Bitcoin and Superannuation

Submitted by editor on Tue, 04/24/2018 - 18:58

As Bitcoin becomes more well-known and popular it is inevitable that it should become considered as a possible superannuation vehicle. There are some issues relating to including Bitcoin in Superannuation however. Firstly you can only include it in Self-managed Superannuation Funds (SMSF) and then only with certain criteria applied.

General managed funds will not accept cryptocurrencies for a super fund primarily as it is not considered an investment but a currency. But it is possible to include it in a SMSF and an SMSF can be set up with your accountant. An experienced accountancy with regard to setting up SMSF is Squirrel Super as they are experienced in applying cryptocurrency to the super fund. If you have your own accountant and they are experienced in including Bitcoin into a super fund you can of course use them.

According to a discussion with the Australian Tax Office recently noted on whirlpool.

"...The SISA and SISR do not prescribe what a fund can and cannot invest in, however there are restrictions. The restrictions aim to ensure that fund assets are not overly exposed to undue risk and aim to ensure that funds make investment decisions with the primary purpose of generating retirement benefits for members, rather than providing current day support. Therefore, there is nothing in the law which explicitly prohibits an SMSF investing in crypto-currencies if the investment complies with all other requirements under the law. Investment restrictions Trustees must ensure a proposed investment is allowed by the fund's trust deed and is in line with the fund's investment strategy does not result in the fund borrowing money for the investment unless the borrowing satisfies the limited exceptions specified in the SISA; complies with restrictions on giving a charge over fund assets; complies with restrictions on acquiring assets from related parties; complies with the investment rules relating to collectables and personal use assets; does not cause the in-house asset limit to be exceeded; and is made and maintained on an arm's length basis. Trustee covenants and investments Section 52B of the SISA provides that certain covenants are to be included, or taken to be included, in an SMSF's governing rules.

Included in the investment covenants is the requirement for trustees to prepare and implement an investment strategy, and to regularly review it. SISR regulation 4.09 further states that the trustee of a regulated superannuation fund must formulate and give effect to an investment strategy that has regard to all the circumstances of the entity. As a result, the SIS legislation requires that the strategy must reflect the purpose and circumstances of the fund and consider: the liquidity of investments and the cash flow requirements of the fund; the risk involved in investments; how best to maximise member returns; the composition of the investments, including whether there is adequate diversification; the ability of the fund to pay benefits as members retire and pay other costs incurred by the fund; and the needs of members (for example, age, income level, employment pattern and retirement needs) It is important that the trustees of a SMSF consider the risk of the investment and ensure investment decisions are made in accordance with the fund's documented investment strategy. Paragraph 52B(2)(b) of the SISA requires a trustee to exercise, in relation to all matters affecting the entity, 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. A useful test to apply is whether a prudent person, acting with due regard to his or her own commercial interests would make such an investment. Further, paragraph 52B(2)© requires trustees to perform their duties and exercise their powers in the best interests of the beneficiaries. These covenant should be considered by trustees when actioning the fund's investment strategy. Trustees must also ensure that the fund'[s ownership of its assets (or investments) is secure, under regulation 4.09A of the SISR. It follows that to comply with this covenant, assets of the fund need to be recorded in a way that clearly distinguishes them from the trustees personal or business assets, and evidences the fund's legal ownership. Sole purpose test and investments. The fund's trustees must also comply with the requirements of the sole purpose test specified in section 62 of the SISA. The sole purpose test requires that the fund is maintained solely for one or more core purposes or one or more core purposes and one or more ancillary purposes. Core purposes generally relate to the provision of benefits for members on retirement, reaching a certain age, or to the member's beneficiaries on death of the member. Ancillary purposes generally refer to the provision of benefits on termination of a member's employment and other death benefits to beneficiaries, not covered by the core purposes.

Any trustee who maintains an SMSF for any other purpose contravenes section 62 of the SISA. Purchasing crypto-currencies Taxation Determination TD 2014/26 Income tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? (TD 2014/26) provides the Commissioner’s view that bitcoin is a capital gains tax (CGT) asset. It does not meet the definition of money or currency. This determination applies to all crypto-currencies which have the same characteristics as bitcoin. As a result, crypto-currencies cannot be acquired from a related party, as per section 66 of the SISA. Trading crypto-currencies Section 70-10(2) of the Income Tax Assessment Act 1997 excludes assets such as shares, units in a unit trust and land held by a superannuation fund from being trading stock. This means that any income and losses resulting from the trading of such assets is accounted for on the capital account, rather than on the revenue account. This exclusion is likely to apply to trading in crypto-currencies, as crypto-currency trading is comparable to share trading. Therefore, if an SMSF is trading crypto-currencies, it will need to report any income or losses as capital gains and capital losses. If you would like a binding decision on whether or not crypto-currencies can be considered trading stock when held by an SMSF, you can apply for a private ruling on the matter. More information in relation to applying for a private ruling is available on our website by entering into the search bar. Yours sincerely, James O'Halloran Deputy Commissioner of Taxation"

