Unlike traditional superannuation funds, self-managed super funds (SMSFs) provide trustees with more autonomy over asset choice, and therefore diversify their portfolios.
SMSF trustees typically invest in trusts, shares, cash and term deposits, managed funds, and local and overseas properties, provided they comply with the SMSF investment strategy, trust deed, sole purpose test, and other legal requirements.
See Also: Investing in Overseas Property With Your SMSF
This enables SMSFs to seek a balance between high-growth and conservative assets to suit their retirement strategy and risk tolerance. Essentially, the core aim is to grow the fund's value to provide members with sufficient income during retirement. As such, diversifying their portfolio with carefully selected assets is crucial.
In recent years, cryptocurrency has become an alternative investment option for many SMSFs seeking to diversify their portfolios. If you're thinking of doing the same for your Fund, it's recommended that you consult a financial adviser or accountant before making any decision.
Popularity of Cryptocurrency Among SMSFs
The rapid appreciation of cryptocurrencies, particularly Bitcoin, since 2017 has generated significant interest among investors looking for high-growth opportunities, SMSFs included. Despite their highly volatile nature, many SMSF trustees, particularly younger ones, saw these virtual currencies as a way to diversify and potentially achieve higher returns than traditional asset classes.
Data from the Australian Tax Office (ATO) shows that $200 million of SMSF funds were allocated to cryptocurrency in the June quarter 2019 when it was first introduced in the annual return of SMSFs.
Crypto investments gained steady attention among SMSFs in the years that followed until it rose exponentially in June quarter 2021 when funds held in this asset reached a high of $1.64 billion (over a 700% increase in two years). It has since settled back to $1.57 billion as of June 2024.
What's fuelled this rise? Aside from high risk, high reward gains attracting SMSF investors, the release of clearer guidelines further propelled cryptocurrency popularity among SMSF trustees.
According to the ATO, cryptocurrencies are not a form of money but rather:
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Classified as capital gains assets (like a property), and are subject to capital gains tax (CGT) when sold for a profit;
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Encompass a subset of digital assets that also includes investment tokens, game tokens, and non-fungible tokens (NFTs).
Since then, cryptocurrency has maintained a small, but steady and growing position among Aussie SMSFs. If you're interested in diversifying into this asset class using superannuation funds, these are a few things you must know about.
Legal and Compliance Considerations
As with other types of assets, SMSFs must meet all legal and compliance obligations when investing in cryptocurrency.
The overarching rule - the sole purpose test - for an SMSF is that investments must be made in the interest of providing retirement benefits for its members. As a trustee, you'll want to make sure crypto can provide long term gains for the future, rather than be lured in by short-term booms (and busts).
Failure to invest in the best interests of your members could result in penalties, particularly if you unwind the SMSF and your crypto allocation has experienced a huge loss.
Verify assets allowed for the Fund
Like investing in other asset classes, cryptocurrency must be allowed under the Fund's trust deed and well-documented in its investment strategy. This ensures compliance with the Superannuation Industry (Supervision) Act 1993 (SISA) and Superannuation Industry Supervision Regulations (SISR).
Maintain SMSF ownership of assets
An SMSF's crypto assets must be separate from personal holdings to ensure compliance with the separation of assets rule. This means the fund must have a separate crypto wallet for the SMSF from those used personally by trustees and members. Additionally, there must be clear evidence that the SMSF has sole ownership of the assets.
Ensure compliance with the Sole Purpose Test
Any cryptocurrency held by the Fund must be intended solely to build retirement wealth for the members. It should not be used to pay for goods or services or spent in other personal transactions.
Conduct audits and valuation
Trustees must ensure their crypto investments are valued following ATO valuation guidelines for SMSFs for accurate annual reporting. This in itself can be challenging given that cryptocurrency prices are highly volatile.
For accurate valuation, the ATO recommends a reputable digital currency exchange or website with updated rates to determine the fair market value of the virtual asset in Australian dollars. The value must be reported at its market value as of 30 June, the end of the financial year.
The investment strategy must also be updated annually to take into account any growth or losses in crypto, or the decision to pull out or pile more money into the asset class.
