Retirement
Is bitcoin leading SMSFs into a compliance trap?
Bitcoin’s stratospheric rise in value has captured the minds and wallets of many, but for SMSFs, there are a few compliance traps to be aware of.
Is bitcoin leading SMSFs into a compliance trap?
Bitcoin’s stratospheric rise in value has captured the minds and wallets of many, but for SMSFs, there are a few compliance traps to be aware of.
That’s according to Access Super Audit principal Vivian Bai, who recently explained that there are at least four key compliance traps for SMSFs looking to invest in bitcoin.
1. Separation of assets
She said that as a bitcoin wallet is a prerequisite for purchasing bitcoin, one compliance challenge lies in the fact that the wallet does not have the SMSF title on it.
“A wallet is a software program [and there] are many providers of this software. Once the necessary software has been downloaded, you have, in essence, opened a bank account with a zero balance,” Ms Bai elaborated.
“A wallet does not have any title on it. While title and ownership are fundamental concepts for SMSF compliance, bitcoin is pseudonymous by design.”
She reminded SMSFs that investment within an SMSF have to be “clearly identifiable” as being not only owned by the SMSF but also separate from assets held in a personal capacity.
“It is critical that an individual’s wallet is separate from a wallet dedicated to the SMSF. Otherwise it is an immediate breach of the separation of assets,” Ms Bai said.
2. Acquisition from related party
Continuing, Ms Bai explained that bitcoin cannot be used as an in specie, or direct, contribution.
Additionally, she said, “The SMSF can’t purchase bitcoin from its members as it is neither a listed security nor a commercial property. It must be purchased with cash in the fund from an unrelated party.”
3. Investment strategy
Due to bitcoin’s historic volatility, a trustee’s decision to invest in the cryptocurrency has to be reflected in the fund’s investment strategy, Ms Bai said.
“Another consideration is that bitcoin may not fall into any existing asset class in the investment strategy. Bitcoin is not cash, it doesn’t have a physical form, therefore is not classified as a collectable, and it is technically a right,” she continued.
“It is recommended that cryptocurrency is added as a separate asset class.”
4. Trust deed
Ms Bai said she “would imagine” that an existing trust deed would generally neither allow or disallow a bitcoin investment.
Nevertheless, she said, “It is prudent to check the fund trust deed, and hopefully the definition is not too narrow.”
Speaking to Nest Egg’s sister site SMSF Adviser, Hayes Knight director of SMSF Ray Itaoui said he anticipates greater SMSF interest in the cryptocurrency.
Calling it a “whole new world” for auditors, he added that one of the key issues with bitcoin is that it can be difficult to confirm who the actual owner is.
Mr Itaoui explained, “Due to the way that bitcoin and the blockchain ledgers work, it can be difficult to maintain separation between the assets of the super fund and the assets of the individual, a lot of times it's linked to their personal credit card for example, so it just creates a lot of specific audit risk.”
Mr Itaoui’s and Ms Bai’s comments follow similar recommendations from solicitor Elizabeth Wang in November.
The Townsends Business & Corporate Lawyers solicitor said that while bitcoin can be defined as property under law, and as such can be left as part of a will, the question of SMSF bitcoin investment is a bit more tenuous.
“Investors and traders are looking at investing in virtual currencies, such as bitcoins, as an alternative investment to more traditional types of collectable and personal use assets, such as coins, medallions and bank notes, to diversify their investment portfolios,” she said.
“Although, regulators such as the Australia Taxation Office (ATO) have yet to provide any formal ruling or publication on whether an SMSF can invest in bitcoins, there are still a number of key issues that an SMSF should consider.”
She highlighted the sole purpose consideration and investment strategy as key areas for SMSFs to be aware of.
RELATED ARTICLES
Self managed super fund
Superannuation guarantee to be paid on government paid parental leave, says ASFA
The Association of Superannuation Funds of Australia (ASFA) has hailed the government's decision to include Superannuation Guarantee payments with its Paid Parental Leave policy as a critical step ...Read more
Self managed super fund
SMSF experts advise against hasty reactions to potential super tax changes
As the Australian Government proposes a new tax measure on superannuation earnings for balances exceeding $3 million, experts from the self-managed super funds (SMSF) sector are urging members not to ...Read more
Self managed super fund
Federal government announces changes to superannuation contribution caps
The Federal Government has announced changes to the superannuation contribution caps, impacting self-managed super funds (SMSFs) and their members from 1 July 2024. Read more
Self managed super fund
SMSF Association calls for joint effort to tackle early super access
The SMSF Association is calling on a collaborative approach including the Government, the Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC), and the ...Read more
Self managed super fund
Rest Super members file class action over alleged insurance premium deductions
Shine Lawyers has initiated a class action lawsuit against Rest Superannuation (Rest), alleging the unlawful deduction of income protection insurance premiums from members' superannuation accounts. Read more
Self managed super fund
Debunking a superannuation tax myth: SMSF Association clarifies the impact on Aussie farms
In the ongoing debate about a proposed new tax targeting superannuation funds exceeding $3 million, the SMSF Association has stepped in to challenge claims from the Association of Superannuation Funds ...Read more
Self managed super fund
Is an SMSF right for you?
When it comes to planning for retirement, one of the most significant decisions Australians have to make is how to manage their superannuation. Read more
Self managed super fund
SMSF growth continues after pandemic peak
The statistics have begun to change coming out of the COVID-19 pandemic, according to new findings from Australian Investment Exchange Limited (AUSIEX). Read more
Self managed super fund
Superannuation guarantee to be paid on government paid parental leave, says ASFA
The Association of Superannuation Funds of Australia (ASFA) has hailed the government's decision to include Superannuation Guarantee payments with its Paid Parental Leave policy as a critical step ...Read more
Self managed super fund
SMSF experts advise against hasty reactions to potential super tax changes
As the Australian Government proposes a new tax measure on superannuation earnings for balances exceeding $3 million, experts from the self-managed super funds (SMSF) sector are urging members not to ...Read more
Self managed super fund
Federal government announces changes to superannuation contribution caps
The Federal Government has announced changes to the superannuation contribution caps, impacting self-managed super funds (SMSFs) and their members from 1 July 2024. Read more
Self managed super fund
SMSF Association calls for joint effort to tackle early super access
The SMSF Association is calling on a collaborative approach including the Government, the Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC), and the ...Read more
Self managed super fund
Rest Super members file class action over alleged insurance premium deductions
Shine Lawyers has initiated a class action lawsuit against Rest Superannuation (Rest), alleging the unlawful deduction of income protection insurance premiums from members' superannuation accounts. Read more
Self managed super fund
Debunking a superannuation tax myth: SMSF Association clarifies the impact on Aussie farms
In the ongoing debate about a proposed new tax targeting superannuation funds exceeding $3 million, the SMSF Association has stepped in to challenge claims from the Association of Superannuation Funds ...Read more
Self managed super fund
Is an SMSF right for you?
When it comes to planning for retirement, one of the most significant decisions Australians have to make is how to manage their superannuation. Read more
Self managed super fund
SMSF growth continues after pandemic peak
The statistics have begun to change coming out of the COVID-19 pandemic, according to new findings from Australian Investment Exchange Limited (AUSIEX). Read more
