The contract for ownership of a non-fungible token (NFT) does not meet the definition of a collectable and too many unknown variables make it difficult for SMSF auditors to confidently sign off on them, according to an audit firm.
ASF Audits head of education Shelley Banton said there had been no guidance from the ATO as to status of an NFT and if it was considered a collectable asset that could be held by an SMSF or an allowable asset that could be purchased by a fund.
“There are many questions and not enough answers on how to treat NFTs in an SMSF. But one thing is clear: in its purest form, an NFT smart contract does not meet the requirements of a collectable under regulation 13.18AA [of the Superannuation Industry (Supervision) (SIS) Regulations],” Banton said in a recent blog post.
She added an NFT was a smart contract that exists on blockchain and proves the ownership of a digital asset represented by providing a digital certificate of ownership, the right to sell the asset and the location of the asset, which was stored separately in a decentralised NFT marketplace.
Pointing to regulation 13.18AA, she noted artwork was allowed as a collectable that could be held by an SMSF and was the only category that might also cover digital assets, but the Income Tax Assessment Act 1997 defined artwork as physical works of art, reproductions of the same and “property of a similar description or use”.
“While ‘property of a similar description or use’ could loosely define digital artwork, the NFT refers to the smart contract containing the file’s location. Technically, an NFT cannot be a collectable and personal-use asset,” she said.
She added that even if an NFT met the definition of a collectable, it was unlikely to meet the requirements of regulation 13.18AA as an SMSF auditor would be unable to confirm whether the NFT was stored in the private residence of a related party on a USB stick, not on digital display, insured within seven days of acquisition or valued by a qualified independent valuer before being transferred to a related party.
Beyond these factors, she also noted the difficulty in valuing an NFT beyond its acquisition cost as no NFT price checkers currently exist to confirm value.
“SMSF auditors cannot meet their professional obligations under SIS regulation 8.02B where acceptable, appropriate audit evidence is lacking,” she said.
“It will result in a Part A qualification of the audit report where the value is material and a breach of regulation 8.02B.
“Until there is clarity from the regulator, an SMSF trustee investing in NFTs should be carefully scrutinised and questioned thoroughly by SMSF auditors.
“Given that most SMSF trustees have no idea what an NFT is, where the value is, why they should own one and what to do with them, the real question is whether an NFT will provide benefits to members in their retirement.”
