Self Managed Super Fund SMSF Bitcoin
You might have heard about bitcoin. It’s a phenomenon that’s been in the news a lot lately. People are even talking about it at barbecues. But is it an investment that you should be considering for your self managed super fund SMSF?
In this article, we’ll explain:
- What bitcoin is.
- How bitcoin works.
- The value of bitcoin.
- How your SMSF can buy and sell bitcoins and comply with legislation.
- The tax implications for bitcoins in the self-managed super fund environment.
- The potential risks of SMSF investments in bitcoin.
- Current Australian government policy on bitcoin.
What is bitcoin?
Bitcoin is a digital currency (known as a cryptocurrency). It doesn’t exist in physical form as coins or notes, it is purely electronic. It can be used as a medium of exchange if a buyer has the currency and a seller is prepared to accept it as an online payment for a transaction.
It’s a peer-to-peer transaction system that doesn’t involve financial institutions. All transactions are time-stamped. Payment is made and received via digital wallets. These digital wallets typically have both a public key and a private password or PIN number.
The public key is like a bank account number. It is used for people to deposit bitcoins into your digital wallet. Your password or PIN number is used to access the digital wallet and the SMSF trustees should not disclose it to anyone.
A cryptocurrency like bitcoin uses cryptography (code) to:
- Maximise the security of its digital (online) transactions.
- Control the creation of additional units of the currency.
- Verify the transfer of the currency.
Bitcoin was created in 2009 by an unknown individual or entity known as Satoshi Nakamoto. It is open-source software with no central authority. It was the world’s first decentralized cryptocurrency.
There are now more than 100 cryptocurrencies, but Bitoin is currently the most valuable.
However, there has been much debate about whether cryptocurrencies like bitcoin are here to stay or not, and whether it will lose its value. This is crucial consideration for any self-managed super fund investment decision.
How does bitcoin work?
A cryptocurrency transaction is recorded in a file called a block. These transactions are organized into a linear sequence (called a block chain) over time.
This blockchain ensures that the currency cannot be spent more than once by the same user. This avoids potential digital currency problems like fraud and duplication.
Bitcoins are registered to online addresses in the blockchain. New blocks are added to the end of the chain via new transactions. A transaction can never be changed or removed from the block once it has been made.
When a block is added to the chain, currently 12.5 new bitcoins units are added to the currency’s network. This increases the supply of the currency to keep up with the increasing demand for it as the network attracts more users.
The number of new bitcoins produced per new block is set to progressively decrease over time until a maximum of 21 million units are in circulation. This is done via an algorithm that is pre-set to determine the volume and rate of the currency that will be created over time.
What is the value of bitcoin?
Like any currency, bitcoin only has value if enough people recognise it as a valid means of payment or exchange for goods and services. And like any currency, its value can rise or fall over time as people speculate on its value.
This increase has been helped by the fact that more Australian and international companies are now accepting it as a form of payment.
It is a liquid investment, meaning it can be easily converted to traditional currencies. This is an important consideration if members of your self-managed super fund are in or near retirement.
How can I buy and sell bitcoins in my self-managed super fund (SMSF)?
If you want to buy bitcoin as an investment for your self-managed super fund, there are a few things you need to ensure:
1) That the bitcoin (and the accompanying digital wallet) is purchased in the name of your fund.
Under no circumstances should it be purchased in the name of an individual SMSF member. It is a legal requirement for the trustees of self-managed super funds to separate the fund’s assets from its individual members’ personal assets. This will ensure that the bitcoin investment satisfies the sole purpose test of SMSFs (i.e. to provide for their members’ retirement needs).
Failure to satisfy this sole purpose test can lead to severe penalties, including fines and the loss of your self-managed super fund’s tax concessions.
Ideally, your SMSF should have a single digital wallet to make accounting for transactions easier and more transparent. The proceeds of the sale of any bitcoins should be transferred to your self-managed super fund’s bank account and that you declare any profit or loss you have made as part of your fund’s annual reporting.
2) That your SMSF trust deed has no restrictions on investing funds in assets like cryptocurrencies.
3) That the investment complies with your self-managed super fund’s diversified investment strategy.
Because bitcoin and other cryptocurrencies are a very new investment type, it’s likely that your investment strategy would need to be revised to consider this option. This should be done in full consultation with the members of your SMSF, considering their short, medium and long-terms needs as well as their risk profile (e.g. conservative/risk-averse, moderate or aggressive). It’s wise to seek professional advice.
4) That the digital wallet used to store your SMSF bitcoins is secure (and ideally insured).
5) That you make your fund’s auditor aware of the investment at your next audit.
