Introduction
I’m pleased to be here today talking to you face to face and hope you are enjoying the SMSF Professionals Day so far.
Events like this provide a great opportunity for the ATO to engage and share perspectives with industry professionals.
And as you can see from the title of today’s presentation, I will be providing an update in relation to current compliance issues and industry trends from a regulators perspective.
Key topics
I am going to start today by talking about some of the recent trends of the SMSF industry observed by the ATO starting with the findings from the independent SMSF research we commissioned last year.
This will include highlighting some of the important behaviours that may affect you and your clients.
As the regulator we also capture a lot of statistical information on SMSFs and SMSF auditors so I’ll also take you through some of our more recent statistical data.
There have been some identifiable compliance trends emerge from the lodgement of recent audit contravention reports with the number of reported contraventions rising in the last 12 months.
In the second part of the presentation, I will explore the key compliance issues that the ATO is currently prioritising including our focus on:
- the rate of non-lodgement by trustees
- illegal early access by trustees to their superannuation funds.
There’s also been some important work that we’ve continued to focus on for misuse of SMSF auditor numbers and following the changes to the Code of Ethics for Professional Accountants from 1 July 2021, we have a more targeted approach to auditor independence matters.
There are also quite a few emerging issues in the SMSF space, none more so than investments in crypto assets. I will share our most updated stats on the extent of SMSF investment in crypto assets and discuss some of the key issues SMSF professionals should be aware of when their clients venture down this investment pathway.
Research
So, let’s get into some of industry observations by considering what we’ve learnt through our recent research project.
To help understand what support trustees need, we recently commissioned an independent SMSF research study which involved qualitative interviews, an online survey and group discussions with current and potential trustees and professional advisors.
Whilst we won’t be publishing the findings in full, we are keen to share relevant information with you through events like this, to broaden our mutual understanding of trustee behaviour in the sector.
The research showed that there are distinct clusters of SMSF trustees that reflect a wide variation in trustee knowledge, confidence, and engagement.
Segments vary from those who are very confident and financially savvy through to unprepared trustees who lack the financial confidence and capability to manage their SMSF.
This independent research has confirmed there is currently a large number of trustees in the system that lack the financial confidence and capability to manage their SMSF.
The research highlighted the important and significant role an SMSF professional plays in helping trustees effectively run their SMSF and meet their regulatory obligations.
Now while the ATO is seen as a trusted source of information, trustees are more likely to turn to their accountant or SMSF professional for information and advice.
So it is clearly in the best interest of both the ATO as regulator and industry professionals to address this.
This is why it’s really important for us and SMSF professionals to ensure prospective trustees enter the system with their eyes wide open and understand their responsibilities and obligations before signing up to an SMSF.
Another finding that is of particular concern to us is the majority of trustees also believe it’s okay to leave their compliance responsibility entirely to their SMSF professional.
A product we’ve recently released that will support prospective and new trustees is our new publication, Starting an SMSF, which is the first in a series of guides we will be delivering to support trustees throughout the lifecycle of their SMSF.
We also have a range of other support products on our website such as videos, checklists, case studies and webinars and I encourage you to share these with your clients as it can complement the support you provide to them.
SMSF Statistics
Moving on now from the research into more general issues about the SMSF sector.
As key industry players most of you would know that we regularly publish statistics which provides information about the health of the sector, including demographics, costs, investment performance and asset allocations.
These statistics are primarily based on SMSF annual returns, new registration data and auditor contravention reports lodged with us. They provide useful data trends and information about the performance of the sector as a whole. This can help inform prospective trustees and assists policy makers and other key stakeholders to make decisions that impact the sector.
There are around 600,000 SMSFs, with over 1.1 million members holding an estimated total asset value of $876 billion.
So what are the key asset classes reported? Well, we publish all of that information on our webpage (and update it every quarter) however the key asset classes in the most recent statistical update were:
- Listed Shares – $241Bn
- Cash and term deposits – $147Bn
- Unlisted Trusts – $115Bn
- Non-residential property – $91Bn
- Residential property – $49Bn.
