In an online statement, the tax office stressed that where an SMSF transacts in cryptocurrencies, precise record-keeping will be crucial to the audit and compliance process in what is a relatively new investment type for superannuation.
“SMSFs involved in acquiring or disposing of cryptocurrency must keep records in relation to their cryptocurrency transactions. There are also super regulatory considerations for SMSF trustees, members and SMSF auditors,” the ATO said.
The ATO also reminded SMSF professionals that an SMSF is unlikely to meet the sole-purpose test if trustees or members, directly or indirectly, obtain a financial benefit when making investment decisions and arrangements.
This is a common outcome of cryptocurrency investments, and should not occur within a superannuation environment.
“For example, it may be a breach of the sole-purpose test where affiliate fees or commissions associated with the fund’s cryptocurrency investment are paid to a trustee or member personally,” the ATO said.
Pension or benefit payments
The ATO also confirmed that where a trustee or member satisfies a condition of release, the SMSF can make an in specie lump sum payment by way of transfer of cryptocurrency. However, pension payments must be made in cash.
“Trustees and members will need to consider the fund’s trust deed and any CGT implications associated with the transfer of assets such as cryptocurrency,” it said.
The ATO also noted that cryptocurrencies such as bitcoin are not listed securities and therefore cannot be acquired from a related party.
“It follows that SMSF trustees and members – being related parties of the fund – cannot make in specie contributions or other transfers of cryptocurrency to the fund,” it said.
Investment strategy and trust deed
While SMSFs are not prohibited from investing in cryptocurrencies, the investment must be allowed under the fund’s trust deed, be in accordance with the fund’s investment strategy and comply with SISA and SISR regulatory requirements concerning investment restrictions.
Before investing in cryptocurrency, the ATO said SMSF trustees and members should carefully consider the level of risk of the investment and review their fund’s investment strategy to ensure the investment being considered is permitted.
“Trustees and members also need to ensure that investments in cryptocurrency are allowed under the SMSF’s deed,” the update said.
Ownership and separation of assets
Cryptocurrency investments in an SMSF must also be held and managed separately from the personal or business investments of trustees and members, the ATO added.
“This includes ensuring the SMSF has clear ownership of the cryptocurrency. This means 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,” said the ATO.
When it comes to valuations, the tax office said SMSFs must ensure their investments in cryptocurrency are strictly valued in accordance with standard 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,” it 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.”
Tax time 2018
The ATO has now issued several public reminders to taxpayers and professional advisers about cryptocurrency compliance in the lead-up to end of financial year.
Most recently, the tax office “strongly” encouraged taxpayers to review its current guidance, as confusion about the tax treatment of cryptocurrency is unlikely to be a suitable defence for non-compliance.
“Where people attempt to deliberately avoid these obligations we will take strong action, in particular using a range of existing powers that are designed to address unexplained wealth and conspicuous consumption that may arise through profits derived from cryptocurrency investment,” an ATO spokesperson told Accountants Daily late last month.
The ATO will be using its existing and standard processes to address unexplained wealth and “conspicuous consumption” that may arise through profits derived from cryptocurrency investment.
Importantly, clients should note that cryptocurrencies with characteristics similar to bitcoin are an asset for capital gains tax (CGT) purposes, as per the ATO’s update last year.