Mar 16, 2023 / News

Superannuation

Crypto Assets in Super Funds

SMSF trustees may be attracted to the idea of including crypto assets in their funds’ investment portfolios. There are a number of critical issues to be aware of.

In the Australian tax and super context, the term “cryptocurrency” is misleading, and a better term would be “crypto assets” or just “crypto”. In view of some uncertainty and the action of the government of El Salvador in adopting Bitcoin as legal tender, legislation will be introduced into Federal Parliament to make it clear that crypto assets are not foreign currency under Australian tax law, but will be treated as capital gains tax assets.

One of the purported benefits of crypto is the ability to hold and trade them without an intermediary such as a bank, enabling transactions to be undertaken without government supervision. However, this has in practice created a major problem for investors. In reality, most investors hold crypto through an internet trading platform, because of the security concerns and inconvenience of personally holding crypto in a hardware device. To date these trading platforms have remained unregulated by governments, which has exposed investors to the risk of fraud and loss inside the platforms themselves. Clients might remember the collapse of crypto exchange FTX in November 2022 following concerns about its solvency and allegations that investors’ funds had been advanced to a related trading firm. 

Governments around the world are considering whether and how to bring crypto platforms under some form of regulation to protect investors, but it is essential that SMSF trustees understand the nature of crypto assets and the risks involved in investing in them before placing members’ balances in these assets.

Apart from these concerns, any SMSF investment in crypto must fit within the superannuation rules to ensure the fund remains complying. The list below is adapted from a Crypto Fact Sheet prepared by ASF Audits, one of the specialist SMSF auditors Nexia uses for our client funds.

Fund trust deed

The investment in crypto must be allowed by the fund’s trust deed.

Fund investment strategy

The fund’s investment strategy must include investment in crypto and must explain how the investment meets the fund’s objectives. 

Ownership of the investment

The crypto should be held in the name of the trustee(s) as trustee for the fund, not in one or more trustees’ personal names. This requirement will exclude platforms in countries where the legal system does not understand the concept of a trust.
Trustees should closely examine the terms under which the platform operates. Some platforms give investors a contractual right rather than actual ownership of the crypto.  

Acquisition of crypto

If a member pays for the crypto and it is registered in the fund’s name, this will be treated as a contribution. The contribution caps will need to be considered.
Acquisition of crypto by the fund from a related party will be a compliance breach. 

Charge over the assets of the fund

An exchange may offer facilities to trade in crypto derivatives by placing a charge over the fund’s crypto investment. Funds are not permitted to give a charge over assets in this situation.

Restrictions on payment

Pension payments must be made in cash and cannot be made in crypto, as it is not regarded as currency.

Investments must be made on arm’s length basis

A member should not receive commission, fee rebate, stakeholder rewards or other benefit in their personal account from a fund purchase of crypto.

No lending to members of relatives

The fund should not transfer crypto to a member or relative of a member.

Borrowing prohibited

Crypto held by a fund cannot be used as collateral to borrow money or buy more crypto. Further, the fund auditor will need to see evidence of all crypto transactions undertaken during the year to be satisfied that the investment was used exclusively by the fund.

Please contact your trusted Nexia Edwards Marshall advisor if you would like further information on the use of crypto in superannuation.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.