These figures highlight the critical role we play as the Government regulator in safeguarding the system.
SMSF auditors – framing the current auditor population
Moving along now to a highly important stakeholder segment – SMSF Auditors.
The current population of approved SMSF auditors is just over 5,300.
We have noticed a declining trend in this number in recent years – somewhere around 15% reduction in the total auditor numbers has been observed over the last 5 years.
However, included in that reduction have also been a number of new registrants entering the system.
In terms of some other key stats which are relevant for us in understanding the auditor population:
- Over 95% of auditors completed under 500 audits for the 2020 year.
- 85% of auditors have an individual Tax Agent registration.
- Over 90% were a member of a professional association when they became registered as an SMSF auditor.
- 27% have sat the AISC exam – although we note that there were registration transition measures in place which provided exemptions for many auditors (all new auditors are required to sit and pass this exam)
- 50% of auditors are above the age of 60
- 48% of auditors have their own SMSF.
Now each of those stats will have different meaning associated with them, but it is helpful to us as the regulator to understand this information and factor it into how we undertake engagement and treatment strategies.
This includes our approach to successfully transition all auditors from the previous electronic super audit tool platform (known as eSAT) to the current online services for business platform.
And it’s probably an appropriate point here to provide a reminder of this recent change.
From 1 March 2022 we are now live via online services for business as the dedicated pathway for SMSF auditors to lodge audit complete advice forms, audit contravention reports and to also seek general guidance via our professional-to-professional service.
Our regulatory stance
It’s important to recognise that as a result of the impacts of COVID, last year we continued to put most of our compliance activities on hold so we could focus on supporting SMSF trustees and their professional advisors.
We also assured the sector we wouldn’t be taking any compliance action for the 2020 and 2021 financial years where trustees had to take up or provide various forms of relief due to the impacts of COVID.
In 2022, while the tax and regulatory performance of the sector remains strong, we are seeing some indicators of heightened risk. One of the ways we are addressing this is to gradually scale up our compliance program but are doing so in a way that remains empathetic to the challenging situations many Australians are still facing.
So what are our key focus areas?
In simple terms, we always maintain a strong focus on behaviours that put retirement savings at risk or inappropriately take advantage of the concessional tax environment. And one of the key areas we continue to dedicate our focus to is illegal early release.
When we refer to illegal early release, we are talking about situations where individuals access superannuation before a condition of release has been met. And unfortunately, I am here to tell you that this behaviour is on the rise.
We see this play out in 3 main ways with:
- new registrants entering the system purely for the purpose of illegally accessing their super
- existing trustees no longer lodging because they have accessed their super illegally
- existing trustees who continue to lodge but have been illegally accessing some of their super – this third category is usually reported to us in an auditor contravention report (ACR).
We know that when someone establishes an SMSF then initiates a rollover but never lodges their first ever annual return there’s most likely been an illegal early release. This is either as a result of deliberate trustee behaviour or where the trustee has been coerced.
We are very concerned about the significant growth in the number of SMSFs failing to lodge their first return as this rate is now sitting at 26% for the 2020 annual return.
For the 2021 year, while we have only recently passed the last lodgment due date, the percentage of outstanding returns for new registrants has increased again. This is why non-lodgment is also a significant priority for us. I will talk more about this in a moment.
To protect retirement savings, we take preventative measures by risk assessing every individual entering the SMSF sector. We call this our new registrant program as this assessment seeks to identify higher risk new entrants and refers them for further scrutiny to ensure they are not trying to enter the system for the wrong reasons. In the last 18 months these actions have protected over $270 million in retirement savings from leaving the super system illegally.
We also use this process, with other sources of intelligence and data analysis to identify promoters of illegal early release schemes. We have found promoters can be either licenced or unlicenced, and often target people who are in vulnerable communities, under financial pressure and with low financial and super literacy.
