If you have not heard about blockchain or Bitcoin by now, many people would say you must have been living under a rock. While most people have heard about these things, few really know much about the detail that sits behind them.
In this month’s article we will explore the high level elements you should know and the potential implications for your Self-Managed Superannuation Fund (SMSF).
So, what’s it all about?
There has been growing attention towards cryptocurrencies, Blockchain and Distributed Ledger Technology (DLT) in recent years and this has influenced the number of enquires our advisers have been receiving related to their use in the SMSF investment world.
Here’s a brief ‘101’ guide to the key terms you need to know.
DLT (Distributed Ledger Technology)
This is a digital system for recording data that has no central data store or administration functionality. Instead, a group of individuals (DLT participants) have their own ledger that is continuously synchronised across the network. For this reason, the DLT participants are always in consensus about what has occurred, at any time.
There are three main categories of DLT:
- Open distributed ledgers – open for anyone to join and its participants are usually anonymous. Many of today’s cryptocurrencies are open distributed ledgers, e.g. Bitcoin and other cryptocurrencies, such as Ethereum
- Private distributed ledgers – only open for a limited number of participants, who must verify their identity. Examples of this are supply-chain networks and private DLTs between banks
- Hybrids – try to utilise the benefits of open distributed ledgers, but with added requirements like privacy and identity.
What about Blockchain?
Today the terms DLT and Blockchain are used interchangeably to describe the same concept. However, strictly speaking, Blockchain is just one form of DLT implementation. In a typical Blockchain, transactions are stored in blocks and linked to a chain. For the purposes of this article, we use the term DLT to also capture concepts that fall outside this more narrow definition of Blockchain.
Considerations for you and your SMSF
Now that you have the most basic level of understanding about some of the general terms, what are the key areas of focus for you when considering how this may be applicable to you within a SMSF.
At its core, the most critical thing to keep front of mind is that cryptocurrency is just like any other investment that you may consider to hold within your SMSF. Given this, you must still comply with all the usual elements of the Superannuation Industry (Supervision) Act 1993 (SIS Act), including the sole purpose test and arm length investment test. You must also ensure the suitable level of documentation and minutes around all decisions that the trustee makes.
Key areas you need to consider include:
Cryptocurrencies are often considered by the ATO as Capital Gains Tax assets and SMSFs may acquire, dispose of or invest in these as they would in any other asset. When an SMSF engages in these transactions it must comply with the same regulatory requirements that apply to investments in other assets.
As usual, the SMSF’s investment strategy outlines its investment objectives and specifies the types of investments it can make. Before investing in cryptocurrency, SMSF trustees and members should consider the investment’s level of risk. Trustees and members may then review and, if necessary, update their fund’s investment strategy to ensure the investment being considered is permitted.
Trustees and members also need to ensure investments in cryptocurrency are permitted under the SMSF’s Trust Deed.
Not all audit firms are comfortable or able to perform an audit of a SMSF that holds cryptocurrency. We suggest you do not wait until your normal audit cycle timing to be engaging with your accountant, administrator and auditor. You should take action to be on the front foot. If your advisers do not understand the investment class or how to audit it, you should find an SMSF auditor who does. The typical items that will be a focus during an audit are related to the ownership and valuation of the cryptocurrency at year end.
If you want to know more about cryptocurrency and its potential use in your SMSF, please contact your local BDO Superannuation expert.
Before making any investment or financial decisions you should consider, with or without the assistance of a professional adviser, your particular objectives, and financial circumstance or needs.
The information contained in this article is purely factual in nature and does not take into account your personal objectives, financial situation or needs. The information is objectively ascertainable and, therefore, does not constitute financial product advice.
Further, the above information is provided as an information service only and, therefore, does not constitute financial product advice and should not be relied upon as financial product advice. If you require personal advice that takes into account of your particular objective, financial situation or needs, you should consult your BDO adviser who will be able to assist you in their capacity as Australian Financial Services licensee.