The Crypto Structure Series : SMSFs
28 Nov
28 Nov
Disclaimer: The content provided in this blog post is for informational purposes only and does not consider your personal financial circumstances. Please conduct your own research and consult with a qualified financial advisor before making any investment decisions. The volatile nature of the cryptocurrency market carries inherent risks, and individual circumstances may vary.
We are an execution-only provider for any SMSF establishments and cannot provide advice on whether you should establish an SMSF.
SMSFs are a private superannuation fund, regulated by the ATO that you have full autonomy over its investment strategy and where you can potentially create the most value for your retirement. This is also why it is a super popular structure for those in the crypto space.
SMSFs can be appealing as you are able to access more exotic investments where other retail superfunds may not have exposure to; such as cryptocurrency and other collectable type assets. Couple this with typically a low-time preference (as Bitcoiners and individuals looking to approach this from a more long-term perspective) and you have a match made in heaven.
In fact, SMSFs at this present time are the only way to acquire direct crypto assets where you can self-custody assets for your retirement. Although recently, Bitcoin and Ethereum exchange traded funds (ETFs) were approved in the U.S. as a means to offer traditional investors exposure to this dynamic crypto industry.
In its purest form, a SMSF is no different any other form of superannuation fund; it is a special purpose trust where assets are managed for its beneficiaries for the sole purpose of providing retirement benefits.
Note: if you are potentially looking to undertake crypto investments, it is important that you ensure your trust deed allows this type of investment.
Fun fact: a SMSF is actually a type of trust one of the many different types of trusts out there, as mentioned above!
SMSFs offer a high level of control and flexibility over investment decisions, potentially allowing members to diversify their retirement savings into cryptocurrencies, or other alternative asset classes. This can be contrasted with the typical prebuilt portfolio services traditional retail and industry super funds offer such as the (conservative, balanced and growth options).
This control and flexibility extends to selecting, managing and divesting fund assets. You are then able to strategically execute strategies to market conditions to cater to personalised goals.
The tax advantages are significant, with the fund paying a concessional flat tax rate of 15% on any earnings in the fund; this includes all types of staking, trading, yield farming, and derivatives to name a few. The flat rate of 15% also extends to capital gains; with long term capital gains eligible to apply a 33.33% discount reducing the overall CGT to 10%.
In retirement, (and subject to a cap called the transfer balance cap; currently at $1.9 million), the earnings in the fund on assets supporting the pension is essentially tax-free at 0% - making it a potential crypto tax haven when you reach this state. In addition to this, the pension drawn (and provided you are over 60 years old) is also tax free to the SMSF fund member.
This makes SMSFs one of the best vehicles forin investing for retirement with one of the lowest tax rates in the world. The idea and basic strategy that can be used in the crypto space is to realise these accumulated crypto gains in retirement, where the SMSF is in the retirement phase to reduce tax and CGT further.
SMSFs now allows up to 6 members where you can obtain further economies of scale with trusted individuals or family members; whereby you can reduce fees and pool capital to allow you to access crypto investments and ventures not otherwise available at the lower end of capital.
While there are various advantages of incorporating a SMSF into your suite of structures for private wealth and management, it is equally important to consider the various challenges and compliance requirements with SMSFs in the crypto space.
One consideration and potential major downside is the fact these funds can’t be used or accessed until your more senior years (in retirement). You can only access super effectively when you have “retired” or met some other strict condition (called a condition of release)
Due to the self-sovereign nature of self-managed, complexity and compliance requirements of a SMSF, fees are generally higher than a retail or industry super fund, such as QSuper, HostPlus or Australian Super who run prebuild portfolios (cookie cutter approach)
Investing in cryptocurrencies through an SMSF requires adherence to the Superannuation Industry (Supervision) Act 1993, the Superannuation Industry (Supervision) Regulations 1994 and the Tax Act, which include the sole purpose test to ensure investments are made to solely provide retirement benefits.
There are various prohibitions with:
Each year, the SMSF is required to prepare special purpose financial statements in-line with current accounting standards and have the fund audited by an ASIC registered auditor for reporting and SIS compliance requirements.
As this is a nascent industry, the regulators are still trying to apply catch-up with identifying crypto specific issues (such a proof of reserves, confirmation of asset ownership, valuations, taxable events and self-custody). That is why it is great to form a strategic alliance with Consensus Layer; one of Brisbane’s Leading Crypto Accountants to ensure you pass the audit with flying colours.
Another case study to highlight the benefits of operating a self-sovereign super.
Theo is a Bitcoiner at heart and is all in on the Bitcoin standard for retirement as a means to diversify his super portfolio. Personally, he and his wife already own a home (real estate) and other equities in the ASX and NASDAQ.
By approaching his affairs from a holistic perspective, he wants to optimise his position and add beta to his portfolio through the acquisition of Bitcoin. He currently has $400,000 in super in normal retail funds and wants to self-custody his Bitcoin.
Unfortunately, he finds that no retail or industry super fund allows him to directly invest his super into crypto assets, only allowing for indirect exposure such as the Blackrock Bitcoin ETF (IBIT).
Theo does his own research and concludes that the only way to access Bitcoin in his super is by starting his own SMSF. He seeks the appropriate financial advice and comes to us under an execution only arrangement and set-ups a SMSF that is tailored and allows access to crypto investments. We help Theo rollover his existing super into his newly created SMSF, get SuperStream compliant and redirect further employer contributions into the fund.
He on-ramps with a leading crypto exchange, purchases a hardware wallet, and transfers the Bitcoin into self-custody. He then speaks with a financial planner who assesses his full financial situation and advises him that to make a voluntary contribution to super to claim a tax deduction for this.
He makes regular pre-tax contributions, which are taxed at 15% (instead of his marginal rate) to stack sats all the way through retirement. In retirement, he plans to start a pension in retirement phase with his whole balance, allowing them to subsequently sell their stacks completely tax free and have access to this money as a lump sum.
While SMSFs offer flexibility and tax advantages for crypto investments, they come with significant compliance obligations and risks due to cryptocurrencies' volatile nature. Proper setup and ongoing management with a skilled SMSF advisor are crucial to harnessing the benefits while mitigating risks.
Click here to speak to an accredited SMSF Specialist Advisor (SSA) with the SMSF Association to help you on your crypto retirement journey.
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