They use various methods to attract people such as cold calling, social media, and face-to-face interactions at shopping centres, workplaces and community groups. Once they have convinced someone their scheme is legitimate, in return for a high fee, they support these individuals to establish an SMSF and help them withdraw their super before they are legally entitled to.
Let me make it clear, promoting illegal early access is unacceptable. Our scrutiny of those engaging in these behaviours will be intensive and the sanctions can be severe including loss of professional licences if they have any, significant penalties, and criminal prosecution.
Likewise, for trustees involved in these schemes, the bottom line is illegal early release is against the law and a matter we treat seriously so they should not be tempted to go down this path. Those engaging in this behaviour may incur additional tax and penalties, risk losing their retirement nest egg, and their rights as a trustee to ever manage an SMSF in the future.
Non-lodgment of SMSF annual returns (SAR)
The most fundamental compliance obligation for all trustees is to lodge their SMSF annual return. Without lodgment we have no visibility of the fund’s compliance with its regulatory and tax obligations or the superannuation balances of its members.
It is essential for all funds to keep lodging their annual return, including when their fund is in retirement phase.
To give you some context:
- there are 34,000 funds who had never lodged their first return
- a further 60,000 lapsed lodgers who have one or more outstanding returns
- the lodgment rate for the 2020 annual return is tracking at 91%.
Our analysis tells us that lapsed lodgment may be due to trustees experiencing difficulties but it’s often an indicator of broader issues. We have found that when an SMSF has an unrectified regulatory contravention, it can be a precursor of failing to meet their lodgment obligations in subsequent reporting periods.
As I mentioned earlier, there has also been an alarming increase in the number of funds that fail to lodge their first annual return and become what we call ‘NEVER’ lodgers. This is not a good start to their journey as an SMSF trustee, particularly as we issue letters to those trustees reminding them of their lodgment due date.
In fact, the number of newly established SMSFs failing to lodge their first return has grown significantly from 3% in the 2013 to over 26% in the 2020. This is particularly concerning if we can see there has been a rollover into these SMSFs, as this is a strong indicator illegal early release may have occurred.
To take you back to the research findings, it is critical in the early stages after setting up an SMSF for trustees to develop good compliance habits. Helping your clients meet this fundamental requirement to lodge their annual return is the first step in ensuring they understand their obligations and remain in the system for the right reasons.
So what are we doing about this?
Well firstly, I would like to take this opportunity to encourage you to bring any outstanding SMSF annual return lodgments for you or your clients up to date.
Non-lodgment of SMSF annual returns
Secondly, I’d like to inform you about the comprehensive communication campaign we have to remind trustees of their lodgment requirements including targeted mail outs for those new to the system and those that have failed to meet a due date.
And whilst this approach does deliver positive results for the majority of trustees, there remain a persistent group who continue to ignore our reminders, so we are now targeting them with a compliance campaign we call ‘3 strikes and you’re out’.
We start with a blue letter, that encourages trustees to take immediate action and lodge their return and provides a pathway for those in need of support.
If we don’t receive a response to this letter, we will issue an amber letter warning the trustees of the consequences of failing to lodge their return.
If we still don't receive a response, we issue our final warning, a red letter advising we are commencing the disqualification process and considering other enforcement action.
Last year we issued red letters to trustees who had never lodged their first annual return and we’ve now commenced disqualifying the 95 trustees that did not respond.
We are particularly concerned about some tax agents and auditors that have their own personal SMSF lodgments outstanding as we do hold professionals to a higher standard when it comes to meeting their tax and regulatory obligations.
We issued our first batch of red warning letters to this group in early April and they had until end of May to lodge their outstanding returns. The group comprised of 299 funds that had 611 trustees where the trustee in the fund was either a tax agent or auditor or both.
The letter provides a final warning to these trustees to lodge their outstanding returns before we move to disqualify them. Tax agents and auditors should treat these letters seriously as it may impact on their professional reputation and registration. We will issue a further batch of red letters to funds with outstanding returns who have a tax agent or auditor as trustee in early June.
