Whilst trustees have the ability to invest in cryptocurrency through their SMSF, there are some important considerations to address. The non-tangible nature of cryptocurrencies requires SMSF members to keep accurate records, but many are failing to do so, opening funds up to a qualified audit report. What should SMSF auditors be doing now to avoid future issues?
What are the obligations of SMSF trustees and members?
An SMSF’s investment strategy outlines its investment objectives and specifies the types of investments it can make. Before investing in crypto assets, SMSF trustees and members should consider the level of risk of the investment. Trustees and members may then review and, if necessary, update their fund’s investment strategy to ensure the investment being considered is permitted.
Before acquiring cryptocurrency, the trustees should review the investment provisions of the SMSF’s trust deed to ensure it is an approved investment. This may not require the trust deed to be amended if the investment in cryptocurrency is possible.
With certain exceptions, SMSFs are prohibited from intentionally acquiring assets from related parties. The exceptions include listed securities and business real property, when acquired at market value. Crypto assets are not ‘listed securities’ so don’t fall within the exceptions. Therefore, crypto assets cannot be acquired from a related party. Transferring funds from personal wallets to SMSF crypto wallets is prohibited.
If an SMSF is to acquire cryptocurrency, a trading account or exchange account with an external exchange will need to be established in the name of the SMSF. A due diligence review of the exchange is required to ensure the account has been opened in the correct name and that the trustees understand the reports that are to be provided. Common acceptable trading platforms include Swyftx and CoinSpot.
Trustees must ensure the separation of assets. This means that cryptocurrency investments are to be managed separately from any personal or business matters of trustees and members. A digital wallet must only hold the SMSF’s crypto assets. Leading crypto wallets include Capital, eToro, Trezor Model One and Ledger Nano X.
What crypto asset records are required for the audit?
Auditors will require a holding statement and full year transaction listing for acquiring, holding, and disposing activity of cryptocurrency. This should include:
- receipts including date of purchase, transfer or dispose of crypto assets
- a record of the date of each transaction
- a record of what the transaction is for and who the other party is (this can just be their crypto asset address)
- exchange records
- a record of the value of the crypto asset in Australian dollars at the time of each transaction
- records of agent, accountant and legal costs
- digital wallet records and keys
- a record of software costs that relate to managing tax affairs e.g. digital wallet
Details will be required for each crypto asset as they are separate CGT assets.
To confirm ownership, an annual trustee declaration will also be required.
Any digital assets are to be presented in the financials as Digital Assets / Crypto / Crypto Currency / Other Asset. However, if the digital investment is material, there should be specific disclosure.
For tax purposes, crypto assets are not a form of money but are capital gains tax (CGT) assets. Therefore, it’s required to declare any regular income from Crypto. For example, token rewards should be declared as other income in the SMSF tax return.
What due diligence is undertaken by the ATO?
The ATO has been tracking crypto in earnest since 2019, when it introduced a data-matching program focused on cryptocurrency transactions. The program allows the ATO to access data held by designated service providers (DSP). The collected data is used to identify the buyers and sellers of crypto, and to quantify the related transactions. Next, the ATO compares the data provided by DSPs with its own records in order to identify individuals who are failing to meet their registration, reporting, submitting, and payment obligations.
For further information on the ATO’s requirements in relation to SMSF investing in crypto assets, visit https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-investing/SMSF-investing-in-crypto-assets/
In summary, what do SMSF auditors need to check?
- Is the crypto investment consistent with the SMSF’s investment strategy?
- Is the investment allowed by SIS act and trust deed?
- Is the digital wallet held in the name of the fund
- Is the end of the financial year balance reconciled with the holding statement
- Has a detailed transaction listing been provided for review?
- Has the accuracy of market value been determined?
- Are the assets classified correctly as Digital Assets / Crypto / Crypto Currency / Other Asset?
- Has the value of digital assets been converted to Australian dollars?
- Has an Annual Trustee Declaration been provided?
From a compliance point of view, cryptocurrency is an asset that is gaining popularity in a high risk and volatile environment. Auditors need to ensure that their SMSF clients understand the recording obligations and financial risks associated with investing in cryptocurrency.
As an independent auditing firm, National Audits Group provides accountants, advisors and trustees with the confidence that their SMSF audits are being managed professionally with regard to all auditing requirements.
For further information, contact us directly at 1300 734 707.
Sharmaine Duran | SMSF Auditor | National Audits Group
- Cryptocurrency and SMSF Audits – What do you need to check? - 2 November 2022