Crypto in SMSFs: How to Dodge Costly Compliance Breaches and Stay ATO-Proof

AusCryptoCon is a great opportunity for attendees to engage directly with some of the leading cryptocurrency and Web3 brands in the industry, globally. Among those is Australian SMSF Consultancy, Easy Super. 

Adding crypto to your SMSF? Do it right and stay compliant with technical specialist advice from Natalia Clack. In this article, we will explore how to dodge costly compliance breaches while holding digital assets in SMSF’s.

The Australian Crypto Convention is the perfect event to explore the burgeoning intersection of cryptocurrency and SMSFs. As crypto gains traction, more SMSF trustees are keen to diversify their portfolios with digital assets. But with great opportunity comes great responsibility. The Australian Tax Office closely monitors SMSFs, and the rapid rise of crypto investments brings new compliance challenges. 

Let’s delve into how to manage crypto in SMSFs without falling afoul of the ATO.

The ATO’s Position on Crypto in SMSFs

The ATO has not turned a blind eye to SMSFs holding cryptocurrency. They consider it a form of property, meaning it falls under the same tax regulations and compliance rules as other assets. While it’s legal to include cryptocurrency in your SMSF, trustees must follow stringent rules to avoid costly compliance breaches.

The ATO’s main focus is to ensure trustees maintain the sole purpose test, keep records up to date, keep the SMSF crypto separate from their own crypto, invest under the SMSF’s mane and ensure that crypto investments align with their fund’s investment strategy. Failing to comply with these obligations can lead to severe penalties.

Common Compliance Breaches with Crypto Investments

Many SMSF trustees venture into crypto without fully understanding the compliance risks. At Easy Super we observed and helped a lot of crypto enthusiasts who came from DIY platforms or accountants who do not understand crypto. These SMSF trustees came to us with costly mistakes and errors already. 

Below are some common breaches the ATO has flagged:

1. Sole Purpose Test: SMSFs must exist solely to provide retirement benefits to members. If crypto investments are not properly structured or are used for personal benefit, this can breach the sole purpose test.
2. Ownership and Segregation of Assets: It is crucial that the SMSF holds the crypto in its own name, not the personal name of the trustee or members. Mixing personal and SMSF wallets is a clear breach, often leading to administrative penalties.
3. Valuation and Record-Keeping: The value of crypto holdings must be provided at the end of each financial year. Ensuring accurate records of transactions and market values at June 30 is crucial. Poor record-keeping can result in a lack of evidence during audits, which can disqualify the fund.
4. Investment Strategy: SMSFs must formulate an investment strategy that considers the unique risks of cryptocurrency, such as volatility, liquidity, and diversification. Failure to document these considerations can result in a contravention report being lodged with the ATO.

Case Study: A Costly Mistake

Consider the case of John, an SMSF trustee who decided to invest in crypto. Unfortunately, John made several errors:

• He opened seven wallets across multiple exchanges.
• He mixed his SMSF and personal coins in one wallet.
• He tried to save on exchange fees by using international exchanges with no SMSF account options.
• He even dabbled in NFTs and other tokens with little market value.
• He moved his coins into SMSF account in a way of contribution
• He engaged a company which provided crypto bot trading option and had 3 mln. Transaction in a year.
• He staked some coins which fluctuated a lot and made $800K paper staking rewards income. 

John ended up being scammed, losing control of his funds, had to deal with contributions refund, failed to maintain proper records and ended up paying more than $100K in tax and about the same in penalties. His SMSF was disqualified, and he faced significant administrative penalties.

Practical Tips to Avoid Non-Compliance

To avoid the mistakes made by trustees like John, it’s essential to follow these practical steps:

1. Separate Wallets: Always maintain separate wallets for personal and SMSF crypto holdings. Mixing assets is one of the most common breaches.
2. Proper SMSF Documentation: Ensure the name on your SMSF accounts matches your fund’s details. The ATO requires clear proof that the SMSF holds and controls the crypto.
3. Use Reputable Crypto Exchanges: Select exchanges that provide SMSF account options and annual transaction reporting. This simplifies record-keeping and audit processes.
4. Stay on Top of Record-Keeping: Maintain detailed records of all crypto transactions, including market value at the end of the financial year. Use tracking software or tools like CSV files and screenshots to provide evidence during audits.
5. Consult with SMSF Specialists: Engage a professional to review your trust deed and investment strategy before investing in crypto. A specialist can help ensure your strategy considers the risks associated with digital assets, as required by law.

Why You Need an SMSF Specialist

Investing in cryptocurrency within your SMSF can be a rewarding strategy, but it’s rife with potential pitfalls. From failing to meet the sole purpose test to improper record-keeping, non-compliance with ATO regulations can cost you dearly. That’s why it’s essential to work with SMSF specialists who understand both the tax implications and technical requirements of crypto.

At Easy Super, there is a team of award-winning SMSF experts that provides tailored advice to ensure that your SMSF remains compliant while allowing you to explore the opportunities presented by digital assets. Book a consultation today to ensure your crypto investments are ATO-proof.

Want to learn more crypto insights from industry-leading experts? Secure your tickets to AusCryptoCon now, 2 day passes starting from only $79 and use our unique discount code EASYSUPER.