We do know there are instances where trustees want to comply, but they run into difficulties. If you or your clients are experiencing difficulties, we encourage you to contact us so we can help. Coming to us first is always a better option than waiting for us to come to you.
Regulatory contraventions
I will now cover what we’re seeing with regulatory contraventions. Overall, we consider the sector displays positive regulatory compliance, as over 97% of the lodging SMSF population had no reportable contraventions during their independent audit.
Whilst this is encouraging, for the 2021 financial year, we received Auditor Contravention Reports or ACRs as we call them for over 13,800 funds, within those ACRs over 40,000 contraventions were reported. This was an increase of nearly 10% over the last year.
So far for the 2022 financial year, we’ve received ACRs for over 7,200 funds with 22,200 contraventions being reported. This is an increase of nearly 22% in the number of SMSFs with ACRs lodged compared to the same period in the 2021 financial year.
The 2 most common contraventions relate to purported loans to members and trustees not separating their personal and business affairs from their SMSF. It’s important to be aware that inappropriately accessing the funds and assets of the SMSF for personal use such as a loan to a member or accessing super to support a business constitutes contraventions which may attract additional tax, penalties and/or the disqualification of trustees.
We find the main drivers of regulatory contraventions are financial stress, poor record keeping and a lack of understanding of the rules. How we respond to breaches depends on a number of factors such as the impact of the breach on the fund, the compliance history of the trustee and their attitude to meeting future regulatory obligations. As you would expect, we treat a simple mistake very differently from someone who shows a blatant disregard of the law.
There are a range of sanctions that we may apply. For instance, in 2021 we disqualified 205 trustees and other contraventions attracted administrative penalties. This can have wide ranging impacts as the disqualifications are published and the penalties can be significant particularly when trustees treat their SMSF bank account as if it‘s their personal ATM. For instance, many trustees do not understand every incidence of illegal early access from their fund may attract its own penalty.
A recent decision by the AAT provides a good example of the interconnectivity of many of the risks I have highlighted so far. I am sure this case is familiar to many of you as it involved the purchase of a Church of Scientology course using the SMSF’s funds. The AAT stated that the course had nothing to do with managing the self-managed super fund. It noted that personal deposits and withdrawals from the fund’s bank account indicate it was not maintained for the sole purpose of providing retirement benefits as it provided financial assistance to its member. The AAT also confirmed late lodgment of annual returns was a contravention and using the fund’s bank account on many occasions for personal benefit is a serious matter. It upheld the ATO’s decision regarding the non-complying status of the fund.
We also investigate situations where individuals seek to inappropriately access concessional tax rates for superannuation. This program focuses on identifying SMSFs involved in inappropriate tax planning arrangements and is linked to the ATO’s high-net-worth individuals program.
We have a particular focus and regularly monitor SMSFs with high asset balances to ensure they have acquired their assets within the regulatory framework and are appropriately accessing superannuation tax concessions. The most common risk we encounter in this area relates to non-arm’s length transactions arising from related party dealings. This often involves the undervaluation of assets acquired from a related party.
So, what should your clients do if they go off track?
As I said earlier, it is always better to come to us before we come to you. If you identify issues with your client’s affairs, I encourage you to bring it to our attention via our voluntary disclosure service as soon as possible. If the issue involves a regulatory breach it is important for you to work with your client to develop a rectification plan as this needs to form part of the disclosure.
Further information about our voluntary disclosure service is available on our website.
SMSF auditors
Now that I’ve covered off on the more general SMSF landscape, let’s shift our attention to SMSF auditors.
I think it’s important when talking about ATO observations for SMSF auditors, that I start by stating that we continue to see the vast majority of the 5,300 or so approved SMSF auditors as demonstrating a high level of competency and professionalism in the work that they carry out.
Similar to our approach to fund compliance risks, we have also had a temporary pause on most of our compliance work for SMSF auditors over the last 2 years whilst maintaining a strong focus on issuing guidance material on a number of topics.
As we get deeper into 2022, we are recommencing our business-as-usual compliance program of work and I will go through some of the specifics as to where our focus will be prioritized in the coming slides.
