Cryptocurrency is everywhere. Most Trustees now know someone that has it and is relentlessly telling them they should have it too. It has become so popular that SMSF Advisers and Accountants are having to get skilled up on all things Crypto. This has prompted Australian Securities and Investment Commission (ASIC) to issue some direct warnings to SMSF trustees to remind them of their responsibilities when it comes to how they invest within their SMSF, particularly when there has been a large spike in scams and marketing targeting SMSF Trustees.

Like many of our colleagues we are working closely with our Auditors to map out a Crypto process that ensures smooth reporting and a hassle-free audit for us and the SMSF Trustee.

Here are some unique challenges for Advisers, Accountants and Trustees when it comes to investing in Crypto in an SMSF.

Investment Strategy

Just like all investments in the SMSF, Crypto Investments need to be documented in the fund’s Investment Strategy. Crypto Investments are considered by Regulators including ASIC to be High Risk Investments due to the volatility of their value. 

SMSF Trustees are required under the Super Laws (s.52(2) SIS) to “exercise…the same degree of care, skill and diligence as a “prudent superannuation trustee” on behalf of the beneficiaries of which it makes investments”.  An SMSF Trustee needs to get specific to show it has prudently considered the “high risks” when it come to their decision to invest in Crypto.

Typically, the Auditor will be looking for an appendix to the Investment Strategy that covers off:

  • Investment Considerations including acknowledgement that the Crypto Investment is high risk and how it meets the members retirement objectives and cash flow requirements,
  • Rationale for the Crypto Investment including confirmation that the Trustees understand the investment and the platforms that manage it and documenting the cash flow requirements of the members,
  • Mitigation of Risk including how the Crypto Investment will be stored and protected.

Working with your Auditor to get the Investment Strategy right from the start will save you time and money.

Complexity may equal Expensive

Crypto Investments are complex, and complex equals expensive when it comes to accounting for and auditing an SMSF with Crypto.

Crypto is purchased via an exchange and can be stored on that exchange (Hot Wallet) or can be transferred off the exchange and stored on a storage device (Cold Wallet).

The SMSF Auditor’s job is to prove the existence, ownership and value of the Crypto Investment at 30 June.  This means that they need appropriate reporting as at this date.

Unlike other investments where a Financial Adviser might be involved to simplify the process (think managed investments on a wrap platform), typically SMSF Trustees are going it alone with Crypto investing.

Without the appropriate guidance on SMSF Compliance, accounting and audit issues of Crypto Investments include:

  • Proof of Ownership by the SMSF
  • Separation of Assets from personal crypto
  • Proving holdings at the end of the financial year

Dealing with these issues and trying to get records in order to satisfy the SMSF Auditor can be costly for an Accountant or Administrator.  Checking the records and compliance is also much more involved and costly for the SMSF Auditor.

For example, it is not enough for the auditor to get a Crypto Tax Report as these are drawn from data imported by the client from the exchange used so it is open to errors and manipulation.  The SMSF Auditor needs to be able to see the holdings in the wallets themselves.

Keeping it Simple To Keep Costs Down

SMSF Trustees can keep it simple by working with their SMSF Auditor to confirm the ways in which they can demonstrate SMSF compliance when it comes to their Crypto Investments. 

For example:

  • using an Australian based coin exchange or brokerage firm that allows the correct recording of ownership and insurance
  • ensuring the SMSF bank account is properly linked to the SMSF exchange
  • taking screenshots of Hot Wallet exchanges on 30 June (including making sure that the screenshot shows the date). This won’t be required though if the exchange produces year-end reporting and the auditor is confident with it’s accuracy.
  • if using Cold Storage, being able to provide the wallet addresses
  • using an Australian Tax Reporting platform that gathers Crypto Investment transactions into a single tax report

As we see Crypto in SMSF’s gather pace there is much for Accountants, Administrators and Auditors to learn. Not just about Crypto itself but how it is administered and how it impacts normal end of year processes. SMSF Trustees need to take heed of their trustee responsibilities for prudent investment and record keeping and understand that this new, unregulated market is considered high risk by our Regulators and is being managed by products and exchanges that are right across the quality spectrum.

Keep It Simple Super provides wholesale SMSF Administration service to Financial Advisers and Accountants across Australia. If your clients are adding Cryptocurrency investments to their Self-managed Super Funds and you are looking for an expert to help you ensure compliance, contact us here.