SMSF Crypto Currency investing
Bitcoin, Ethereum and Ripple along with the over 1500 Altcoin investments are proving very popular investments for smsf investors.
There are a lot of things people need to be aware of before embarking on bitcoin or crypto investing, in an SMSF.
3 Things to check, to remain compliant
- Who owns the asset ? – make sure you open a trading account in the SMSF’s name
- How are the holdings stored – you cannot store bitcoin or other coins in a software, paper or hardware wallet and keep the wallet at your home or office. It must be independently stored, just like all collectables
- Does your trust deed allow for derivatives and collectable investments? and is your investment strategy up to date to reflect the crypto assets?
The Super Laws – SIS Act 1993
Of particular importance to SMSF investors are the super laws and what they say about whether you can or cannot buy bitcoins or altcoins. The good news here is that the super laws ( SIS Act 1994) does not dictate what is allowed and what is not allowed to be invested in super. It does provide guidance on the responsibilities of trustee/members in selecting appropriate investments which are suitable for investing for the fund members retirement. Here are some of the key sections of the super laws that highlight the importance of managing bitcoin and other such assets.
Sis Act Section 62 – sole purpose test, requires that investments are suitable for retirement and the provision of death benefits ; the core purpose.
Sis Act Section 4.09 – Requires SMSF members to regularly review and update their investment strategy considering, risk, age and suitable asset allocations within the fund relative to a members circumstances. Crypto assets should be classed as a separate asset class, as they don not conform with existing asset classes.
Sis Act Section 4.09a – Requires members to identify investments held by an SMSF as owned by the SMSF and clearly separate assets held by members of the fund personally
Sis Act Section 13.18aa highlights the treatment of collectables. What is acceptable and how these assets are maintained. In particular storage so no personal benefit or present day benefit is gained
Sis Act Sections 66 – A trustee or a member of an SMSF must not intentionally acquire an asset from a related party of the fund. The only exception is in the acquisitions of business real property and listed securities
Sis Act section 71 – In -house assets are a investment made by an SMSF with a member/ trustee of the fund, such as a loan, any direct type of investment or via a trust and a lease to a member of the fund. A fund may invest in no more than 5% of the funds value in in-house assets, calculated each financial year. Note:Exemptions exist for business real property.
Sis Act section 109 – All transactions must be at arms length, so at commercial rates neither below or above market value
The super laws show that, just as with owning jewellery; which may be used by a member for personal benefit; or a race horse;which could be considered a hobby interest with a present day benefit; or a car collection which is not housed independent of the member; that, bitcoins held by a member personally via a paper wallet, software wallet or hardware wallet, in the members home or office or within their control, will breach these provisions and thereby render a fund non compliant and subject to penalties from the ATO.
It is important to check your SMSF trust deed to make sure there are no restrictions on investing in collectables or bitcoin and it is very important that the funds investment strategy shows the level of investment and considerations of risks, asset allocations into such an asset, having regard for members age and time frame to retirement. Research reports on the investment, can further provide evidence of due diligence undertaken, relating to bitcoin investing by the fund.
An SMSF Bitcoin auditor will check the following
a) Where the bitcoins or altcoins are stored and a wallet address will not suffice !
b) The value of the holdings from a reputable exchange and transaction receipts for buy/sell trades during the year
c) A receipt of proof for the purchase of a hardware wallet in the SMSF’s name and proof of storage services engaged to maintain the assets at arms length in compliance with the SIS regulations
In order to invest in bitcoins and altcoins and remain compliant with super laws, there needs to be measures put in place to ensure that these investment are maintained at arms length, that the fund and its members are not party to early access of super monies or providing financial assistance to ( via a loan ) a member of the fund and that the assets are purchased and stored properly, just as with collectable investments. Some crypto investments involve leverage and others provide distribution payments, which might be deemed as a contribution to the fund. It is therefore important to understand the risks entailed with purchasing some crypto assets, as not all will comply with super laws.
Warning: Always seek legal and financial advice when investing in crypto currency due to the high volatility and uncertainty around this sector