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NFT risks raise questions on SMSF use

NFTs investment

The risks inherent in NFTs will be a chief consideration as to whether they should be included in an SMSF investment portfolio.

SMSFs looking at investing in non-fungible tokens (NFT) need to consider how they will be used within the fund and the inherent risk factors to gauge whether they are an acceptable investment, a superannuation lawyer has advised.

Townsend Business and Corporate Lawyers solicitor Elizabeth Wang said there was no simple answer as to whether an SMSF can invest in NFTs and fund members should rely on ensuring the sole purpose test and investment strategy will be satisfied.

Wang noted, however, that in meeting the sole purpose test the ATO will consider the length of time an SMSF had held an NFT and if its place in the fund was to provide retirement benefits for members.

“The ATO states that a cryptocurrency is more likely to have been acquired as a personal-use asset if the cryptocurrency is acquired and used within a short period of time in comparison to a cryptocurrency being acquired and held for [a longer] time before any such transaction is made,” she said.

“So an SMSF may be able to satisfy this requirement if the trustee is able to show that the NFT will not be used as a personal-use asset by the trustee or the members of the SMSF and instead will be kept or mainly used as an investment.”

She added this retention of an NFT asset had to be considered in the context of the SMSF’s investment strategy and the fact the risks associated with NFTs were high and their value was subjective.

“As part of this [investment] framework, an SMSF trustee must exercise due diligence in relation to all investments made by the SMSF,” she said.

“The issue here is the risky nature of NFTs as an investment. The process to buy an NFT can be complicated as most NFTs need to be acquired using an Ethereum-compatible crypto-wallet. As with other types of cryptocurrencies, NFTs are also susceptible to scams and crypto hacks.

“Generally, there is no intrinsic value linked to an NFT, unlike a stock or a bond where you would already know the intrinsic value of that investment. A successful NFT is generally only as valuable as the next person who is willing to pay for it.”

She pointed out these risk factors made NFTs less suitable for some investors, particularly those approaching retirement age where income generation and low levels of capital loss were important, but they could be used in an appropriate investment strategy.

“For example, the trustee may be able to argue that having less than 5 per cent of the total fund’s assets invested in digital assets such as NFTs does not constitute a material risk for the fund and yet adds the potential to increase the fund’s overall investment performance,” she said.

“Whatever the decision, NFTs as an investment must be approved in an SMSF’s investment strategy.”

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