Adj Professor, Dr Brett Davies, Legal Consolidated Barristers & Solictors, answers the frequently asked questions and important points to note regarding SMSF Deeds, Cryptocurrency, and more.
SMSF Deed, SMSF Deed updates and Investment Strategies are drafted to comply with the:
- Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act);
- Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regs).
Few SMSF Deeds allow for the investment of Cryptocurrency. Even if allowed whether the trustee should invest in Cryptocurrency is another matter.
Investment Strategy for Cryptocurrency
From the practitioner’s experience, the ATO’s biggest attack on SMSFs at audit is the Investment Strategy. But sadly, often, it cannot be found, it is out of date or poorly drafted.
Consider section 52B SIS Act and reg 4.09 SIS Regs. The trustee is required to:
- formulate
- review regularly
- obey
the investment strategy.
This is for:
- the risk? This is for making, holding and realising, and the likely return from, the fund’s investments
- what are your objectives and expected cash flow needs?
- the combination of the fund’s investments
- investments diversity (if any). And risks from inadequate or too much diversification
- liquidity for cash flow needs – pay debts and payout retired and dead members
- insurance
What is the risk that is acceptable? The SIS Act and SIS Regs are regrettably silent. The practitioner has spoken to 100s of ATO auditors since 1988. The best response? It depends on the SMSF member’s risk tolerance.
What happens if an SMSF member suffers loss from a faulty investment strategy?
What if a person suffers loss or damage from a faulty investment strategy? Or, the investment strategy is not followed? The member can sue the trustee. But they are, generally, the same persons. So there is no point in suing yourself!
Frighteningly, we are seeing SMSF funds suing advisers who help their clients to invest in Cryptocurrency. Especially, while the SMSF governing rules do not authorise such an investment.
SMSF trustees hold a fiduciary relationship. This is to their fund members. This is the same duty that an accountant, lawyer and financial planner owes to their client. It is one of the utmost good faith. It is the highest duty to act in the best interests of the SMSF’s beneficiaries.
The local State Trustees Act also puts responsibilities onto trustees. Plus the SIS Act imposes more onerous duties. See section 52B(2)(b) SIS Act:
“to exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinarily prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide.”
Investment strategies for an SMSF should automatically allow for investing in Cryptocurrency. But, even if authorised is it in the best interests of the SMSF members to do so?
Is it a high risk for the SMSF? Does that matter?
Volatility and speculative capital growth opportunities are not prohibited in most SMSF Deeds.
All investment questions are a question for the trustee of the SMSF to address.
Many SMSF Deeds and variations reviewed by our law firm are silent on Cryptocurrency. Or prohibit such investments! If so upgrade the SMSF Deed.
Governing rules of the fund for Cryptocurrency
The trustee of an SMSF must follow:
- the SIS Act and the SIS Regs
- the SMSF Deed
- written Investment Strategy
Drafting SMSF Deeds to invest in Cryptocurrency
The practitioner has had the benefit of attending a number of ATO desktop audits.
This is best practice in what an SMSF Deed, SMSF variation and Investment Strategy should contain:
- the definition of Cryptocurrency should be inclusive and not exclusive – especially as this new asset class continues to evolve
- the expressions of Cryptocurrency should include:
- digital currency
- blockchain currency
- currency
- Cryptocurrency
- Cryptocurrency CFD trading
- contracts for difference
- derivatives
- all forms of storage of the Cryptocurrency should be expressly allowed, including, a hardware wallet, software wallet, wallet and even no wallet at all
- all, or rather ‘any’ exchanges and custody services should be permitted (as the rules are changing again on this shortly)
- as the concept of ‘encryption’ is subject to debate any or no encryption should also be allowed
- so as to allow for the exciting world of leveraging there should be an express mention of “synthetic financial products”. This is without owning the underlying product. To put the matter beyond doubt, include movement in the price of shares and other indicia of title, futures contracts and other financial instruments such as:
- stock indices
- commodities
- currencies
- cryptocurrency
Can an SMSF ‘identify’ Cryptocurrency assets?
Cryptocurrency is private and anonymous. It is designed to be that way. To date, currency and money is controlled by only sovereign States. The practitioner does not like monopolies. While the practitioner holds no Cryptocurrency the practitioner finds it offensive that the only way I can hold currency is through a government.
But the ‘anonymous’ nature of Cryptocurrency is problematic for an overregulated vehicle, such as a Self-Managed Superannuation Fund. Therefore, the trustee must be even more vigilant that it has evidence that the Cryptocurrency is owned by the SMSF. And in particular, it is held:
- by the trustee of the SMSF
- for the SMSF
For example, Colin Jones Nominees Pty Ltd atf Jones SMSF ABN 38383939383938
The super laws require trustees and members to ensure their fund’s assets are held separately from personal assets. An SMSF’s cryptocurrency investments must be held and managed separately. This is from personal or business investments.
This includes ensuring that the SMSF has clear ownership of the cryptocurrency. For example, the SMSF maintains a separate cryptocurrency wallet.
