Following on from last month’s article on whether bitcoin was property, we now turn to whether a self-managed super fund can invest in bitcoin.
Since their creation in 2009, there has been an increase in interest to invest in virtual currencies such as bitcoin, due to the potential for mainstream usage as a form of digital currency.
This can be seen by the value of bitcoins reaching an all-time high in 2013, when bitcoins were estimated to be valued at around US$1200, compared to its initial value of being less than US$1.
As a result, investors and traders are looking at investing in virtual currencies, such as bitcoins as an alternative investment to more traditional types of collectable and personal use assets, such as coins, medallions and bank notes, to diversify their investment portfolios.
In the September edition of this newsletter we reached the conclusion that bitcoins satisfied the definition of ‘property’ despite their online or ‘virtual’ character.
Although, regulators such as the Australia Taxation Office (ATO) have yet to provide any formal ruling or publication on whether an SMSF can invest in bitcoins, there are still a number of key issues that an SMSF should consider, these include:
whether an investment in bitcoins would satisfy the ‘sole purpose test’; and
whether the investment strategy of the SMSF will be satisfied.
Does the investment satisfy the ‘sole purpose test’?
The ‘sole purpose 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 prior to their retirement, including use of or access to the assets of the SMSF.
An SMSF may be able to satisfy this requirement, if it could be shown that the SMSF’s bitcoins are held securely in a public IP address, and that the trustee of the SMSF, and not the members are controlling any movement of the bitcoins held in the public IP address.
Any movement or transfers between the SMSF’s public IP addresses and a member’s public IP addresses, even temporarily, could cause significant issues under the sole purpose test.
The investment strategy of the SMSF
The current rules regarding an SMSF investment risk are based within the “investment covenants” framework in s 52B of the Superannuation Industry (Supervision) Act 1993 (Cth) (“SIS Act”).
The SMSF trustee will need to consider a number of aspects including the risk in making, holding and realising any investment, the likely return from an investment, diversification, liquidity, costs and tax consequences as part of its investment strategy.
As part of this framework, an SMSF trustee must exercise due diligence in relation to all investments made by the SMSF. The issue here is the risky nature of bitcoins as an investment.
Investing in bitcoins may not be a prudent SMSF investment, 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 total fund’s assets invested in bitcoin does not constitute a material risk for the fund and yet adds the potential to increase the fund’s overall investment performance.
Whatever the decision, bitcoins as an investment must be approved in the SMSF’s investment strategy.
Note also that it may be necessary to amend the SMSF’s trust deed in order to allow investment in bitcoins.
By Elizabeth Wang
Townsends Business & Corporate Lawyers
03 November 2017