Important to note is that our approach to ensuring that auditors are compliant with their obligations is not just about undertaking audit or review work.
Our compliance approach is designed and balanced in a way which aims to support the whole population of SMSF auditors as well as identify and deal with high-risk SMSF auditors.
We do this in a number of ways including:
- Providing web guidance and news articles to help SMSF auditors understand and comply with their professional and reporting obligations and the super laws.
- And I encourage you all to subscribe to our SMSF updates via the ato.gov.au webpage if you haven’t done so already.
- We maintain specialist support products such as Online services for business and the SMSF Auditors' Professional to Professional service where guidance and advice can be sought.
- We also have light touch products where we target information and advice to SMSF auditors through mailouts, where our data indicates potential areas of concern. The intention of this is to prompt auditors to review their own arrangements and approaches and to self-rectify.
Of course, in carrying out our function, we do also undertake specific and targeted compliance work where our data or intelligence indicates there may be some concerns with an auditor’s behaviour and/or the quality of their work.
Over the next 12 months, our program of work is expected to deliver increased visibility on how we are working with ASIC as co-regulators to address inappropriate auditor behaviour.
An important example of this joint work was highlighted in a recent ASIC media release where they announced the outcome of 18 ATO referrals involving auditors who contravened the independence requirements because of their involvement in reciprocal audit arrangements. Each of the reciprocal audit arrangements involved 2 SMSF auditors who audited each other’s personal SMSFs.
ASIC accepted voluntary cancellations or imposed conditions on the registration of these auditors because of the self-interest and familiarity issues which threatened the auditor’s independence.
To be absolutely clear, there are no safeguards that can reduce these threats to an acceptable level so the auditors should not have entered into these arrangements.
Surprisingly, despite the ASIC sanctions and active ATO direct engagement with auditors who are in this risk category, we continue to see auditors who are continuing to maintain reciprocal arrangements and as a result, will continue to receive ATO and ASIC scrutiny.
Our high-risk auditor compliance work is starting to become a stronger focus for us, particularly compliance with the independence standards impacting firms who provide both non-assurance and auditing services to an SMSF.
The restructured Code of Ethics and the Guide, make it clear that firms who provide both accounting and auditing services to an SMSF client, known as in-house audits, will only be able to continue to do so in very limited circumstances.
Last year we had a strong education focus where we issued detailed guidance on our website and produced a webinar, to help firms comply with the standards. The guidance provides further details on the standards impacting in-house audits as well as some of our concerns around restructuring arrangements.
We expect firms to have familiarised themselves with our guidance and encourage them to also reach out to their professional associations, who can potentially assist in answering enquiries about the application of the standards.
Auditors also now need to ensure that they’re using the updated the SMSF Independent Auditor’s Report to ensure they’re complying with these standards. The new version must be used for all audits completed on or after 1 July 2021 regardless of the income year reported on.
It’s worth also mentioning here that we are in the process of finalising an update to our SMSF Auditor Checklist to capture the key independence considerations for auditors. This is a document that our staff consider when auditing or reviewing an SMSF auditor.
The checklist is published on our ato.gov.au webpage and is a useful tool for assisting SMSF auditors understand some of the key considerations they need to have in completing an audit activity.
SMSF Auditors – Market valuations
In other recent reviews we’ve conducted, we’ve identified some common issues such as failing to obtain sufficient audit evidence to support the market valuation of property/fund assets and transactions with related parties.
We also commonly find audits lacking documentation to support the conclusions reached which is critical to enable us to determine that the audit has been conducted appropriately. This is the case even if there was no contravention.
We have issued recent guidance on market valuations and it is an area that we will continue to focus on going forward.
Asset valuation is a key component in preparing meaningful SMSF financial reports. It has an impact on the returns for members and ultimately, the SMSF sector performance as a whole.
A valuation of assets is also required to confirm an SMSF has complied with all of the relevant super laws.
Approved SMSF auditors are responsible for checking the valuation of fund assets as part of the annual SMSF audit.
