invest in Cryptocurrency is a question for you and your adviser.
How does Legal Consolidated see Cypro in an SMSF context?
Crypto assets are a digital representation of value. SMSFs can transfer, store or trade these assets electronically.
They are a subset of digital assets that use cryptography. This is to protect digital data and distributed ledger technology (DLT) to record transactions.
In a Legal Consolidated SMSF Deed or SMSF Update, crypto assets can be used as:
- an investment; as a means of exchange
- to access goods and services.
Examples of crypto assets include cryptocurrencies (eg bitcoin and litecoin), utility tokens (eg filecoin), security tokens, as well as non-fungible tokens (NFTs).
Legal Consolidated Investment Strategy for Cryptocurrency
The ATO’s biggest attack on SMSFs at audit is the Investment Strategy. But sadly, often, it cannot be found, it is out of date or poorly drafted.
Consider section 52B SIS Act and, my personal favourite, reg 4.09 SIS Regs. You are required to:
- review regularly
your investment strategy
This is for:
- the risk? This is for making, holding and realising, and the likely return from, the fund’s investments
- what are your objectives and expected cash flow needs
- the combination of the fund’s investments
- investments diversity (if any). And risks from inadequate or too much diversification
- liquidity for cash flow needs – pay debts and pay out retired and dead members
What is the risk that is acceptable? The SIS Act and SIS Regs are regrettably silent. I have spoken to 100s of ATO auditors since 1988. The best response? It depends on the SMSF member’s risk tolerance.
What happens if an SMSF member suffers loss from a faulty investment strategy?
What if a person suffers loss or damage from a faulty investment strategy? Or, the investment strategy is not followed? The member can sue the trustee. But they are, generally, the same persons. So there is no point in suing yourself!
Frighteningly, we are seeing SMSF funds suing advisers who help their clients to invest in Cryptocurrency. This is while the SMSF governing rules do not authorise such an investment.
SMSF trustees hold a fiduciary relationship. This is to their fund members. This is the same duty that an accountant, lawyer or financial planner owes to their client. It is one of the utmost good faith. It is the highest duty to act in the best interests of the SMSF’s beneficiaries.
Your local State Trustees Act also puts responsibilities onto trustees. Plus the SIS Act imposes duties. See section 52B(2)(b) SIS Act:
“to exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinarily prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide.”
Legal Consolidated’s investment strategies for an SMSF allow for investing in Cryptocurrency. But, is it in the best interests of the SMSF members to do so?
Is it a high risk for the SMSF? Does that matter?
Volatility and speculative capital growth opportunities are not prohibited in a Legal Consolidated SMSF Deed.
All investment questions are a question for the trustee of the SMSF to address.
Many non-Legal Consolidated SMSF Deeds and variations are silent on Cryptocurrency. Or prohibit such investments! If so upgrade your SMSF Deed to a Legal Consolidated SMSF Deed.
Governing rules of the fund for Cryptocurrency
The trustee of an SMSF must follow:
- the SIS Act and the SIS Regs
- the SMSF Deed
- written Investment Strategy
upgrade your SMSF Deeds and Investment Strategy to a Legal Consolidated deed.
Drafting SMSF Deeds to invest in Cryptocurrency
Legal Consolidated has had the benefit of attending a number of ATO desktop audits. Further, over 4,600 advisers, accountants and other law firms build legal documents on our website. These loyal people have given us valuable feedback on what auditors and ATO staff are looking for.
Is Cryptocurrency money
Money fascinates us as a medium to buy or exchange. We use the words money and currency interchangeably. But there is a definition.
For example in Britannica, “Money is a commodity accepted by general consent as a medium of economic exchange.”
Merriam-Webster explains currency as “something (such as coins, treasury notes, and banknotes) that is in circulation as a medium of exchange.”
Before 770 B.C., the trade of goods and services is mostly a barter system. Then we get coins. When then move from Stones, Gold, Bronze, Copper, Silver, other metals, paper, and plastic with generations.
In the twenty-first century, money is often virtual. This is with the evolution of mobile transfer, and by 2009 we first came across Bitcoin (cryptocurrency). According to CoinMarketCap, the entire crypto market is in the trillions of dollars. Bitcoin holds the largest market share.
What is Australia’s view of cryptocurrency?
Investopedia defines cryptocurrency as a digital or virtual currency secured by cryptography, making it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference and manipulation.
