Taxation on cryptocurrencies in self-managed super funds (SMSFs)

By Florence Ioannou, Manager Accounting at LDB Group.

As the prevalence in cryptocurrencies investment is on the increase, it is important to know about the taxing environment of this emerging asset class.

From my experience, the purchase of cryptocurrencies has been in a range of entities including individuals, trust, companies and self-managed super funds (SMSFs).

In this article I will focus on SMSFs however, please feel free to read my article How is cryptocurrency, like Bitcoin, treated for income tax in Australia? which discusses general treatment which may be applicable to other entity types. 

To my surprise, investors are purchasing cryptocurrencies without speaking to their accountants and financial advisors prior to making their investments in their SMSF, which can lead to disastrous tax consequences including making the fund non-compliant.

While it is important to discuss with your trusted advisor which vehicle to purchase any new investments, I cannot stress enough the importance of discussing with your advisor your intent to begin investing in cryptocurrencies before making the purchase. This is especially the case if making the purchase in your SMSF so you can ensure all rules are adhered to and that your fund remains compliant.

In short, the Australian Taxation Office (ATO) states you can invest in cryptocurrency however, it is when you read their SMSF investing cryptocurrencies guidelines that you will discover it is not as easy as you think.

The guidelines are as follows:

Investment strategy and fund’s governing rules

According to the ATO, in the first instance, “the investment must be allowed under the funds trust deed, to be in accordance with the fund’s investment strategy and comply with SISA and SISR regulatory requirements concerning investment restrictions”. 

This strongly suggests you need professional advice before making any purchases.

Firstly, you should read and interpret whether your SMSF trust deed allows you to even consider cryptocurrencies as an investment choice.

Secondly, you may need financial advice to determine if it fits in within your investment strategy or alternatively you may need to alter your investment strategy.

An SMSF investment strategy outlines the fund’s investment objectives and specifies the types of investments it can make. This should be in writing and reviewed regularly to ensure it continues to reflect the purpose and circumstance of your fund and its members.

Ownership and separation of assets

If you pass the two hurdles mentioned above, I think this can be the one that stumbles most investors.

According to the ATO, “the superannuation laws require trustees and members to ensure that their fund’s assets are held separately from personal assets. An SMSF’s cryptocurrency investments must be held and managed separately from the personal or business investments of trustees and members. This includes ensuring the SMSF has clear ownership of the cryptocurrency. This means the fund must maintain and be able to provide evidence of a separate cryptocurrency wallet for the SMSF from that used by trustees and members personally.”

The reason I feel this could be the sticking point for most is that it is difficult to acquire a cryptocurrency wallet in the name of the trustee.

The ATO does not go into great detail on how this can be achieved, but I feel the most practical way is via a hardware wallet that is dedicated to the SFMF cryptocurrencies holdings.

Not only will this achieve the separation of assets from that of the trustee and members, but it will also allow for an effectively secure method to store your cryptocurrencies that is separate from your PC or phone wallet. This eliminates the threat of being deliberately or accidently compromised over the internet. 

The hardware wallet seed/password can be securely stored in a number of locations, such as in a bank safe deposit box, and eliminates the need to remember the password.

It should be noted that not all cryptocurrencies can be stored on a hardware wallet, which may impact your diversification strategy into cryptocurrencies.

Valuation

SMSFs must ensure their investments in cryptocurrencies are valued in accordance with the ATO valuation guidelines.

For the purposes of calculating member’s balances as at June 30 each year, the ATO says it “will accept the June 30 closing value published on the website of cryptocurrency exchange that also reports on historical cryptocurrency values”.

Related party transactions

SMSF trustee and members, being related parties of the fund, can dispose of cryptocurrency to such related parties on arm’s length terms that is at market value.

Unfortunately, there is no exemption that allows for an SMSF to acquire cryptocurrency from related parties.

Sole-purpose test

The SMSF may be in breach of the sole-purpose test where affiliate fees or commissions associated with the SMSF’s cryptocurrency investment are paid to a trustee or member personally.

Pension or benefit payment

When a member meets the conditions of release, the SMSF can make either an in-specie lump sum payment by way of transfer of the cryptocurrency. Alternatively, they can make the payment via Australian dollars at proven market value.

It should be noted that pensions are required to be made in Australian dollars. 

You will also need to consider the SMSF’s trust deed and any capital gains tax (GCT) implications associated when the assets are transferred or converted back to Australian dollars.

Voluntary disclosures

The ATO encourages trustees or members to work with their professional advisors if they believe they are in breach of the superannuation laws and to rectify the breach as soon as possible. 

Together they may consider making voluntary disclosure using the SMSF early engagement and voluntary disclosure service.

Editor’s note: This article was originally published on October 30, 2018, and has been updated to include new information. 

Disclaimer: Please note that the above information is general advice only and conditions may vary depending on an individual’s circumstances. This article should not be used as a substitute for competent professional advice from a suitably qualified professional and, as such, we advise you seek professional advice to obtain an accurate assessment. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. You alone are solely responsible for determining whether any investment, asset or strategy or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult a suitably qualified professional regarding your specific legal, tax, financial or investment situation.