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he rising interest in cryptocurrency as an investment option within self managed superannuation funds (SMSFs) reflects the evolving preferences of Australian investors. According to recent statistics from the Australian Taxation Office (ATO), the value of cryptocurrency assets held in SMSFs surged by an astounding 589.9%, growing from modest levels to $1.17 billion between June 2019 and June 2022.
Although cryptocurrencies currently make up just 0.16% of the total $837 billion managed within SMSFs, this figure is larger than the value of collectibles, personal-use assets, and even overseas property held in these funds. Notably, smaller SMSFs with total assets below $200,000 are more likely to allocate a significant portion of their portfolio to cryptocurrencies.
However, the Australian Securities and Investments Commission (ASIC) has raised alarms about emerging scams targeting SMSFs, particularly those marketed with promises of high returns through crypto-related investments.
ASIC warns of SMSF cryptocurrency scams
Earlier this year, ASIC flagged a disturbing rise in schemes encouraging Australians to transfer their superannuation savings from regulated retail funds into SMSFs with promises of higher returns. Many of these promotions target inexperienced investors, often downplaying the significant risks associated with cryptocurrency investments.
ASIC has repeatedly emphasized that crypto-assets are high-risk and speculative, urging Australians to consult licensed financial advisers before transferring their superannuation into SMSFs to invest in such assets.
One alarming example is the case of A One Multi Services Pty Ltd, a company ASIC shut down after uncovering fraudulent activities. The scheme convinced over 60 SMSFs to roll their superannuation into SMSFs, then lend the funds to the company. Investors were promised returns ranging from 10% to 20%, with some even being lured by the possibility of 26% returns.
Between January 2019 and June 2021, a staggering $25 million was transferred into the company’s accounts. Instead of being appropriately managed, the funds were misused—between $7 million and $22 million worth of Bitcoin was held in a director’s name, while an additional $5.7 million was spent on luxury cars and real estate. Cases like this highlight the importance of due diligence and seeking expert advice before making significant financial decisions.
Investing in crypto
For those who choose to incorporate cryptocurrency investments into their SMSFs, it’s essential to adhere to the regulatory framework to protect both the fund and its members. Here are key considerations:
1. Trust Deed
The SMSF’s trust deed must explicitly permit investments in cryptocurrency. Most modern deeds are drafted broadly, allowing trustees to choose from a wide range of assets permitted by superannuation laws. Nevertheless, it’s important to verify that the deed aligns with your investment intentions and doesn’t inadvertently restrict crypto-related investments.
2. Investment Strategy
Cryptocurrency’s inherent volatility and speculative nature make it critical to detail how it fits into the SMSF’s investment strategy. The strategy should outline how cryptocurrency assets will contribute to the fund’s overall objective of providing retirement benefits, taking into account the individual circumstances of each member. A well-articulated strategy is not just a regulatory requirement—it helps demonstrate prudence and foresight in managing the fund.
3. Separation of Assets
One of the most common issues with SMSF cryptocurrency investments is the failure to properly separate assets. All cryptocurrency holdings must be held in a digital wallet registered in the SMSF’s name. Furthermore, the fund must provide the wallet’s IP address and transaction history to auditors for verification.
Problems arise when personal credit cards or bank accounts are used to acquire cryptocurrency on behalf of the SMSF. Such transactions can be misinterpreted as either contributions or loans, potentially breaching superannuation laws. Maintaining a clear separation of personal and fund assets is non-negotiable to remain compliant.
4. Sole Purpose Test
An SMSF must adhere to the sole purpose test to maintain eligibility for superannuation tax concessions. This means the fund must solely exist to provide retirement benefits to its members or their dependents in the event of a member’s death before retirement. Any cryptocurrency investment must align with this overarching purpose. Failure to meet the sole purpose test could result in significant penalties or loss of tax concessions.