In accordance with Auditing Standard ASA 500, an auditor must obtain sufficient appropriate evidence, either from the trustee or external sources, to form an opinion about whether the SMSF has complied with regulation 8.02B of the SIS Regulations. The auditor must also document that evidence and any judgments made in their audit file.
It is not the role of the auditor to value fund assets, or to determine their market value. Their role is to check that assets have been reported at market value by the trustees and assess and document whether the basis for that valuation is appropriate given the nature of the asset.
We appreciate, as identified within our research study, that many trustees may not fully understand their responsibilities in running a fund and that this may apply to issues regarding market valuations – that is, trustees do not provide objective and supportable evidence to their auditor to support the valuation of a fund asset.
Despite the challenges that this may pose when conducting the audit where an auditor is unable to obtain sufficient and appropriate evidence verifying the market value of a fund asset, they need to consider whether to modify the Independent audit report and lodge an ACR.
Again it’s important that I reiterate that it’s also imperative that the auditor documents any evidence and any judgments they have made in their audit file.
SMSF Auditors – SAN misuse
In the last 3 years we have invested heavily in identifying instances of SMSF annual returns being lodged where an auditor’s details have been entered incorrectly or an audit has not been undertaken which we refer to as SAN misuse
This has involved the important assistance from auditors who have responded to the ATO’s mailouts of lists of funds which have quoted their auditor number. I’d like to say thank you to those who has assisted on this front.
As a consequence of this partnership, we have noticed a significant positive shift in behaviour of tax agents and trustees in lodging annual returns with the correct SAN quoted.
This has been supported by action taken by the TPB following ATO referrals and we note the recent decision by the AAT in October 2021 to uphold the 3-month suspension of a tax agent that prepared and lodged 20 SMSF annual returns with details of audits that had not been done.
We have continued to track SAN misuse for 2020 annual returns via a mailout in September 2021 and a reminder email was recently issued in April to those who had not responded.
Based on responses to this mailout, we have recently commenced compliance action to engage the tax agents associated with the almost 1,900 instances where we have been informed that SAN misuse may have occurred.
Crypto assets
I mentioned earlier in my presentation the key asset classes which are reported to the ATO annually. One asset class that we are now capturing data on is crypto assets.
It’s clear that public interest in crypto is growing. The increase of some crypto values and the significant price fluctuations which occur in the market has generated increased public discussion, media coverage and the interest of investors.
A number of new crypto players including crypto exchange firms have entered the market and their advertising is starting to become quite prominent on media platforms and at public events such AFL matches.
Recognising this trend, ASIC issued a media release in January of this year which identified a number of key points related to SMSF investment in crypto. In the release ASIC noted:
- an increase in marketing recommending Australians switch from retail and industry superannuation funds to SMSFs so they can invest in a ‘high return’ portfolio
- that SMSF trustees are being targeted to invest in crypto assets (or cryptocurrencies)
- they advised trustees who decide to self-manage their super should consider the risks before using their SMSF to invest in crypto assets.
It’s only natural that as a result of these influences that investment in crypto assets will continue to edge its way into SMSF investment strategies. So how prevalent is it?
If you explore the SMSF data on our webpage you will see that the investment by SMSFs in crypto has been fairly insignificant in recent years. The March 2022 statistical data identifies the total SMSF crypto investment at just over $220M. Or in comparative terms, less than 0.03% of all SMSF investment.
This was reported by 3,345 SMSFs – approximately 0.6% of the population of SMSFs.
The total assets held by these SMSFs was $1.4bn – meaning that for the funds that held crypto, crypto made up less than 16% of their asset holdings.
So, given the low profile of SMSF investment thus far, why all the fuss?
In considering our statistics in greater depth, we have been able to see that there was an increase in new registrants investing in crypto during 2020 with 4% reporting crypto investments.
