Phil Broderick, principal at Sladen Legal, said the Board of Taxation recently released its report on the taxation of digital assets – Review of the tax treatment of digital assets and transactions in Australia – which included a section on whether crypto assets should receive the “trading stock” exemption.
“Under the trading stock exemption, most CGT assets of super funds, like listed shares and land, are taxed under the capital gains tax (CGT) regime, even if they would otherwise be treated as trading stock,” Broderick said.
“This means the super funds, including SMSF, are eligible for the 33 per cent CGT discount if they have held those assets for 12 months or more.”
A Treasury statement said the report concluded that the taxation of digital assets and transactions can already be accommodated under existing tax law, and any uncertainty can be effectively managed by the ATO, providing additional guidance materials.
In response, the Tax Office agreed to form a bespoke and time-limited crypto working group, which will consult with the industry and tax professionals to develop a package of publicly available crypto tax advice.
The board received numerous submissions to the inquiry, which opened in 2021, including one from the SMSF Association in September 2022.
In its submission, the SMSFA said taxation and digital assets was a complex and rapidly evolving area from both a financial product regulation and taxation perspective, and one of the biggest challenges with cryptocurrencies and digital assets is the lack of regulation.
“This coupled with a rapidly expanding market which encompasses a wide variety of different products and their hybrids, means that there is little basic information available to aid professional advisers and consumers,” it said.
It added that SMSFs are often targeted and given misleading taxation advice, including the promotion of tax exemptions.
Regarding the taxation of certain assets in an SMSF, it said that since 10 May 2011, SMSFs have been prohibited from using the trading stock exception provided by the Income Tax Assessment Act 1997 item 5 of section 295-85(4).
“This item allows for gains and losses on certain assets to be accounted for on revenue account. Item 5 does not apply to ‘covered assets’ as defined in ITAA97 section 70-10(2) and 275-105, which includes shares, units in a unit trust and land (including an interest in land) held by an SMSF,” it said.
“We would welcome these provisions being extended to include a new category for digital assets. Additionally, asset valuation rules are important from a capital gains tax perspective. However, valuation rules must also be considered for compliance with both taxation and superannuation law purposes.
“We would welcome further guidance from the Australian Taxation Office on how the various digital assets should be valued. This will be necessary to assist tax agents and accountants but also SMSF trustees, administrators, and auditors to fulfil their duties and obligations.”
Broderick said, despite the SMSFA submission, as well as others, it seems the BOT has concluded there is no compelling reason for crypto assets to be “carved out”.
“However, it does not stop crypto assets from being on capital account, and eligible for the CGT discount, if, for example, the SMSF has a long-term buy and hold strategy,” he said.
Crypto in SMSF should be subject to the same rules as Derivatives. An investment strategy is required by the Trustees specific to this asset class.
The article highlights how complex and volatile this type of investment is. Surely the Trustees must substantiate why they will invest in it? Unless you believe Derivates are a far riskier investment?
And moreso because there is very little regulation and guidance on Crypto & associated assets.
You cannot scapegoat auditors for decisions the Trustees make when this all goes sour and the fund loses their coins or the markets crash.
Insisting Trustees provide documentation on their risk assessment and the steps taken to mitigate should be mandatory.