It is a legal requirement for your self-managed super fund to be audited each year. Bitcoin assets are valued at the prevailing market rate at the end of each financial year (i.e. 30 June) during this process.
6) That your SMSF does not acquire bitcoin from one of its members or a related party.
All self-managed super funds must be arm’s length transactions.
You can buy and sell digital currencies like bitcoin via digital wallet services like Coinbase and Xapo. You use traditional currency (e.g. Australian dollars in your SMSF’s bank account) to buy it. You can also sell your bitcoins for other currencies via these digital wallet services (just like you can with Australian dollars or any other currency).
Trading fees are charged by service providers for buying and selling transactions, usually based on the value of the transaction.
It’s important to remember that an SMSF bitcoin investment is just like any other superannuation investment. You won’t be able to access it until your reach your preservation age. Your preservation age depends on your date of birth, as illustrated in the table below:
The most common superannuation condition of release is retirement, provided you have reached your preservation age. This age depends on your date of birth, as outlined in the table below:
|Date of birth||Your preservation age|
|Before 1 July 1960||55|
|From 1 July 1960 until 30 June 1961||56|
|From 1 July 1961 until 30 June 1962||57|
|From 1 July 1962 until 30 June 1963||58|
|From 1 July 1963 until 30 June 1964||59|
|On or after 1 July 1964||60|
What are the tax implications for bitcoin in self-managed super funds (SMSFs)?
The Australian Tax Office (ATO) takes the view that bitcoin transactions are like a barter arrangement and they are taxed accordingly. The ATO confirmed in a recent determination that it doesn’t currently regard it as a form of foreign currency.
No GST is charged on the buying or selling of bitcoin. However, it is regarded as an asset for capital gains tax (CGT) purposes. This ruling was confirmed in a recent ATO determination.
If you sell bitcoins and convert them to Australian dollars, you may be subject to capital gains tax (CGT). This rate is currently 10% for self-managed super funds selling assets that have been held for longer than 12 months.
However, if you are currently in the pension phase, selling bitcoin would not attract CGT under current Australian superannuation laws.
However, as bitcoin and other cryptocurrencies are still relatively new, their tax treatment in relation to self-managed super funds may change over time.
The potential risks of self-managed super fund (SMSF) investments in bitcoin.
Although bitcoin can be used to pay for goods and services if sellers of goods and services are prepared to accept them, it is not legal tender. This means that it does not have the backing of any bank or government, unlike traditional currencies like the Australian dollar, which is backed by the Reserve Bank and the Australian government.
The value of bitcoin can therefore potentially be more volatile. That can be great if the value is rising like it did in 2017, but not great if the value were to fall significantly. Members of your self-managed super fund need to be aware of this risk that bitcoin could fall in value and be prepared to accept that fact.
Investing in bitcoin is not a suitable investment strategy for SMSFs with risk-averse members. You don’t want to gamble your self-managed super retirement nest egg in a speculative investment like bitcoin unless you can afford to take a risk to potentially achieve higher returns as part of a diversified investment portfolio.
Digital currencies like bitcoin can also potentially be stolen from your digital wallet by online hackers, just like traditional currencies can be stolen by thieves. You have little hope of getting your SMSF bitcoin asset back if it is stolen.
You also have little protection against unauthorized or incorrect transactions being made from your digital wallet.
In addition, people trading in bitcoin can also be relatively anonymous. This makes the currency attractive to criminals who may want to use it for money laundering or other illegal activities.
What is the Australian government’s current policy on bitcoin?
The Australian government has recently approved legislation for the use of digital currencies in Australia to be monitored by AUSTRAC (the Australian Transaction Reports and Analysis Centre).
AUSTRAC is a federal government financial intelligence agency. It has the regulatory power to take measures to prevent the abuse of Australia’s financial system (such as money-laundering and tax evasion).
The legislation requires digital currency exchange services to:
- Register with AUSTRAC.
- Identify and verify their customers.
- Keep records of transactions.
- Report transactions over a certain threshold (the equivalent of $A10,000 or more).
- Report any suspicious transactions.
Different countries around the world have taken different views on the legality of conducting transactions using cryptocurrencies like bitcoin. For example, it is either currently banned or discouraged in countries like China, India, Thailand and Vietnam.
How we can help
At the very least, we hope this article has helped you understand some more about bitcoin.
There are multiple factors to consider when deciding whether an SMSF is a good option for you and how to structure it and manage it in the most tax effective way.
Our expert SMSF Accountants would be happy to speak or meet with you to discuss your situation. We’ll take the time to understand your circumstances and provide advice that maximises your financial position.
You can contact us on 1300 883 597. We have offices in Brisbane, Sydney and Melbourne and provide full SMSF services Australia wide via internet, email and phone.