Investment strategy considerations outlined with NFTs
As NFTs continue to gain traction in mainstream culture, an industry lawyer has highlighted some vital considerations for SMSFs planning to invest in these assets.
In an online article, Townsends Business and Corporate Lawyers solicitor Elizabeth Wang explained that an NFT, which stands for non-fungible token is a digital asset that is a unit of data stored on a digital ledger. It is unique and is not interchangeable.
“These days almost anything digital can be an NFT such as drawings, paintings, music and signed photos,” she noted.
Ms Wang said there is no simple answer to whether an SMSF can invest in an NFT.
When determining whether to invest in an NFT, the trustee needs to consider whether the investment would satisfy the sole purpose test and whether the investment strategy of the SMSF will be satisfied, she said.
The sole purpose test, she said, will be satisfied if an SMSF’s 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 of the SMSF,” she explained.
“The ATO states that a cryptocurrency is more likely to have been acquired as a personal use asset if the cryptocurrency is acquired and used within a short period of time in comparison to a cryptocurrency being acquired and held for time before any such transaction is made.”
An SMSF may be able to satisfy this requirement, she said, if the trustee is able to show that the NFT will not be used as a personal-use asset by the trustee or the members of the SMSF and instead will be kept or mainly used as an investment.
Ms Wang said the current rules regarding SMSF investment risk are based within the “investment covenants” framework in s52B of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).
The SMSF trustee, she said, will need to consider a number of aspects, including the risk in making, holding and realising any investment, the likely return from an investment, diversification, liquidity, costs and tax consequences as part of its investment strategy.
“As part of this framework, an SMSF trustee must exercise due diligence in relation to all investments made by the SMSF. The issue here is the risky nature of NFTs as an investment. The process to buy an NFT can be complicated as most NFTs need to be acquired using an Ethereum-compatible crypto-wallet. As with other types of cryptocurrencies, NFTs are also susceptible to scams and crypto hacks,” she explained.
Investing in NFTs may not be a prudent SMSF investment, she said, especially for those approaching retirement age, where stable income-generating assets and minimal risk of significant capital loss are important.
“Generally, there is no intrinsic value linked to an NFT unlike a stock or a bond where you would already know the intrinsic value of that investment. A successful NFT is generally only as valuable as the next person who is willing to pay for it,” she noted.
Ms Wang explained that there might be a role for NFTs, however, where they form part of an appropriate strategy.
“For example the trustee may be able to argue that having less than 5 per cent of the total fund’s assets invested in digital assets such as NFTs does not constitute a material risk for the fund and yet adds the potential to increase the fund’s overall investment performance,” she stated.
“Whatever the decision, NFTs as an investment must be approved in an SMSFs investment strategy. It may also be necessary to amend an SMSFs trust deed in order to allow investment in digital assets such as NFTs.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.