This is best practice in what an SMSF Deed, SMSF variation and Investment Strategy should contain:
- the definition of Cryptocurrency should be inclusive and not exclusive – especially as this new asset class continues to evolve
- the expressions of Cryptocurrency should include:
- digital currency
- blockchain currency
- Cryptocurrency CFD trading
- contracts for difference
- all forms of storage of the Cryptocurrency should be expressly allowed, including, a hardware wallet, software wallet, wallet and even no wallet at all
- all, or rather ‘any’ exchanges and custody services should be permitted (as the rules are changing again on this shortly)
- as the concept of ‘encryption’ is subject to debate any or no encryption should also be allowed
- so as to allow for the exciting world of leveraging there should be a express mention of “synthetic financial products”. This is without owning the underlying product. To put the matter beyond doubt, include movement in price of shares and other indica of title, futures contracts and other financial instruments such as:
- stock indices
Can an SMSF ‘identify’ Cryptocurrency assets?
Cryptocurrency is private and anonymous. It is designed to be that way. To date, currency is controlled by only sovereign States. I do not like monopolies. While I hold no Cryptocurrency I find it offensive that the only way I can hold currency is through a government.
But the ‘anonymous’ nature of Cryptocurrency is problematic for an overregulated vehicle, such as a Self-Managed Superannuation Fund. Therefore, you must be even more vigilant that you have evidence that the Cryptocurrency is owned by the SMSF. And in particular, it is held:
- by the trustee of the SMSF
- for the SMSF
For example, Colin Jones Nominees Pty Ltd atf Jones SMSF ABN 38383939383938
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. This is from your personal or business investments.
This includes ensuring that the SMSF has clear ownership of the cryptocurrency. For example, the SMSF maintains a separate cryptocurrency wallet.
Evidence that your SMSF auditor and ATO are looking for is:
- the currency is purchased from a bank account used solely by the SMSF
- SMSF Minutes
- the trading account clearly shows the trustee is acting in the capacity of the SMSF
- keeping all documentation of the transaction and the indicia of title
- keeping exchanges of emails between your accountant and financial planner that relate to the Cryptocurrency
Can I sell Cryptocurrency to my SMSF?
You and related parties can not gift or sell assets to your SMSF. Section 66 SIS Act prohibits an SMSF trustee from acquiring an asset from a related party.
There are only two exemptions:
- commercial real property (e.g. factory and offices)
- listed security (e.g. shares sold on the Australian Stock Exchange)
Cryptocurrency is not (at the moment) a listed security under the SIS Act. So you, your mum, your company and other related persons cannot sell your Cryptocurrency into your SMSF.
SMSF trustees, members and related parties of the SMSF cannot make in-specie contributions or other transfers of cryptocurrency to the SMSF.
Is Cryptocurrency ‘money’ for an SMSF?
‘Acquiring an asset’ does not include money. Cryptocurrency is money. You use it to buy and sell. But the ATO does not acknowledge Cryptocurrency as money. It is neither Australian nor foreign currency. This is in the eyes of the ATO.
Can a Legal Consolidated SMSF Deeds gear and hedge Cryptocurrency
Cryptocurrency exchanges allow you to short and gear your Cryptocurrency. This may be against sovereign state currencies and different Cryptocurrencies.
Just as a bank takes a mortgage over your real estate to guarantee the money you owe the bank, similarly you can give a charge over your Cryptocurrency.
But your SMSF is prohibited from giving a charge over its assets. One exemption is that your SMSF can charge its assets when investing in derivatives. This is permitted under a Legal Consolidated SMSF Deed.
This is provided the Cryptocurrency exchange is an SIS Regulation ‘approved body’. Do not become involved with derivatives without your accountant and financial planners’ signoff. Importantly your accountant and financial planner must check to ensure that the Cryptocurrency exchange is an ‘approved body’.
How does the SMSF value its cryptocurrency for the ATO?
SMSFs must ensure their investments in cryptocurrency are valued. This is under the ATO’s valuation guidelines. The value is:
- in Australian dollars
- the fair market value from a reputable digital currency exchange or website that publishes its rates publicly.
Like most assets, the value of your cryptocurrency fluctuates. For the purpose of calculating member balances on 30 June, the ATO accepts the 30 June closing value. This is as published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.
Australian SMSFs investing in Cryptocurrency overseas
Cryptocurrency is an international currency. What if you are purchasing Cryptocurrency with overseas currency or with overseas organisations? You may need to factor in, such things as, currency movements against the Australian dollar.
