SMSF trustees wanting to invest in cryptocurrencies must ensure certain compliance requirements are satisfied before any such transactions can be executed, a specialist financial adviser has warned.
The first item that must be checked before an SMSF purchases a cryptocurrency is the trust deed to make sure this overarching document of the fund allows this type of investment, WealthPartners principal Andrew Heaven advised in a recent blog post.
Following on from a review of the trust deed should be an examination of the investment strategy of the fund.
“The investment strategy of the SMSF should specify investments that are permissible. In formulating an investment strategy, trustees need to consider the risks in making, holding and realising any investment. They are obliged to consider the likely return, diversification, liquidity, costs and tax consequences as part of the investment strategy,” Heaven noted.
“Bitcoin [for example] is not a conventional asset class like shares or property, so it may be worthwhile specifying cryptocurrencies as a permissible investment asset in the investment strategy.”
According to Heaven, trustees must apply due care and diligence to all of the assets in which the SMSF invests. He suggested, to this end, trustees must take into account the life stage the fund’s members are in and assess the associated risk of a cryptocurrency allocation. For example, would buying bitcoins be too risky for an SMSF member who is approaching retirement.
Assuming a cryptocurrency such as bitcoin has been deemed an appropriate asset to be held by the SMSF, trustees must be aware the same ownership rules apply as for any other asset class in the super fund’s portfolio, he pointed out.
“When registering for the bitcoin wallet [the storage device for bitcoins], the legal owner of the wallet must be the SMSF. The trustees need to ensure that the SMSF has legal ownership of the bitcoins purchased. The individual member of the SMSF must not have ownership or control of the SMSF bitcoins at any time,” he said.
“Bitcoin cannot be transferred as an ‘in-specie’ transfer to the fund by a fund member nor purchased from a member or a related party as it is not a listed security.”
He also emphasised the ATO has stipulated cryptocurrency transactions are subject to tax, including capital gains tax.
“[However] there have been no formal rulings or publications from the ATO in specific reference to bitcoins and SMSFs,” he said.