Opinion piece written by John Maroney, CEO, SMSF Association
Just 0.6 per cent of SMSFs held cryptocurrency in 2020 and the sector remains wary. Regulators would like to keep it that way.
Self-managed super funds have not been immune to the appeal of cryptocurrency as an investment opportunity, and ATO statistics to December 31 show this asset comprised $227 million of SMSF assets.
But SMSFs have hardly been swept away in the excitement crypto has generated in some investors, with $227 million representing just 0.03 per cent of net assets of $840 billion.
Since the ATO added crypto to the list of assets held by SMSFs in June 2019, when total assets stood at $194 million, the figure has remained remarkably stable, peaking at $236 million in June 2020 before ebbing to $227 million in the December quarter.
It’s a similar story when it comes to the number of SMSFs holding crypto. The latest ATO SMSF statistical overview report shows 0.6 per cent of the SMSF population held cryptocurrency at June 30, 2020, compared with 0.3 per cent the year before. With the total number of SMSFs sitting at about 600,000, that’s a mere 3600 SMSFs holding crypto.
Finally, for those SMSFs with cryptocurrency assets, the median amount invested in crypto is about $34,000.
These numbers should not surprise. SMSFs have long remained faithful to assets they understand, explaining why Australian shares, property (commercial and retail), cash and fixed interest make up just over 60 per cent of net assets. Add listed and unlisted trusts and that percentage jumps to more than 80 per cent.
So, when an asset as volatile as crypto becomes an investment option, it’s expected that SMSF investors will adopt a conservative and measured approach, especially when the ATO and ASIC have been forthright in their warnings about volatility.
Tax and regulatory requirements
It’s not just an issue of volatility. The regulations around SMSFs speculating on crypto are exacting.
There is the overarching requirement that the investment complies with the sole purpose test that means fund members must not directly or indirectly obtain a financial benefit when investing in crypto. This could be an issue if fees or commissions associated with the fund’s investment are paid to a trustee or member personally.
The fund’s trust deed must allow this investment, as well as being required to align with its investment strategy, a document trustees cannot just set and forget.
They must consider liquidity (if some or all of the fund’s members are in the pension phase, there is a requirement to pay at least an annual pension), the members’ risk profile, and ensuring their investments are adequately diversified – an issue where the ATO is taking greater interest.
There are also several other specific SMSF compliance issues to consider. An SMSF’s crypto investments must be held and managed separately from the personal or business investments of members.
Fair market value
This means the fund must maintain and be able to provide evidence of a separate crypto wallet. SMSFs’ crypto investments also must be given a fair market value as defined by the ATO.
Then there are tax implications. In 2014, the ATO issued two rulings clarifying that crypto is not money but a capital gains tax asset. Although any tax payable will depend on an SMSF’s circumstances, it means all funds trading crypto must keep records of all transactions.
Remember, too, SMSFs are not allowed to acquire cryptocurrencies from a related party, meaning it is not possible to make an in-specie contribution of cryptocurrency from a related party or any other transfer of cryptocurrency from a related party to the fund.
Finally, if fund members are in the pension phase, pension payments from the fund must be made in cash and cannot be made by transferring crypto to a pension member.
ASIC has also entered the fray to warn SMSFs about crypto, noting a growing number of investors are reporting crypto scams to the regulator, in part due to the surge in speculative activity during COVID-19.
The regulator adds that offenders are difficult to catch and money lost on these scams can be difficult to recover, especially when offenders operate outside of Australia and all contact has been online.
SMSFs are an obvious target, and both the ATO and ASIC stress the need for trustees to get professional advice before venturing down this investment path. But here’s the catch. Many licensed financial advisers are not permitted to provide advice on such investments, adding another layer of risk when investing in crypto.
That well-worn phrase, caveat emptor, has never been so apt.