Cryptocurrencies such as bitcoin and ethereum are a burgeoning asset class held in self-managed super funds, or SMSFs. Australian Tax Office data for June 2021 shows $212 million worth of cryptocurrency was held in SMSFs - up from $190 million when the ATO started measuring it in June 2019. And for good reason - the potential returns are tantalising, but as the old saying goes, history is written by the winners.
The value held has fluctuated through those two years, which could be attributed to the assets class' volatility. While crypto in SMSFs pales in comparison to other asset classes, such as listed shares ($230.5 billion), and residential property ($43.3 billion), the growth over time is evident.
However, just because you can invest in crypto through your SMSF, does that mean you should?
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What are the risks of investing in crypto through SMSFs?
The obvious risk is the asset class' volatility, but it’s more than just dollars on a page you have to worry about as an SMSF trustee.
Savings.com.au spoke with H&R Block’s director of tax communications Mark Chapman (pictured below) to find out about some of the other risks.
Beware of the volatility
“The extreme level of volatility demonstrated by cryptocurrencies should give all SMSF trustees pause for thought and before proceeding trustees will need to give serious consideration to the risk appetite of their members,” Mr Chapman said.
“The level of risk acceptable within an SMSF is at the discretion of the trustees and members and is not specified within the law and the regulations.”
Such volatility is seen in bitcoin, where it peaked at AUD $91,148.99 in early November 2021 and cratered to $48,819.02 by late January 2022.
Invest without getting sued
There is the very real possibility of being sued as a trustee by your other members, according to Mr Chapman, and it’s due to one little rule.
“Trustees should bear in mind the words of section 52B(2)(b) SISA that they must ‘exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide’,” he said.
“A super member can take legal action against the trustee where they suffer loss or damage as a result of a breach in the rules regarding the formulation of an investment strategy.
“In the context of an SMSF however this rule may have little practical benefit because the member may end up taking action against themselves.”
As at June 2021 there were 597,900 SMSFs in Australia encompassing 1,114,529 members, implying an average membership per SMSF of just under two members. ATO data suggests nearly 70% of SMSFs have two members. The maximum number of members permissible has recently grown from four to six.
Beware of crypto cowboys and scams
The Australian Securities and Investments Commission (ASIC) has warned SMSF trustees to be wary of scammers and other ‘cowboy’ investment firms.
“Do not rely on social media ads or online contact from someone promoting an ‘investment opportunity’. Be wary of people ‘cold calling’, text messaging, or emailing you with a recommendation to transfer your super to an SMSF, or invest in crypto-assets via your SMSF,” ASIC’s warning read.
ASIC also warned investors to make sure any investment advisers are licensed.
ATO data as at June 2019 shows the median member age of SMSFs was 60 years.
Investment scams accounted for $177 million worth of scams out of $323 million in 2021. People aged over 65 lost $81.9 million in total according to the ACCC’s ‘Scamwatch’.
“While the proportion of reports involving a financial loss has dropped this year, the people who do lose money are losing bigger amounts. The average loss so far this year is about $11,000 compared to $7,000 for the same period [January through September] in 2020,” ACCC deputy chair Delia Rickard said.
Here’s what to do before investing in crypto through your SMSF
There’s a few hoops you need to jump through, like any investment, before tying a crypto wallet to your SMSF.
Trust deeds
The first port of call is getting the trust deed up to date, according to Mr Chapman.
“Trustees should ensure that the SMSF trust deed is worded in such a way as to permit this kind of investment,” he said.
”Whilst many newer funds may have this power written into the trust deed, many older funds - that long pre-date the development of cryptocurrencies - may not have it meaning that it may be necessary to vary the fund rules before proceeding with the investment.”
Sole purpose and ‘at arm’s length' tests
The second is the encompassing ‘sole purpose test’ and ‘at arm’s length' policies the ATO has stipulated, according to Mr Chapman:
“The Trustee must be able to identify the assets of the fund. This can be a problem with cryptocurrencies. Steps to take include: using the funds bank account to purchase cryptocurrency (not the members' own bank accounts); passing and documenting relevant trustee resolutions; 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; creating fund specific email addresses ensuring sufficient documentation exists to satisfy the fund auditor and the ATO; and ensuring sufficient security exists to protect the fund's crypto assets, such as private keys.”
Investment strategy and valuation
The third is ensuring the investment strategy is up to date and accurate.
“It is essential to continually monitor the value of cryptocurrency investments to ensure that relevant superannuation caps are not breached,” Mr Chapman said.
“For example, a sudden rise in the value of the crypto could lead to the member's total superannuation balance exceeding the total superannuation balance cap, which can lead to a member not being able to make any further non-concessional contributions to the fund.”
The current transfer balance cap is $1.7 million. The average value of assets held within SMSFs in the 2017-2018 tax year was nearly $1.3 million according to the ATO. Though the ‘average’ or mean can be pushed out by a few funds with very-high values - the median was just under $720,000.
“SMSFs must also ensure their investments in cryptocurrency are valued in accordance with ATO valuation guidelines. The value in Australian dollars will be the fair market value which can be obtained from a reputable digital currency exchange or website that publishes its rates publicly,” Mr Chapman said.
“The value of cryptocurrency can change constantly. For the purpose of calculating member balances at 30 June, the ATO will accept the 30 June closing value published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.”
Lead photo by VisionPics on Pixabay
Photo of Mark Chapman supplied
Rachel Horan
