Although they are highly speculative, cryptocurrencies have experienced a surge in popularity amongst investors. With investors seeking out ways to get their hands on Bitcoin, Ripple and other cryptocurrencies – whether they can be accessed through super has become a common question. This edition of ClearLaw explores if and how you can use your super to invest in cryptocurrency.Melissa Ramov, Maddocks Lawyers
The trustee of an SMSF must make investment decisions and continuously monitor them to ensure they serve the best interests of members. The investment decisions must also comply with the SMSF's investment strategy and be in accordance with superannuation law.
Earnings by a super fund on investments which are arms-length income are taxed concessionally. However, earnings which are considered non-arm's length income of the super fund (NALI) – which the ATO has highlighted as an issue when an investment is financed by a related party loan – are taxed at the highest marginal rate.
In determining whether income from an SMSF's investment in cryptocurrency is NALI – two questions must be asked: can the SMSF invest in cryptocurrency in the first place, and then can the SMSF borrow for such an investment.
The trustee of an SMSF must assess investments in cryptocurrency in the same manner as any other investment. The trustee's considerations include:
The Cleardocs SMSF trust deed is drafted broadly and therefore enables the trustee to invest in cryptocurrency.
Assuming that an SMSF may invest in cryptocurrency – and has a suitably prepared investment strategy – the SMSF trustee must consider whether such an investment is consistent with the trustee's obligation to act as a prudent superannuation trustee. For example:
SMSFs are permitted to borrow only under a limited recourse borrowing arrangement (LRBA). If the terms of the LRBA are on non-arm's length terms, then income generated from the assets acquired from the borrowed funds risks being considered by the ATO as NALI and therefore taxed at the highest marginal rate.
The ATO will only treat dealings as being on arm's length terms if the arrangements reflect what might be expected to have occurred if the parties to the scheme had been dealing with each other at arm's length. For example:
When assessing whether an arrangement is on arm's length terms, the ATO will assess whether the SMSF has derived more ordinary and statutory income under the scheme then it might have been expected to derive if the parties had been dealing with each other at arm's length in relation to the scheme.
In order to determine what the parties might have been expected to derive had the parties been dealing with each other at arm's length (hypothetical situation), one must identify:
Once the hypothetical situation has been determined, it is necessary to consider whether the SMSF would have or could have entered into the hypothetical borrowing arrangement as follows:
Factors the ATO considers concerning whether the SMSF 'could have' include:
Factors the ATO considers concerning whether the SMSF 'would have' include:
The issue for an SMSF is identifying a defensible hypothetical scenario: that is, can one conceive of an arm's length lender providing a loan to an SMSF to invest in cryptocurrency?
The same reasons that a prudent SMSF trustee may be reluctant to invest in cryptocurrency, apply to whether a bank, being an arms-length lender, would lend money to an SMSF for an investment in cryptocurrency. In addition to the fact that cryptocurrencies are currently unregulated and operate in a volatile market, lenders' concerns would be amplified by:
Therefore, even if the SMSF can demonstrate that it 'could have' and 'would have' invested in cryptocurrency (by reference to the factors set out above), if the SMSF cannot establish a hypothetical scenario, then the SMSF's income from its investment in cryptocurrency will be exposed to an assessment as NALI.
Given the above, a decision to borrow money to acquire cryptocurrency through an SMSF should not be taken lightly as it is unlikely to achieve the desired outcome of tax savings. Individuals should consult their advisors before taking any steps.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
You can read earlier ClearLaw articles on a range of topics, such as:
 Section 52(2)(b) Superannuation Industry (Supervision) Act 1993.
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.