A bit of a mouthful but important to know. You can set up an SMSF using an accountant of your choice near you. Squirrel Super are an accountancy team who have demonstrated the ability to understand and audit cryptocurrency investments. Look for this skill set in the accountant of your choice. Once your SMSF is setup you will get a bank account for it to which you will transfer funds from your existing industry superannuation account. The Bitcoins you keep in your SMSF should be kept separate from your usual wallet and, needless to say, it should be a hard wallet such as a Trezor and not kept on an exchange. Remember this wallet will be subject to annual audits as part of the administration of the fund. You will need to open a bank account specifically for the fund and an account at a reputable cryptocurrency exchange in the name of the super fund if possible. If you have occasion to sell any of the Bitcoins through the account at the exchange ensure that the funds go back into the bank account attached to the super fund. It should be possible to do a paper trail and audit of any funds entering or leaving the fund. Records need to be kept for tax purposes also. Any profit or loss should be recorded even with Bitcoin buys and sells.

If there is a fork and you accumulate some coins or fractions of a coin of that fork as a result that should be recorded also.

Of course you cannot spend any of your Bitcoins in the superfund for personal use until you are of retirement age or meet the criteria of the superfund. There are very specific laws which your accountant will advise you regarding the use and distribution of Super funds regardless of their form.

Some information about the audit trail with regard to Bitcoin is advisable here. The audit trail includes all transactions performed in and with the SMSF account. This would include any wallets, records of asset ownership, currencies, bank accounts and any transaction between any of the above. An audit of ther wallets would mean checking the block chain to establish the actual transaction (blockchain.info). One would need the account public keys to locate each transaction in and out of the wallet to and from the exchange. The blockchain will not advise the actual ownership of the bitcoins being transacted. This can only be ascertained by comparing the public keys in the blockchain to the public keys in the wallet and exchange. This especially applies where an exchange will not register an account to a trust or superfund directly and will only accept an individual as an account holder. In addition your hard wallet (The Trezor is recommended for this activity) can print out a list of transactions which can be tracked in the blockchain.

With trust deeds a check should be made to ensure that cryptocurrencies are included or at least not specifically ruled out. Older deeds will have no provision for Bitcoin so it is unlikely Bitcoin would be accepted. More recent deeds however, may have or could have incorporated into them clauses relating to Bitcoin or at least a wider scope to ‘invest’ or include whatever the member feels appropriate. The trust deed needs to be thoroughly checked before being agreed to and initiated.

It should be noted that an SMSF is not allowed to purchase cryptocurrency from its members.

At the end of the year any cryptocurrencies in the fund will need to be valued at their market value. The trustee will need to obtain clear records of the holdings and value. The more transactions that occurred with the fund the more records there will be and this might include currency fluctuations (cryptocurrencies tend to be more volatile than fiat currencies) and changes to and from Australian Dollars. It can get quite complex if one is trading in crypto on a regular basis and the cost of the audits and accountancy fees should be taken into account in relation to any profit obtained or loss made.

Possible the big advantage to using a SMSF rather than buying and selling Bitcoin directly or personally is the tax advantage. Superannuation is concessionally taxed which means the tax paid is usually lower than personal tax.

What is the cost of a SMSF? The costs associated with setting up and administrating a SMSF can be quite considerable. Especially, as has been pointed out, there is a lot of activity involved on a regular basis. To make it worthwhile the superfund should be quite substantial, at least 200,000 dollars and the more the merrier of course.

It is a good idea to have a spread of assets in a super fund. Not just all one type of asset. Some possibilities are:

A spread of the major cryptocurrencies such as bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin for example
Stocks and Shares (a mix of blue chip and adventurous)
A quantity of precious metals, such as gold and silver 
Property or a property investment of some sort
Mutual Funds

Having a superfund is important as there is no guarantee the government will continue to supply a pension and if they do it will likely continue to shrink and one will need to be much older to qualify.

This article is for information purposes only and is not to be construed as financial information for any purposes such as investment or speculation and it is the responsibility of the reader to perform proper due diligence before acting upon any of the information provided. We recommend that you consult with a licensed, qualified investment advisor and certified accountant before making any investment decisions.