There is a new buzzword going around – its “BITCOIN”! We have heard about it for years but really didn’t know enough about it. Well, Bitcoin now has peoples attention. The rising value of bitcoin has been a topic of discussion for years – however now, more than ever it is bring used as a SMSF Strategy. Lets explore bitcoin a little further including how bitcoin can be used as an effective SMSF Strategy to build your retirement nest egg.
What is Bitcoin?
Bitcoin is a type of digital cryptocurrency. Sounds cool right? There are others out there termed as “altcoins” such as Litecoin. The main feature of cryptocurrencies or Bitcoin in particular is that they operate on a decentralised peer-to-peer network – with no central authority or government regulation. Transfers can be made with no bank – just a program on a computer. To me, this has been the greatest curiosity and hold-back of many people investing in Bitcoin, it’s not known, tried, tested or trusted. However with the rising value of Bitcoin over the last few years – many are now ready to take the bait and invest in Bitcoin.
Can an SMSF invest in Bitcoin?
The legal status of bitcoins as an investment by regulated investors including self-managed superannuation funds (SMSFs) remains unclear.
Although there are not yet any formal rulings or publications from the ATO clarifying how the rules apply to Bitcoin, there are many issues that would arise for any SMSF considering investing in bitcoins.
Who owns the asset?
How are your holdings stored?
Does your trust deed allow bitcoin investing?
Is your investment strategy up to date?
The compliance and reporting requirements under the SIS Act for SMSF investors in Bitcoin include adherence to:
The ‘sole purpose test’ under the SIS Act
SMSF investment strategy covering off on the investment decision to invest in Bitcoins
SMSF deed restrictions on what types of investments an SMSF may hold and annual valuation requirements of assets in SMSFs at market value
An SMSF may be able to buy Bitcoins if all of these criteria are met by the Bitcoin Trader and its SMSF clients. This is subject to the SMSF trustees reviewing their SMSF deeds to ensure there are no restrictions on the fund in relation to investing in crypto-currencies.
How to buy Bitcoin
Buying Bitcoin is different to opening a bank account with your local bank or a trading account and there is no “branch” to assist you. Here are some steps to assist:
Sign up for a Bitcoin wallet
Use regular currency to buy bitcoin
Once you have a wallet, you can use a traditional payment methods such as your funds in your SMSF bank account to buy bitcoin. The Bitcoins are then transferred to your wallet.
Remember that the Bitcoin wallet is not for storage, they are not stored anywhere which has been part of the puzzle of bitcoin. Bitcoin balances are kept using public and private keys. If signing up with an exchange, please complete your due diligence and ensure that the account is opened in the correct name and understand the reporting to be provided at year end or regular intervals. Consult with your accountant to ensure that the reports required will be provided by the exchange.
Sole Purpose Test
SMSFs are required to operate for the sole purpose of providing retirement benefits for their members. This means that the SMSF fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement. Your fund fails the sole purpose test if it provides a pre-retirement benefit to someone – for example, personal use of a fund asset.
This requirement may be able to be addressed by carefully identifying the SMSF’s bitcoins as being held at a public address, stored in a secure manner. Regular movement between different public addresses could cause difficulties because it would need to be shown that each of these public addresses is controlled by the trustee, and not the members. An issue may occur when the auditor attempts to verify the existence of the bitcoin, for example, if an SMSF invests in Gold, the auditor can attend a vault to physically sight the gold however in relation to bitcoin, it is impossible to verify the existence of Bitcoin.
SMSF’s Investment Strategy
Investment strategy sets out your fund’s investment objectives and specifies the types of investments your fund can make in the SMSF, which is followed and regularly reviewed by the trustee. The Investment Strategy as well as the Trust Deed are the key instruments to indicate the “powers” of the SMSF. The investment Strategy should specifically include bitcoin as an asset class the fund is investing in.
Investing in bitcoins does not yield any income return, its only potential value as an investment is in capital growth. As can be seen recently, Bitcoin is a volatile asset which regular fluctuations in value. If an SMSF intended to actively trade bitcoins, rather having a buy-and-hold strategy, it would need to be carefully considered in the context of the investment strategy. SMSFs are prohibited from carrying on a business, which could include a bitcoin trading business, or a bitcoin mining business. Bitcoin mining activities are likely to be more difficult to reconcile with the SMSF’s investment strategy.
Bitcoins are stored in wallets, but unlike a bank account, these “wallets” don’t store the bitcoins themselves. Despite many different implementations and formats, generally wallets will contain a public key that is used to receive bitcoins (like a bank account number). It also contains a private key that is used to verify that you are indeed the owner of the bitcoins you’re trying to spend.
The bitcoin protocol itself may be secure enough but this does not extend to all the sites and services that deal in bitcoin.
Acquire the bitcoins with SMSF Loan
As an SMSF Broker, I am not aware of any lender that will allow you to borrowing to acquire Bitcoins, I don’t see that changing any time soon.
It would be hard to set up the required limited recourse arrangements if an SMSF wanted to borrow money to acquire bitcoins. Borrowing would also increase the already dicey nature of an investment in bitcoins, making it harder for the SMSF to prove that it is an appropriate investment. Therefore, the strategy would be for the SMSF to acquire bitcoins through a third-party exchange using its existing cash reserves.
Everyone with a superannuation asset needs to annually verify its presence by external audit.
An SMSF trustee which has invested in bitcoins will need to be able to prove to the SMSF auditor that:
SMSF’s trust deed and the investment strategy allows for Bitcoin or other online/virtual/crypto currency can be held as an investment;
SMSF, as the holder of Bitcoin obtains their own Bitcoin address
the Bitcoin history appears with time stamps, so that Bitcoin transactions are readily identifiable.
As a practical issue, as detailed above, it may be difficult to prove these matters to an SMSF auditor, especially if the auditor does not have experience with Bitcoin.What does the ATO think about Bitcoin in an SMSF?
The ATO has issued TD 2014/26 which states that Bitcoin is a CGT assets for the purposes of s108-5(1) of the ITAA 1997, meaning that the disposal of Bitcoins gives rise to a CGT event, however there is still some clarity required over the ruling particularly if the ATO view Bitcoin as a personal use asset and whether one is carrying on a business investing in Bitcoin in an SMSF.Our View
You need to be ultra-cautious about dipping your toes into the bitcoin market to collect better returns as part of your super. However, if you do trade Bitcoin in your SMSF, at the least, you will need to make sure you open a trading account in the SMSF’s name, amend the SMSF’s trust deed to allow investment in bitcoins and create a sound SMSF’s investment strategy. Further, complete due diligence on the exchange you are using and understand the reports they are providing.Please note this article is for information purposes only and does not constitute financial product or legal advice. The content has been prepared without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. Read our Disclosures here.
Ivan Filipovic is authorised through Dover Financial Advisers Pty Ltd – Australian Financial Services Licensee -License No. 30748 – Dover Authorised Representative Number 1244358. Redwood Wealth Pty Ltd – Dover Corporate Authorised Representative Number 1244359
Ivan Filipovic is a leading Specialist Superannuation and Property Advisor with Redwood. Ivan has almost 20 years experience providing a range of services across all sectors of Self Managed Superannuation, Property and Finance with an emphasis on long term wealth strategies. Ivan has been educating and coaching investors and has built a successful property portfolio with a number of positive geared properties across Australia. Ivan provides detailed strategies at https://redwoodadvisory.com.au/. Ivan is a Chartered Accountant, ASIC registered auditor, Mortgage Broker and Licensed Property Professional.