Is Bitcoin a good investment strategy for my super fund?
ANDREW Heaven, an AMP financial planner at WealthPartners Financial Solutions, talks about how you can buy Bitcoin for your self-managed super fund.
Bitcoin is a form of digital currency. Created in 2009, it is the first example of a category of money or store of value referred to as Cryptocurrency.
Software developer Satoshi Nakamoto devised Bitcoin as an electronic payment system. The idea was to create a currency independent of any central authority. Unlike conventional currencies, Bitcoin is unique in that it is decentralised. No Government or Central Bank controls the Bitcoin network.
You buy Bitcoins either through Cryptocurrency exchanges or directly from others via Bitcoin marketplaces.
Bitcoins can be traded by exchanging cash or other currencies, services or goods.
- The Bitcoin system is peer-to-peer.
- Transactions can take place between users directly, without an intermediary.
- These transactions are verified by computer network nodes and recorded in a public distributed ledger called a blockchain.
- The blockchain transactions are verified and recorded by a network of nodes (or databases) on the internet. Because each node stores its own copy, there is no need for a trusted central authority (bank).
Designed to work as a currency, bitcoin is touted as a low-cost medium of exchange with international currency transfers costing a fraction of what, say, a bank may charge.
To buy Bitcoins, you must first establish a Bitcoin 'wallet'. As there is no physical currency, the value is stored electronically. The process of establishing a wallet in Australia is akin to opening a bank account and subject to conventional banking requirements verifying identity and the source of funds.
There is a range of exchanges that you can trade Bitcoins through, but be aware they do not offer the same capital protection as banks.
There are a number of issues that SMSF trustees need to consider before investing in Bitcoins or any other cryptocurrency.
- Trustees need to review the SMSF Trust Deed to ensure that the SMSF is permitted to invest in Bitcoin under the fund rules.
- The Investment strategy of the SMSF should specify investments that are permissible. In formulating an investment strategy, trustees need to consider the risks in making, holding and realising any investment. They are obliged to consider the likely return, diversification, liquidity, costs and tax consequences as part of the investment strategy.
- Bitcoin is not a conventional asset class like shares or property, so it may be worthwhile specifying Crypto currencies" as a permissible investment asset in the Investment strategy.
- Trustees must exercise and demonstrate due care and diligence in relation to all investments made by the SMSF. The issue here is the risky nature of bitcoins as an investment. Would Bitcoin be considered a prudent SMSF investment for those approaching retirement age?
Assuming the trustees determined that Bitcoin was appropriate as part of an Investment strategy, they may be able to argue that having a small allocation of the total fund's assets invested in Bitcoin does not constitute a material risk for the fund and adds the potential to increase the fund's overall investment performance.
When registering for the Bitcoin wallet -
- The legal owner of the wallet must be the SMSF.
- The trustees need to ensure that the SMSF has legal ownership of the Bitcoins purchased.
- The individual member of the SMSF must not have ownership or control of the SMSF Bitcoins at any time.
Bitcoin can't be transferred as an in-specie transfer to the fund by a fund member, nor purchased from a member or a related party as it is not a listed security.
While the Australian Taxation Office has issued guidelines that profits derived from Bitcoin transactions are taxable and subject to capital gains tax rules, there have been no formal rulings or publications from the ATO in specific reference to Bitcoins and SMSF. However, SMSF trustees are subject to the requirements to comply with the SIS Act and the requirements for investments to be permitted and eligible for a SMSF to invest in.
Q&A with The Coach first appeared on www.wealthpartners.net.au. Any general advice in this story doesn't take account of personal objectives, financial situation and needs.