Cryptocurrency has become very popular in the last few years and many of our SMSF clients have asked how they can buy cryptocurrency in their SMSF and pass their annual audit. Here we’ll provide some of those answers. While this is an exciting development, it can be a legally complex area. So do your research and get professional advice before you leap. Vault’s highly experienced SMSF accountants and advisers can make sure you make the most of your investment and meet all the requirements.

Understanding Cryptocurrency

Cryptocurrency is a new type of currency that uses digital files as money. It’s secured by cryptography, which means it’s encrypted and very difficult to counterfeit. An SMSF may invest in cryptocurrency if it meets very strict conditions. The ATO considers cryptocurrency to be capital gains tax assets rather than money. So there are tax implications if an SMSF transacts in cryptocurrency. SMSFs must keep records of all cryptocurrency transactions, and meet all related superannuation regulations.

Specifically, the investment must:

  • be allowed under the fund’s deed
  • align with its investment strategy
  • comply with regulatory requirements.

Always get professional advice before investing in this highly complex area. For now, let’s consider some of these requirements further.

Reviewing SMSF Investment Strategy And Deed

An SMSF’s investment strategy outlines its objectives and the kinds of investments it can make. Before investing in cryptocurrency, trustees and members should consider the risk of the investment, and then review the strategy to make sure it’s acceptable. They must also check that the SMSF’s deed allows for cryptocurrency investments.

Separating SMSF And Personal Assets

By law, trustees and members must keep the fund’s assets separate from their personal assets. If trustees and members have personal investments in cryptocurrency, they must be careful to manage it separately from the SMSF’s investment. The SMSF must have ‘clear ownership’ of the cryptocurrency. This includes having a cryptocurrency wallet for the fund that’s separate from any wallet used by trustees and members.

Getting A Cryptocurrency Valuation

SMSFs must get cryptocurrency investments valued in line with ATO guidelines. The value in Australian dollars will be the ‘fair market value’. You can get this from a digital currency exchange or website that publishes rates. As cryptocurrency values change regularly, the ATO accepts the closing value on 30 June, as published on a cryptocurrency exchange website.

Understanding Related-Party Transactions

SMSFs must not intentionally acquire assets from ‘related parties’, unless they’re listed securities or other allowable exceptions and acquired at market value. Cryptocurrencies aren’t listed securities. As SMSF trustees and members are related parties of the fund, they can’t make in-specie contributions or cryptocurrency transfers to the fund.

Passing The SMSF Sole-Purpose Test

The sole purpose of an SMSF is to provide retirement benefits to trustees and members, or their beneficiaries if they die before retirement. An SMSF doesn’t meet this criteria if trustees or members benefit financially when they make investment decisions for the fund, including receiving affiliate fees or commissions for a cryptocurrency investment.

Making Pension & Benefit Payments

A SMSF can make an in-specie lump sum payment via cryptocurrency transfer if a trustee or member satisfies a condition of release. However, all pension payments must be made in cash.

Satisfying The SMSF Audit

Ultimately, the cryptocurrency investment must pass the annual SMSF audit. First, the auditor will review the fund’s investment strategy to make sure the asset has been documented correctly and the risk level acknowledged. Then the auditor will confirm the cryptocurrency’s existence and value at 30 June. If a trustee or member holds the cryptocurrency in their own name in a wallet, the auditor won’t treat this as an SMSF asset. Even if they’re only holding the investment in their name on behalf of the fund, this won’t satisfy audit requirements.

Want To Know More?

These are just some important requirements for an SMSF that invests in cryptocurrency. To find out more, contact our experienced SMSF accountants.