The recent volatility in the price of Bitcoin has everyone talking about it.
Cryptocurrencies are growing in popularity, though opinions differ widely on whether they are a worthwhile investment, as opposed to a usable currency.
Whether or not Bitcoin is a suitable investment for a self-managed super fund can depend on the risk appetite of the members, their age, the amount invested and the total funds of the SMSF.
Issues to consider include:
This test will be satisfied if an SMSF’s sole purpose is to provide retirement benefits for its members.
However, difficulty may arise in trying to satisfy the sole-purpose test as an SMSF cannot directly or indirectly provide financial assistance or benefits to its members before their retirement, including use of, or access to, the assets (except money and listed securities) of the SMSF.
The tax office says Bitcoin is not to be classified as “money”, meaning that an SMSF cannot acquire Bitcoins from its members but may acquire them through an exchange.
An SMSF may be able to satisfy this requirement if it could be shown that its Bitcoins are held securely and that the trustee of the SMSF, and not the members, is controlling any movement of the Bitcoins. Any movement or transfers between the SMSF and a member, even temporarily, could cause significant issues under the sole-purpose test.
The current rules regarding an SMSF investment risk are based within the “investment covenants” framework in the Superannuation Industry (Supervision) Act.
As part of the investment strategy, trustees will need to consider a number of aspects relating to Bitcoin, including the risk in buying, holding and realising an investment, the likely return , diversification, liquidity, costs and tax consequences.
As part of this framework, a trustee must exercise due diligence in relation to all investments made by the SMSF. The issue here is the risky nature of Bitcoin as an investment.
Bitcoin may not be a prudent choice, especially for those approaching retirement age, where stable income-generating assets and minimal risk of significant capital loss are important.
But there may be a role for Bitcoin as part of an otherwise appropriate strategy.
For example, the trustee may be able to argue that having 2% of the fund’s assets invested in Bitcoin does not constitute a material risk for the fund and yet adds the potential to increase the overall investment performance.
Whatever the decision, Bitcoin as an investment must be approved in the SMSF’s investment strategy. It may be necessary to amend the SMSF’s trust deed to allow investment in cryptocurrencies.