Manage risks
Although not a specific legal requirement, trustees are responsible for ensuring that the level of risk associated with such a highly volatile asset like crypto is aligned with the members' retirement goals and risk tolerance. A Fund that is heavily concentrated in a volatile asset could be deemed impudent and unable to meet its best interest duty.
Keep all important records
Cryptocurrency transactions and holdings must be properly documented and kept for audit requirements. This includes all sales and transfers, with dates included, as well as records from exchanges or wallets showing the crypto holdings and their values at specific points of time.
Advantages of Investing in Cryptocurrency with SMSF
Here are the key benefits an SMSF might encounter when including cryptocurrency in their investment strategy.
Portfolio diversification
Unlike traditional investments often influenced by broader market factors (e.g. inflation, interest rates, or company performance), cryptocurrencies operate in a more decentralised and independent market (which can be a risk in itself, more on that below). However, this has changed recently as the crypto market has begun exhibiting a stronger correlation with traditional markets, with its value moving in concert with other assets.
Diversifying into crypto investments can help balance risks if one sector performs poorly. There are also many cryptocurrencies on offer, not just Bitcoin.
Potential for high returns
Crypto has gained significant attention for its potential to generate outsized returns over short periods. Bitcoin, for instance, surged from around AUD $14,000 in early 2020 to a peak of over $105,000 in April 2024. Those who invested earlier witnessed considerable returns on their investment, thus further increasing the appeal of crypto assets in their early stages.
Future-readiness
Blockchain-based financial systems, decentralised finance (DeFi), and digital assets are becoming increasingly integrated into the global financial system. By investing in cryptocurrencies, trustees can ensure their SMSF remains relevant and responsive to future technological shifts.
Risks of Investing in Cryptocurrency
High rewards mean high risk, that's the reality of investing. However, cryptocurrency carries, not just significant risks, but also a unique set of challenges that trustees must carefully understand and manage.
High volatility
Cryptocurrencies, including the major ones, can experience dramatic price swings in short periods. Large, unexpected losses can severely impact the value of the SMSF's portfolio or jeopardise the fund's ability to meet its retirement objectives, especially if a significant portion is allocated to this asset.
Regulatory uncertainty
Crypto regulation is still evolving in Australia and around the world. Despite the ATO clarifying tax guidelines, other aspects of cryptocurrency regulation such as anti-money laundering laws (AML) and know-your-customer (KYC) requirements are still catching up. There is also uncertainty regarding how future regulations might affect crypto markets.
This evolving regulatory framework poses a compliance risk for SMSF trustees, who must stay updated on both current and potential future regulations to ensure their holdings remain compliant and prevent fines or disqualification.
Security risks
Since cryptocurrencies are held in decentralised systems, they are not regulated or protected by a central authority, which makes them particularly vulnerable to theft and hacking. Unfortunately, if an SMSF's crypto holdings are stored on an exchange that gets hacked, it is nearly impossible to recover the stolen funds.
Liquidity issues
In some cases, SMSF trustees may find it difficult to sell their crypto assets quickly, especially if there is a sharp decline in the market or if regulatory changes disrupt trading on exchanges. This may leave the SMSF unable to meet superannuation obligations such as paying out pensions, or, just as bad, be unable to liquidate their position without taking significant losses.
How to Safeguard SMSF Crypto Investments
Here are a few measures SMSF trustees can take to safeguard their investments when investing in a notoriously volatile and non-traditional asset like cryptocurrency.
Choose reputable exchanges
Reputable exchanges offer stronger protections against fraud and hacking, which is vital in the volatile and unregulated cryptocurrency landscape. Cryptocurrency exchanges registered with AUSTRAC, such as CoinSpot and BTC Markets, are required to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations, providing a relatively safer environment for crypto trading.
Utilise safe storage solutions
One of the ways to protect funds held in crypto is by using cold storage solutions. Cold storage refers to keeping crypto offline, typically in hardware wallets or other offline devices to help significantly reduce the risk of hacking as it is inaccessible to online attackers.
When using a software-based wallet, on the other hand, it's highly recommended to use a multi-signature (multi-sig) setup that requires multiple private keys to authorise a transaction. This can be ideal for shared control, as in the case of SMSFs, to ensure no single trustee can move funds without consensus.
Photo by Drazen Zigic on Freepik
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