Practitioners dealing with SMSFs holding digital assets may face significant professional liability risks if the investments are prohibited under the fund’s governing documentation, according to a technical specialist.
ASF Audits head of education Shelley Banton noted a provision included in the Superannuation Industry (Supervision) (SIS) Act could expose practitioners to potential legal action if this situation were to materialise.
“One thing to consider from a risk management point of view is that under section 55, a person who suffers a loss or damage as a result of investing in an asset which is not covered by the investment strategy or the trust deed can recover that loss or damage if there’s a contravention against another person who’s involved in that contravention,” Banton told attendees of The Tax Institute’s Super Intensive held online recently.
“So don’t be that auditor, that accountant, that financial adviser, or anyone else in the SMSF food chain who didn’t do their job properly because if the trustee’s lawyers can prove a breach of duty and care, you’re going to be in the firing line if the fund suffers a loss.
“We saw that play out in the Baumgartner case, where legal liability was proven in court against the SMSF auditor because they didn’t bring the deficiency of the investment strategy to the trustee’s attention. And in that fund they invested in high-risk unlisted entities and loans which weren’t covered in the [SMSF] investment strategy.
“This is where being a little bit more pedantic can reduce your legal liability, notwithstanding the fact that it’s probably not very favourable with your clients.”
As such, she shared three factors all SMSF professionals need to consider to protect themselves from potential legal action by a trustee seeking to recoup losses from a failed investment.
“Did the digital asset pass the sole purpose test? As we know there is nothing that stops the fund from investing in crypto as long as it complies with the SIS rules and it’s a permittable acquirable asset,” she noted.
“Does the trust deed explicitly stop trustees [from] investing in digital assets? Probably not, but we may actually see these clauses enter into trust deeds [more] once trustees have been bitten by crypto and other digital assets, and they may be included to stop [trustees] investing in this asset class in the future.
“The [investment strategy] needs to specifically allow for these types of investments where they’re material. And at the bare minimum, you want to see in the risk section that [the trustee has] addressed secure storage of the wallet and the private key.”