What is an SMSF
A Self-Managed Super Fund (SMSF) is a special entity that allows Australians to directly manage and invest their superannuation, instead of using an industry or retail super fund. In practice, this is the only way for Australian’s to get exposure to cryptocurrency in their superannuation.
How to setup an SMSF with crypto
Setting up a crypto SMSF can be a complex process, but with the right guidance, it can be done. We’ll go through the key SMSF considerations for investors who wish to invest in crypto through an SMSF.
💡 Tax Insight
The latest ATO statistics for the December 2022 quarter show there is now approximately $1.5 billion in crypto assets held by Australian SMSFs. That represents a significant increase from the $137 million invested in crypto assets back in June 2020.
Can an SMSF invest in cryptocurrency ✅
Of course! Investing in crypto through an SMSF is perfectly legal, however, it does require careful consideration of both the superannuation laws and your compliance obligations.
The main requirement when setting up a crypto SMSF is to ensure it complies with all super laws contained in the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). The ATO has strict rules on SMSF investments, and crypto is no exception.
The SMSF’s investment strategy must allow for investments in crypto, and the trust deed must also permit such investments.
The SMSF needs to be registered with the ATO and have a valid Australian Business Number (ABN) and Tax File Number (TFN). The SMSF must also have a separate bank account for all its financial transactions.
Failure to comply with these regulations can result in penalties or fines.
How much does setting up an SMSF cost💲
There’s more than one cost when setting up an SMSF. You’ll need to consider the following fees:
- Financial Advice (if needed) on the appropriateness of establishing an SMSF
- SMSF establishment
- SMSF corporate trustee (if needed) along with ASIC fee
- Annual compliance costs
- ATO supervisory levy
- Additional fees due to complex activity or one-off events
- Additional fees for complex structuring such as a LRBA to borrow
Although some providers market an SMSF similar to an off the shelf product, it’s fundamentally a bit more complicated than that. There can be unexpected costs if you’re not careful with how you operate the SMSF, if you undertake complicated investments or if you breach regulations.
It’s recommended that you always discuss your intended activity with your accountant, so they can give you a realistic estimate on the cost to establish and complete the annual compliance each year. This will give you a much better understanding of what’s involved.
If you don’t already have an SMSF, then there are two ways that you might consider setting one up:
Low-cost wholesale option
If your main decision factor is cost, then you’ll probably want to look at using an online SMSF provider. These budget-friendly options are able to drive down costs, primarily through the use of offshore staff and by limiting the time spent on your SMSF compliance.
In some cases it can be hard to maintain a high standard of quality, so make sure you find a good provider that you’re happy with. You’ll also need to be careful what crypto investments you make, to ensure your activity is relatively simple, so your provider can get the compliance sorted.
Wholesale SMSF providers generally cost around $500 to setup an SMSF and around $1,100 per year in annual compliance fees, along with the $259 ATO Supervisory Levy.
Engaging an accounting firm for your SMSF may come at a higher cost, but it's often worth it for the higher quality and lower risk. Additionally, you'll have someone local that you can speak with.
A local accounting firm will tend to have more experienced tax professionals, who understand superannuation laws and can also assist with your tax planning. If you use the same accountant to also do your individual or business tax, then they can advise on more holistic tax savings strategies.
The average costs when using an Australian accountant to help with your SMSF are $2,000 for initial setup and from $2,500 - $3,500 per year for annual compliance.
The costs do increase as the size or complexity of the fund increases, so make sure to discuss any major changes with your Accountant to estimate your costs.
Steps to purchasing crypto in an SMSF
You’ll need to choose a reputable crypto exchange, allocate funds to the exchange, purchase the crypto, securely store it, and keep accurate records of all transactions and holdings.
It’s essential that you have your basics covered so you don’t run into any problems later on.
The steps to purchasing crypto in an SMSF are:
1. Crypto must be allowed in the SMSF Trust Deed
It’s important that your SMSF has a trust deed that permits the use of crypto assets as an investment. Fortunately, most SMSF trust deeds are written broadly enough to allow trustees to invest in crypto, but you’ll still need to check the following:
- The trust deed should clearly state the sole purpose of the SMSF (which is to provide for the retirement benefits of its members).
- The trust deed should specify who the trustees of the SMSF are and the powers they have. The trustees must be appointed in accordance with the SIS Act and SIS Regulations, and they must act in the best interests of the members of the SMSF.
- All trustees and directors must consent in writing and sign a separate Trustee declaration stating they understand their responsibilities within 21 days of becoming a trustee or director.
- The trust deed should specify who the members of the SMSF are, and how new members can be added. It should also specify the rights and obligations of the members.
- The trust deed must allow for investments in cryptocurrency, this could be specifically stated, or allowed for under a more general clause.
2. Register your SMSF
You’ll need to setup and register your SMSF with the ATO and if you use a corporate trustee then you’ll also need to register with ASIC.
You and your fund members will have a lot of documents to sign and it’s important that you spend the time to do this correctly. The Trust Deed must be physically signed by hand, to ensure it’s been correctly executed and to remove any doubt that the SMSF has been legally established.
Once your superfund is established and all trustees have been appointed (including signing the Trustee declaration), you will then have to register your SMSF with the ATO by applying for an ABN within 60 days.
When completing the ABN application, you should:
- apply for a TFN for your SMSF
- elect for your fund to be an ATO-regulated SMSF.
If you don’t elect for your fund to be an ATO-regulated SMSF, your fund won’t get tax concessions and the members won’t be able to claim deductions for contributions.
