Cryptocurrency, SMSF

Avoid sole purpose bias on crypto

SMSF cryptocurrency sole purpose auditor

SMSF auditors are prone to negatively apply the sole purpose test to cryptocurrency investments, but doing so may be inconsistent with superannuation rules.

SMSF auditors should not be quick to judge cryptocurrency investments as being unsuitable within a fund portfolio under the sole purpose test if the members attest the investment is consistent with their retirement plans, according to an audit firm.

Tactical Super director Jacob Kewley acknowledged the sole purpose test was an area of concern for a number of SMSF auditors in regards to cryptocurrency, but their approach had to be consistent with audit principles and the member’s statements.

Some of the auditors I have spoken to will look at automatically qualifying crypto, sometimes on the issue of market valuation, sometimes on the issue of ownership, and quite frequently also on sole purpose,” Kewley said during a presentation hosted by The Auditors Institute.

“For me, I feel that as the auditor its overly onerous of us to imply their decision to invest in cryptocurrency doesn’t meet the standards of the sole purpose test.

“Let’s think of an example where a fund has invested 100 per cent of their assets in [cryptocurrency] DogeCoin, which is about as extreme an example as we’re going to get. Is that going to be a sole purpose issue?

“You can agree with me that’s not a great investment. There was a time where that would have done really well for a fund, but let’s conclude it’s not a great investment now and the trustees have got rocks in their heads.

“Yet their honest opinion is that Dogecoin is going to go up in value. They are also not trying to personally benefit from this and it is their super assets they think that are going to increase in value. At that point, the sole purpose test is being met.”

According to Kewley it may appear this creates a low bar for the sole purpose test when it comes to cryptocurrency, but it was consistent with the rules as they currently stand.

“There is a sole purpose issue with non-fungible tokens, but when we are talking about cryptocurrency, and I’m not just talking about the blue-chip currencies, but including the trash coins that are never going to be anything more than a flash in the pan, our conclusion from a straight reading of the legislation is that we don’t have a sole purpose issue there,” he said.

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