The ATO has released an online publication in relation to self-managed superannuation funds (SMSF) investing in cryptocurrencies.

Although the ATO has indicated that SMSF’s are not prohibited from investing in cryptocurrencies, it notes that the relevant investment must:

  • be allowed for under the fund’s trust deed
  • be in accordance with the fund’s investment strategy and
  • comply with regulatory requirements under Superannuation Industry (Supervision) Act 1993 and Superannuation Industry (Supervision) Regulations concerning investment restrictions.

Importantly, practitioners should ensure that the terms of the fund’s trust deed allow for investment in cryptocurrencies. This may necessitate amendments to the current deed.

With reference to TD 2014/25 and TD 2014/26, the ATO outlines that the tax consequences of SMSF’s investing in cryptocurrencies will depend on the particular circumstances and that SMSF’s must keep records in relation to their cryptocurrency transactions.

The ATO’s online publication also covers the following topics:

  • Level of Risk – SMSF trustees and members should consider the level of risk involved when investing in cryptocurrencies. This is a valid concern, given the lack of understanding about cryptocurrencies, the volatility of the markets, lack of regulation and risks associated with cybercrimes and hacking of exchanges. It is also relevant in terms of determining whether an SMSF can borrow to invest in cryptocurrency while avoiding non-arm’s length income (NALI) consequences.
  • Ownership and separation of assets – SMSFs must have clear ownership of a cryptocurrency investment, separate from the personal or business investments of trustees and members. Again, this is a valid concern given that there may be difficulties in accurately establishing an account with some exchanges in the name of an SMSF.
  • Valuation – cryptocurrency investment portfolios must be valued in accordance with ATO guidelines. As exchanges often do not provide a direct AUD conversion rate, this may require additional steps.
  • Related-party transactions – as cryptocurrencies are not ‘listed securities’, they cannot be acquired from a related party.
  • Sole-purpose test – the ATO notes that an SMSF must be maintained for the sole purpose of providing retirement benefits to trustees and members, or to their dependants if a member or trustee dies before retirement. This test may be failed where trustees or members, directly or indirectly, obtain a financial benefit when making investment decisions and arrangements. This is of particular concern in the context of ‘utility’ tokens that have a personal application which may not align with the sole-purpose test.
  • Pension or benefit payments – the ATO notes that certain pension payments must be made by an SMSF in cash.

Case law

Past non-compliance history of tax lodgements might be considered in current tax lodgement claims

In MMFT and FCT [2018] AATA 772, the taxpayer failed to discharge his burden of proving that default tax assessments issued by the Commissioner of Taxation (Commissioner) were excessive. Moreover, the Administrative Appeals Tribunal (AAT) accepted the imposition of a 75% penalty by the Commissioner for the taxpayer’s failure to lodge income tax returns.

The default assessments issued to the taxpayer related primarily to personal services income (PSI), and the denial of deductions for motor vehicle expenses, phone/internet expenses and work-related travel expenses.

While this case highlights the importance of consistent and contemporaneous documentation and records, the facts of the case raise some more interesting questions. For example, while the taxpayer referred to himself as a ‘PAYG contractor’, the AAT noted that there was no such thing and that either the taxpayer was employed or alternatively provided his services as a contractor. Further, while the taxpayer provided the AAT with a PAYG payment summary which appeared (at least on its face) to be regular, it did not match the PAYG records of the purported employer.