Evidence that the SMSF auditor and ATO are looking for is:
- the currency is purchased from a bank account used solely by the SMSF
- SMSF Minutes
- the trading account clearly shows the trustee is acting in the capacity of the SMSF
- keeping all documentation of the transaction and the indicia of title
- keeping exchanges of emails between your accountant and financial planner that relate to the Cryptocurrency
Can I sell Cryptocurrency to my SMSF?
You and related parties can not gift or sell assets to your SMSF. Section 66 SIS Act prohibits an SMSF trustee from acquiring an asset from a related party.
There are only two exemptions:
- commercial real property (e.g. factory and offices)
- listed security (e.g. shares sold on the Australian Stock Exchange)
Cryptocurrency is not (at the moment) a listed security under the SIS Act. So you, your mum, your company and other related persons cannot sell your Cryptocurrency into their SMSF.
SMSF trustees, members and related parties of the SMSF cannot make in-specie contributions or other transfers of cryptocurrency to the SMSF.
Is Cryptocurrency ‘money’ for an SMSF?
‘Acquiring an asset’ does not include money. Cryptocurrency is money. It is used as a currency to buy and sell. But the ATO does not acknowledge Cryptocurrency as money. It is neither Australian nor foreign currency. This is in the eyes of the ATO.
Does the SMSF Deed allow for gearing and hedging of Cryptocurrency
Cryptocurrency exchanges allow the trustee to short and gear Cryptocurrency. This may be against sovereign state currencies and different Cryptocurrencies.
Just as a bank takes a mortgage over real estate to guarantee the money owed to the bank, similarly the trustee can give a charge over Cryptocurrency.
But your SMSF is prohibited from giving a charge over its assets. One exemption is that the SMSF can charge its assets when investing in derivatives. This must be expressly permitted under the SMSF Deed.
This is provided the Cryptocurrency exchange is an SIS Regulation ‘approved body’. A trustee must not become involved with derivatives without its accountant and financial planners’ signoff. Importantly the accountant and financial planner must check to ensure that the Cryptocurrency exchange is an ‘approved body’.
How does the SMSF value its cryptocurrency for the ATO?
SMSFs must ensure their investments in cryptocurrency are valued. This is under the ATO’s valuation guidelines. The value is:
- in Australian dollarh
- the fair market value from a reputable digital currency exchange or website that publishes its rates publicly.
Like most assets, the value of cryptocurrency fluctuates. For the purpose of calculating member balances on 30 June, the ATO accepts the 30 June closing value. This is as published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.
Australian SMSFs investing in Cryptocurrency overseas
Cryptocurrency is an international currency. What if the trustee is purchasing Cryptocurrency with overseas currency or with overseas organisations? The trustee may need to factor in, such things as, currency movements against the Australian dollar.
Also, from what we have seen, some overseas exchanges do not understand the SMSF requirement that the assets must be in the name of the trustee of the SMSF. They cannot be in the name of the beneficiaries.
When I retire can I take the Cryptocurrency directly out of my SMSF?
When a member satisfies a condition of release they can start getting wealth out of their SMSF. Provided the SMSF Deed is so drafted the member can make an in specie lump sum payment. And the trustee can do so by transferring the cryptocurrency directly into the member’s name.
A pension payment is, however, always in cash.
Do I pay CGT tax on cryptocurrency in species transfers and trades?
CGT may be payable on the transfer of assets, such as cryptocurrency, to the member in retirement. The accountant calculates the CGT.
The ATO states that cryptocurrency is not money. It is a CGT asset. Therefore, keep full records of cryptocurrency trades. The accountant reviews these. And the SMSF pays tax accordingly. CGT applies to every cryptocurrency trade made through the SMSF.
Should my SMSF invest in Cryptocurrency?
Just because a trustee is allowed to do something, does not mean that the trustee should or must.
As well as the investment issue, Cryptocurrency in an SMSF involves compliance work. Seek advice from the accountant and financial planner. The ATO states:
“We strongly encourage SMSFs to seek independent professional advice before undertaking any new investment in their SMSF, including investments in cryptocurrencies.”
And such advice is expensive.
- Financial planners are overly regulated by the ridiculously complex Australian Financial Services Licence obligations and the Corporations Act 2001(Cth).
- Accountants have huge regulatory requirements for tax advice obligations under the Tax Agent Services Act 2009 (Cth).
Both professions suffer huge burdens and personal liability exposure for their advice.
Dr Brett Davies, Adj Professor, is a Barrister of the High Court of Australia, based in Perth Western Australia. Brett is the tax partner of the national practice Legal Consolidated Barristers & Solicitors. They are Australia’s only law firm providing legal documents online. Brett is Adjunct Professor at the Curtin Business & Law School where he lectures both the Estate Planning and Superannuation units. He also lectures at The University of Western Australia and has lectured at Western Sydney. Brett gives back to the tax community. He has sat on the Tax Institutes’ national Education Committee. He has also sat on both the Law Society’s and Law Council’s Tax Committee. Brett has seven degrees including four law degrees. He has both a Doctorate in tax law and an MBA.