With a significant amount of 2021 lodgement that has now occurred, we have had our first glimpse of the 2021 lodgement statistical information. Although not fully settled in terms of our assurance work, there are a couple of trends we can see emerging:
- firstly, we are expecting similar growth in crypto investment by new registrants as that observed in 2020
- growth is also expected to be observed in the broader SMSF population
- for new registrants, we are expecting to see a trend of higher asset concentration in crypto assets.
In the coming months we will commence reporting on 2021 lodgement statistics and the extent of SMSF investment in crypto assets during the last year will become clearer. Although we expect that the figure will still remain relatively small in comparison to the total $876Bn+ in SMSF assets reported for 2020, we do expect an observable rise to be seen.
In noting these environmental shifts, there a number of important aspects for SMSF professionals to be contemplating for cryptocurrency.
Firstly, we’d like professionals to take note of the recent ASIC advice.
That is, for trustees of a SMSF thinking about investing in crypto, we strongly encourage them to seek independent financial advice before doing so. This is the case whether they have set up the fund themselves or used a SMSF professional to help them.
This is because there are many regulatory and income tax issues to consider when deciding to invest in cryptocurrency, and the trustees are ultimately responsible for ensuring the investment complies with the super and tax laws in their role as trustee.
In relation to the tax aspects of crypto investment, the ATO has had public guidance in the form of tax determinations and web content on the tax consequences of transacting in crypto for some time.
Further, we also have a crypto data-matching program which has been in place since April 2019. Under the program, we have collected data on cryptoc transactions for the 2014–15 to 2019–20 financial years and our protocol outlines our approach to collecting further data up to and including the 2022–23 financial year. This data can obviously be compared to lodgement data to determine the accuracy of returns that are lodged.
Secondly, while SMSFs investing in crypto is not prohibited, it's essential that trustees ensure that the investment:
- is allowed under the fund’s trust deed
- is made in accordance with the fund’s investment strategy and the trustees have considered the level of investment risk
- complies with the investment restrictions under the super laws.
What we have started to see is some examples of new funds which have chosen to maintain a very high level of investment in crypto as part of their fund’s investment strategy.
While a trustee can choose to invest all their retirement savings in one asset or asset class, certain risks such as return, volatility and liquidity risks may be minimised if a trustee considers diversifying their portfolio.
Diversification also helps trustees to potentially avoid concentration risk.
In situations where concentration risk is a real issue, we expect that the fund’s investment strategy should document that the trustees have considered the risks associated with a lack of diversification. It should include how they still think the investment will meet their fund’s investment objectives including their fund’s return objectives and cash flow requirements.
And as the third key point, there are a number of SMSF regulatory issues that trustees and SMSF professionals will need to carefully manage including ensuring the appropriate valuation of crypto assets and satisfying the sole purpose test. However, one area I would like to highlight today is the importance of ensuring that the crypto assets are owned by the fund and are held separately from the personal or business assets of the trustees.
For SMSF auditors, evidence of proof of asset ownership for the purposes of being satisfied that contravention of Reg 4.09A of the SISR hasn’t occurred can be tricky territory.
A fund must have its own digital wallet, separate to one used by trustees for personal or business purposes. The wallet will have a transaction listing for each separate crypto which can be provided as evidence.
Where an exchange has been utilised, trustees may also receive a report which can also show holdings on a certain date.
Some other things to consider which may show SMSF-only ownership could be:
- the account details being only SMSF-related, such as the email address used for the account
- bank records matching crypto FIAT fund deposits and SMSF bank account outgoings for the investment
- clean records that show the transactions with the crypto and how they align with the SMSF's deed.
In finishing today, I’d like to make the point that although the presence of crypto investments within SMSFs is still at the low end of the spectrum, it is starting to show an emergence that warrants more than a passing interest from SMSF professionals.
Whilst the ATO will continue to publish new and updated content to assist you in understanding how assets like crypto need to be considered, we would encourage SMSF professionals to recognise the increasing investment as a sign to broaden their understanding of this asset class in anticipation of it becoming a more prominent feature of their work in future.
Presentation by Paul Delahunty at the SMSF Professionals Day on 31 May 2022.