Speaking at a recent event, HLB Mann Judd director, superannuation, Andrew Yee said that one of the problems with holding cryptocurrency assets in an SMSF is that there are still a lot of SMSF auditors that don’t understand these assets.
“A lot of the auditors don’t understand it, and so they can’t really audit those assets. A lot of them are taking the easy option and saying, ‘well, I don’t know much about it and there’s not enough information about it, so I’m going to qualify the audit report’,” explained Mr Yee.
“That’s another factor that’s preventing SMSFs from investing in it — the auditors don’t want to deal with it.”
ATO statistics from December 2021 estimate that cryptocurrency assets only account for $227 million out of the total $876.7 billion in SMSF assets.
Speaking at the same event, HLB Mann Judd partner, wealth management, Jonathan Philpot said any SMSFs considering these types of assets should only invest a small portion of their fund and consider whether it actually meets the investment strategy of the fund and the needs of members.
Mr Philpot said cryptocurrency is still a relatively new asset class and is unlikely to be appropriate for someone in retirement given there is no income produced from these sorts of holdings.
“It’s a bit like a currency or gold perhaps where it could serve a role as a defensive asset, but at the moment, it seems to be very closely correlated with equity markets.
“It’s likely to become a much bigger part of the mainstream. I don’t think it will ever be a core part of investment portfolios, but whether it plays some sort of part in a portfolio, time will tell.”
ASF Audits head of education Shelley Banton previously outlined that SMSFs investing in bitcoin or cryptocurrency assets need to be careful of related-party transactions occurring and ensure proper records are kept.
One of the biggest headaches that can occur with these assets is when an SMSF trustee dies, she stated.
“Typically, the private key and password to access the wallet are known and stored by the user who set it up. Documenting and sharing this information is critical; otherwise, in the event of death, the bitcoin will be lost because the wallet can’t be accessed,” she noted.
“To this extent, ensuring that the bitcoin wallet details are documented and stored securely should be considered BTC insurance.”
Where the BTC is a material asset, the fund should document the fact that precautions have been put in place to securely pass on the BTC wallet details to other trustee/s or beneficiaries in the event of death.
“If no such documentation exists, the SMSF auditor may consider qualifying part A of the audit report as fund assets are at risk,” she warned.
The high likelihood of a “subsequent event” occurring for better or worse between 30 June and the date of report preparation makes for a qualification. With wild fluctuations crypto is unlike any other asset.
Equally important, and possible more important, is whether the trustee understands the investment. The investment must be adequately documented as an asset of the SMSF, as they are often held in an individual’s name. In addition, the fund’s investment strategy must adequately explain why the trustees have chosen this asset class. I also believe the strategy must adequately state how the fund can retrieve value upon the death of a member. A strategy is a plan of action for the future. One recurring failure of investment strategies is that they do not provide a plan of action needed for the death of a member, in relation to fund investments.
Excellent article. Now can someone please recommend a smsf auditor who can audit my smart contract UNFI with unclaimed staking rewards on the Venus Protocol? Asking for a friend who doesn’t understand.