You will also need to appoint an approved SMSF auditor to audit your superfund. This must be done no later than 45 days before you need to lodge your annual return for your SMSF.
Your SMSF auditor must be registered with ASIC and be independent (i.e. hold no financial interest or personal interest with members or trustees). You can search for an SMSF auditor on the ASIC website - SMSF auditor register.
There’s a lot that can go wrong here, so your accountant will help you through each step and ensure that everything is established correctly.
3. Crypto must be in your SMSF investment strategy
Every SMSF must have an investment strategy that outlines what investments are planned, and how investments are to be managed.
The investment strategy must be consistent with the SMSF's investment objectives and risk profile. The investment objectives should be documented and clearly stated in the investment strategy, and should explicitly include crypto as an asset.
Crypto is a relatively new and volatile asset class compared to traditional investments, and investing in it carries significant risks. It is therefore important to clearly justify why crypto is a suitable investment for each member of the SMSF and how it addresses their investing preferences and risk profiles.
The investment strategy must be reviewed at least once per year and updated as necessary.
4. Set up your SMSF bank account
You will need to open a bank account in your SMSF’s name to manage the fund’s operations, and accept contributions, rollovers of super and income from investments.
It’s important to choose a reputable bank that allows establishing a bank account correctly for SMSF entities.
Having a separate bank account for the SMSF ensures that the money that belongs to the SMSF is held separate from the accounts of the members.
5. Rollover superannuation to SMSF
Once your SMSF bank account is established, the next step is to rollover the super from your industry or retail fund to your SMSF.
You can initiate a rollover from your retail or industry superfund by completing a “Request for rollover of whole balance of super benefits between funds”, available here. Most industry and retail funds will also have an equivalent form, that is simpler to process in practice and will speed things up.
For transfers to SMSFs, your fund will need to use SuperStream to roll over your benefits for which a electronic service address is required, an ABN and SMSF bank account details.
6. Select an Australian crypto exchange or broker
After your crypto SMSF has been set up and your super rolled over, you’ll need to decide which crypto exchange to use to invest in crypto.
The most important factors when choosing a digital currency exchange for your SMSF are:
- Australian-based exchange
- AUSTRAC registered
- Has a specific account type for SMSFs
- Accurate and comprehensive transaction reporting
- End of financial year account statements that show balances and market values on 30 June
Choosing an exchange that has direct support for SMSFs will makes a big difference in ensuring your annual SMSF compliance is completed efficiently and passes its annual audit.
When you setup your account on the digital currency exchange, you must ensure that you register as an SMSF (and not an individual). For this, it is vital that the exchange can support SMSF entities or you are at risk of breaching the sole purpose test.
When you register with the digital currency exchange, you’ll be asked to provide personal ID documents and a copy of your signed and executed SMSF trust deed.
Once your account on the exchange is set up, you can transfer the funds from your SMSF bank account into the exchange and start investing in crypto.
7. Using a wallet for your SMSF
Depending on the security preference of your SMSF, you may choose to either store crypto on the digital currency exchange or an external hardware wallet.
The fund must be able to provide evidence of a distinct crypto wallet for the SMSF. When purchasing a hardware wallet, you must make sure the purchase is invoiced to the SMSF. Keep a copy of the tax invoice as substantiation, for the SMSF audit.
Make sure you only use the wallet for storing assets that belong to the SMSF. Never store SMSF assets and personal assets in the same wallet.
How crypto is taxed in an SMSF 💡
The crypto invested in your SMSF is a CGT asset, which means that sales and disposals of crypto will normally result in capital gains.
SMSFs are subject to a flat tax rate of 15% on their income, including capital gains. This low tax rate, is one of the reasons that SMSFs are so popular for long-term investment.
If an SMSF sells an asset that it has owned for more than 12 months, then any resulting capital gain will be eligible for a 1/3 (33.33%) CGT discount. Otherwise, the capital gain is taxed at the flat rate of 15%.
Annual compliance in an SMSF
There is a requirement for SMSFs to determine the market value of their cryptocurrency investments on the 30 June each year.
Consult with your accounting professional 🎓
It is advisable to consult with your accounting professional regularly to ensure you’re keeping up with all compliance responsibilities for your SMSF.
Before making any large changes in your investment activity, it’s best to discuss with your accountant. With crypto, it’s very easy to end up in a situation where you have inadvertently breached superannuation law, or drastically increased the costs of your annual compliance.
What records do you need to keep
SMSFs are a highly regulated investment entity that must pass an annual audit. Due to this, it’s crucial to have excellent record keeping for your crypto investments.
Most crypto tax software has been designed overseas for use by individuals. However, SMSFs are specific only to Australia, and the compliance requirements are much higher.
The only crypto tax software designed specifically for Australian SMSFs is Syla.
You or your accountant can use Syla to manage your annual tax and compliance.
Many accountants use BGL Simple Fund 360 to complete the compliance work for SMSFs. You’ll save hours of manual data entry by using Syla to directly sync transactions and tax outcomes into BGL.
Get started with Syla now
Getting your SMSF taxes done
Your accountant will help you to get your SMSF compliance sorted, but you can definitely help and save a lot on fees by doing so.
To lower the administration costs, make sure you are using Syla to record all of your transactions and to prepare an ATO compliant Crypto Tax Report. This is important for your accountant and the external auditor. You can also let your accountant know that Syla supports a direct data sync into their SMSF administration software when they use BGL.