Michael Hallinan, special counsel for SUPERCentral said as part of an investment strategy SMSF trustees need to consider a number of aspects relating to bitcoin including the risk in buying, holding and realising a bitcoin investment, the likely return , diversification, liquidity, costs and tax consequences.
“An SMSF trustee must exercise due diligence in relation to all investments made by the SMSF,” Hallinan said.
“The issue here is the risky nature of bitcoins as an investment. Investing in bitcoins may not be a prudent SMSF investment, especially for those approaching retirement age, where stable income-generating assets and minimal risk of significant capital loss are important.”
However, Hallinan said there may be a role for bitcoin as part of an otherwise appropriate strategy.
“For example, the trustee may be able to argue that having two per cent of the total fund’s assets invested in bitcoin does not constitute a material risk for the fund and yet adds the potential to increase the fund’s overall investment performance,” he said.
“Whatever the decision, bitcoins as an investment must be approved in the SMSF’s investment strategy. It should also be noted that it may be necessary to amend the SMSF’s trust deed in order to allow investment in bitcoins.”
Hallinan said the emergence of bitcoins and other cryptocurrencies as a form of virtual currency is growing in popularity, though opinions differ widely on whether or not they are a worthwhile investment, as opposed to a usable currency.
“For investors and traders looking to venture out from investing in the more traditional types of collectable and personal use assets such as coins, medallions and bank notes, investing in bitcoins or other forms of cryptocurrencies may be worth considering for those wanting to diversify their investment portfolios,” he said.
“However, whether bitcoin is a suitable investment within a SMSF can depend on the risk appetite of the members, their age, the amount invested and the total funds of the SMSF.”
He continued there are several key issues that an SMSF should consider in regard to bitcoin investment, including whether an investment would satisfy the sole purpose test and if the investment strategy of the SMSF will be satisfied.
“The sole purpose test will be satisfied if an SMSFs sole purpose is to provide retirement benefits for its members. However, difficulty may arise in trying to satisfy the sole purpose test as an SMSF cannot directly or indirectly provide financial assistance or benefits to its members prior to their retirement, including use of or access to the assets (except money and listed securities) of the SMSF,” he said.
“The Australian Taxation Office has taken the viewpoint that bitcoin is not to be classified as ‘money’, meaning that an SMSF cannot acquire bitcoin from its members, but may acquire bitcoins through an exchange.”
However, he added, an SMSF may be able to satisfy this requirement if it could be shown that the SMSF’s bitcoins are held securely, and that the trustee of the SMSF, and not the members, is controlling any movement of the bitcoin.
“Any movement or transfers between the SMSF and a member, even temporarily, could cause significant issues under the sole purpose test,” he said.
