Choosing the right superannuation investment strategy is an essential element of long-term financial planning. There are many different types of out of the box super investment funds, such as retail funds, industry funds, public sector funds, and corporate funds — but none of these options allow investors to take personalised control over the investment strategy that will help them accumulate capital essential for a comfortable retirement.
Need help? Speak with Cryptocurrency Superannuation Expert at New Brighton Capital Book a Free 20 min Consultation
A self-managed super fund, or SMSF, however, allows investors to take control over their financial future and drive their own superannuation strategy. Managing your own superannuation fund via a SMSF can be a complicated process, and requires careful planning, research, and due diligence. Self-managed super funds allow investors to select their own investment strategy — an option that has created a new class of SMSF investors that are now investing their superannuation into Bitcoin and cryptocurrencies.
There is doubt the cryptocurrency market has captured the attention of investors around the globe, with Bitcoin skyrocketing in value over 2,000% in 2017. Forward-thinking SMSF investors are now turning to cryptocurrencies in order to create highly robust super funds, a practice that has already been demonstrated to deliver returns of 600% in a short amount of time.
Regulatory changes allow SMSF investors to invest in cryptocurrencies, but there are many regulatory and tax considerations that must be understood before launching into cryptocurrency-driven SMSF.
Crypto Self-Managed Super Fund Basics
A self-managed super fund is a private superannuation fund managed by individuals and regulated by the Australian Taxation Office. SMSFs operate as legal tax structures with the sole purpose of providing investors with funds for retirement, and are closely scrutinized by regulatory bodies.
Individuals operating self-managed super funds must possess sufficient financial experience and skills to make sound investment decisions, and must demonstrate that they are able to budget for expenses such as professional accounting, tax, audit, legal and financial advice. All SMSFs must maintain comprehensive records, as SMSFs are audited on an annual basis by ATO SMSF auditors.
Setting up a self-managed super fund is a lengthy process. Before getting started, investors must decide whether the fund will be structured with up to four individual trustees, or as a corporate trustee, each of which presents different options for membership requirements, costs, ownership of assets, and penalties.
Once the structure of a SMSF is determined, investors must appoint eligible trustees, then create the trust and the trust deed, which must be properly executed according to state or territory laws. The SMSF must then acquire classification as an Australian super fund in order to be a complying super fund and receive tax concessions, after which the SMSF can can be registered and provided with an ABN.
Subsequent to registration, a SMSF can set up a bank account and prepare an exit strategy, at which point the SMSF is considered valid and operational. The entire process of setting up a SMSF can take between 3 and 6 weeks.
SMSF Setup Fees:
- Trust Deed : $150-$500
- SMSF Sole Purpose Trustee Company: $500 – $900
SMSF Recurring Annual Costs:
- Basic Online Accounting Administration and Auditing: $665 – $1660
- ATO Supervisory Levy: $518
- Annual ASIC Corporate Fee: $45
SMSF Minimum Investment:
The average operational cost of a SMSF is $1878. Given the average annual SMSF positive return on assets of 2.9%, a self-managed super fund would need to start out with $65,000 just to break even. In order to reach average positive return rates, it’s essential that SMSFs launch with a minimum of $130,000. Cryptocurrency-driven SMSFs, however, have been demonstrated to deliver positive return rates hundreds of times higher than traditional asset driven SMSFs.
Note that it’s not mandatory to operate a single superannuation fund — it’s possible to operate both a SMSF and another larger super fund such as an industry fund or retail super fund.
SMSFs and Cryptocurrency
It’s completely legal to invest in cryptocurrencies via a SMSF — The Australian Taxation Office provides very clear guidelines on what can and can’t be done when investing in cryptocurrencies via a SMSF. Taxation determinations issued by the ATO in 2014 clarified that Bitcoin and cryptocurrencies like Bitcoin are not money but are capital gains tax assets, making it possible for SMSFs to acquire, dispose of or invest in these as they would in any other asset.
There are a number of key requirements that must be adhered to when investing in cryptocurrencies via an SMSF:
- Cryptocurrency investments must be allowed for under the fund’s trust deed
- Cryptocurrency investments must be performed in accordance with the fund’s investment strategy
- Cryptocurrency investments must comply with Superannuation Industry (Superannuation) Act 1993 regulatory requirements concerning investment restrictions
When establishing a SMSF, investors must provide a breakdown of the fund’s investment strategy in the >application of regulation. This strategy must outline:
- The risks involved in making, holding and realising, and the likely return form investments, outlining objectives and expected cash flow requirements
- The composition of the fund’s investments as a whole
- Investment liquidity
Storing SMSF Cryptocurrency Investments
SMSF cryptocurrency investments must be clearly separated from the personal assets held by fund members — the ATO is surprisingly clear on the manner in which cryptocurrencies must be held, stating that 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.
At a fundamental level, this means the cryptocurrency assets can be held by an SMSF in a simple hardware wallet such as the Ledger Nano S or Trezor, provided the wallet is wholly separate from the personal assets of trustees and fund members.
The valuation of SMSF cryptocurrency assets must be provided in AUD, in accordance with ATO valuation guidelines. ATO guidelines on cryptocurrency valuations state that valuation must be performed with the closing value of cryptocurrencies published on the “website of a cryptocurrency exchange that reports on historical cryptocurrency values”.
Purchasing Cryptocurrency via SMSFs
It’s important to note that ATO related-party transaction rules for SMSF cryptocurrency assets don’t allow SMSF trustees and members to make direct, in specie contributions or other transfers of cryptocurrency to the cryptocurrency wallets operated by the fund.
Cryptocurrency must be purchased by the fund with fiat capital contributed via approved methods, such as direct cash contributions to the SMSF bank account or Salary Sacrifice Contributions.
Cryptoassets obtained by SMSFs must be purchased via an exchange that identifies the SMSF trustee as the owner of the account. Linking the correct SMSF bank account to the coin exchange account is essential in determining provenance of cryptocurrency capital.
Other practices, such as using an email address specific to the SMFS for exchange registration, Completing a declaration of trust or other declaration accepted by the auditor of the SMSF that confirms the cryptoassets are held by the trustee for the fund, and notifying the crypto currency exchange that the account is being operated on behalf of a SMSF helps SMSFs remain compliant with the SIS Act and regulations.
Cashing out: Pension or Benefit Payments
When SMSF trustees or members satisfy conditions of release, an SMSF is able to make in specie lump sum payments via cryptocurrency transfers. Pension payments issued by the SMSF must be made in fiat currency.
SMSF Cryptocurrency Investments and Tax
Cryptocurrencies held by SMSFs are taxed on a capital account, which means there is no capital gain or loss when cryptocurrency assets are sold. Trading fees and commissions associated with the trade of cryptocurrencies by the SMSF are considered by the ATO to form part of the cost-base of the asset, and therefore cannot be claimed as a tax deduction.
SMSF cryptocurrency investment is wholly legal and can dramatically increase superannuation holdings in a short amount of time. Investing in cryptocurrencies via an SMSF, however, occurs at a point of intersection between the complex regulatory frameworks that govern superannuation investment and cryptocurrency regulation.
In order to ensure you’re establishing your crypto-SMSF in a compliant, effective manner, it’s best to engage the services of a financial professional, as any investment related to an SMSF is considered financial product advice.
Also see our Top 10 Bitcoin Superannuation Options in Australia.