Also, from what we have seen, some overseas exchanges do not understand the SMSF requirement that the assets must be in the name of the trustee of the SMSF. They cannot be in the name of the beneficiaries.
When I retire can I take the Cryptocurrency directly out of my SMSF?
When you satisfy a condition of release you can start getting wealth out of your SMSF. Under a Legal Consolidated SMSF Deed, you can make an in specie lump sum payment. And you can do so by transferring the cryptocurrency directly into your name.
A pension payment is, however, always in cash.
Do I pay CGT tax on cryptocurrency in species transfers and trades?
CGT may be payable on the transfer of assets, such as cryptocurrency, to the member in retirement. Your accountant calculates the CGT.
The ATO states that cryptocurrency is not money. It is a CGT asset. Therefore, keep full records of cryptocurrency trades. Your accountant reviews these. And your SMSF pays tax accordingly. CGT applies to every cryptocurrency trade you make through your SMSF.
Cryptocurrency records required by the ATO
Each time the SMSF transacts in crypto, the ATO requires it to record:
- the date and value of the cryptocurrency (or digital asset) in Australian dollars at the time of the transaction;
- what the transaction is for;
- who the other party is, this is obviously impossible. So a cryptocurrency address is acceptable.
The Self-Managed Superannuation fund keeps these records for at least 5 years. This is after lodging the tax return.
ATO Cryptocurrency data matching
The ATO started its first crypto data-matching programme in April 2019. It compares taxpayer self-reported income to cryptocurrency transaction data. The programme collects:
- client identification details
- date of birth
- phone numbers
- social media accounts
- email address)
- transaction details
- bank account details
- wallet addresses
- transaction dates and times
- transaction types
The ATO sources its data from creatures called ‘designated service providers’ (DSPs). The ATO’s has the right to do so in Australia under the Anti-Money Laundering/Counterterrorism legislation. See sections 5, 6 and 6A Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Act).
A DSP is an exchange that issues, transacts and deals in digital currency, including:
- centralised cryptocurrency exchanges
- exchanges that convert fiat currency to cryptocurrency (or vice versa)
- other designated or regulated entities (section 6A Act)
A DSP may notify account holders of the sharing of their information with the ATO.
ATO is powerless to track Cryptocurrency
Decentralised exchanges and decentralised physical wallets are outside the ATO’s data collection powers. It is just too decentralised for a revenue collector. It is impossible for the ATO to identify and collect sufficient information from these types of transactions and exchanges.
But the ATO’s power to gather information is extensive. See TAA 1953. It includes the power to physically enter any place and inspect any document, good or other property. This extends to a physical cryptocurrency wallet. Alos, other countries are keen to work with our Australian tax regulator.
But, eventually, computers and systems will be moved off the planet Earth. They will be put in satellites, the moon and Mars. Over the next 100 years, we will see the decline of the sovereign state. It will be the era of the corporates. The loss of currency control is just part of that movement of power.
Sadly, all things blockchain will be a major revenue loss for the Australian government.
However, given the low tax rates of Self-Managed Superannuation funds and their over-regulation, I expect a high level of full disclosure.
Perhaps the Australian government should consider similarly reducing the high tax rates imposed on humans and companies. But then again if it did so, as a tax lawyer, I would have no work! And accountants would go hungry.
How many SMSFs invest in Cryptocurrency?
About 0.71% of SMSFs held a total of $218m of cryptocurrency. This is up from $142m. While this $218m represents less than 0.1% of all SMSF assets, the average holding for those funds that have cryptocurrency is $67,726 (median $33,705).
Should my SMSF invest in Cryptocurrency?
A Legal Consolidated SMSF Deed and our SMSF Deeds of Variations allow Cryptocurrency investing and gearing.
But, just because you are allowed to do something, does not mean that you should or must.
As well as the investment issue, Cryptocurrency in your SMSF involves compliance work. Seek advice from your accountant and financial planner. The ATO states:
“We strongly encourage SMSFs to seek independent professional advice before undertaking any new investment in their SMSF, including investments in cryptocurrencies.”
And such advice is expensive.
- Financial planners are overly regulated by the ridiculously complex Australian Financial Services Licence obligations and the Corporations Act 2001 (Cth).
- Accountants have huge regulatory requirements for tax advice obligations under the Tax Agent Services Act 2009 (Cth).