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ATO outlines cryptocurrency tax risks

SMSF trustees and members transacting in cryptocurrencies need to be aware of the tax consequences and keep records of all cryptocurrency transactions, according to a recent ATO update.

“In each case these [tax consequences] will depend on the nature of the SMSF’s circumstances,” the ATO update said.

The tax office released the update on the regulatory parameters surrounding SMSF transactions in cryptocurrencies following two tax determinations (TD) in 2014.

TD 2014/25 and TD 2014/26 clarified that bitcoin and other cryptocurrencies are not money, but are capital gains tax (CGT) assets.

The ATO said SMSF trustees, members and SMSF auditors must also be mindful of super regulatory considerations.

While SMSFs are not forbidden from investing in cryptocurrencies, trustees and members must ensure the investment is allowed under the fund’s trust deed and is aligned with the fund’s investment strategy.

It should also comply with the Superannuation Industry (Supervision) Act 1993 and Superannuation Industry (Supervision) Regulations 1994 regulatory requirements concerning investment restrictions.

Trustees must also consider the level of risk of the investment.

Addressing ownership and separation of assets, the ATO update said an SMSF’s cryptocurrency investments must be held and managed separately from the personal or business investments of trustees and members, including ensuring the SMSF has clear ownership of the cryptocurrency.

SMSFs must also ensure their cryptocurrency investments are valued in accordance with ATO valuation guidelines. The value in Australian dollars will be the fair market value and this can be obtained from a reputable digital currency exchange or website that publishes its rates publicly.

The ATO also warned it is unlikely an SMSF will meet the sole purpose test if trustees or members, directly or indirectly, receive a financial benefit when making investment decisions and arrangements.

For example, the SMSF can breach the sole purpose test where affiliate fees or commissions associated with the fund’s cryptocurrency investment are paid to a trustee or member personally.

On pension or benefit payments, where a trustee or member satisfies a condition of release, the SMSF can make an in-specie lump sum payment by way of a transfer of cryptocurrency. However, pension payments must be made in cash.

The tax office said SMSFs must consider the fund’s trust deed and any CGT implications associated with the transfer of assets such as cryptocurrency.

Trustees and members who believe they may have breached super laws should consider making a voluntary disclosure using the SMSF early engagement and voluntary disclosure service.

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