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Is bitcoin leading SMSFs into a compliance trap?

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.

Is bitcoin leading SMSFs into a compliance trap?
Is bitcoin leading SMSFs into a compliance trap?
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