Crypto SMSF is the only way to add cryptocurrency to your retirement funds in Australia.
Many Australian taxpayers are attracted by the idea of self-managed super funds (SMSF), particularly because of its tax benefits.
However, SMSF is tricky territory.
Despite great tax benefits, most people choose not to opt for an SMSF, and the ones who do are typically under a lot of stress and pressure due to the strict laws and requirements around SMSF.
In this article, we’ll discuss everything about crypto SMSF – what it is, how it works, the pros and cons and how to set it up.
What is an SMSF?
As the name suggests, a self-managed super fund is a private super fund that allows you total control and management responsibilities of your funds for your retirement portfolio.
Unlike traditional retirement funds, SMSF allows you to invest in rather unconventional forms of assets like artworks, gold, collectibles and, of course, cryptocurrency.
One can start an SMSF on their own or with a maximum of six members, called trustees. The trustees are responsible for managing and complying with super laws and tax laws all the way from start to finish.
How Does a Crypto SMSF Work?
As mentioned, an SMSF is the only way to add crypto to your retirement portfolio. Though many are optimistic about crypto’s future, most investors may not be ready to consider crypto in their retirement portfolios. For them, these methods may be more attractive to make money with crypto.
Nonetheless, if you’re still interested, you must know how a crypto SMSF works.
There’s not much difference between a normal SMSF or a crypto SMSF. In fact, both are pretty much the same except for a few things in terms of taxes that we’ll point out later.
Generally, an SMSF would have two phases – the accumulation phase and the retirement phase.
Accumulation Phase – The period when you’re actively contributing to your super fund.
Retirement Phase – When you use the accumulated funds as your pension.
In Australia, you can only access retirement benefits once you enter the preservation age. For people born after the 1st of July 1964, the preservation age is between 55-60.
Further expanding on the retirement phase, you can opt-in for one of two pension types based on your employment situation – a transition to retirement pension and an account-based pension.
Transition to retirement pension – If you’re in your preservation age, this pension scheme will allow you to receive a pension while still working. However, if you’re under 65, you’ll still have to pay capital gains and income taxes on your pension. Once you cross 65, you’re exempted from all taxes, though. Also, you can only pay out 10% of your total assets each year.
Account-Based Pension – In an account-based pension scheme, you receive SMSF income once you hit your preservation age. Unlike in transition to retirement pension, all income from your SMSF after the preservation age is tax-free. The only limitation in an account-based pension is that you can only have up to $1.6 million in the retirement phase of your SMSF.
And that’s how crypto SMSF or any SMSF works.
Perks of a Crypto SMSF
Let’s talk about some of the perks of opening an SMSF:
Flexibility & Control
SMSF provides great flexibility and control around what kind of assets you want to add to your retirement portfolio. In an SMSF, you can even switch up your investing strategy midway to invest in a coin other than the one you started out with. Most other super funds are much more rigid and don’t offer this much control to their members.
Of course, this also leads to newer layers of complexity. Not to mention, SMSFs are generally much more complex and nuanced anyway. That’s why many people avoid it despite the benefits. They just don’t want the headache.
Nonetheless, whether you choose to utilize its flexibility or not, it’s still a relief to know you’re in control at all times.
The biggest perk of a crypto SMSF is its tax benefits. This is where a normal SMSF differs from a crypto SMSF. Sure, you still get the same tax benefits, but when you compare these to your ordinary crypto taxes in Australia, you see how great of a tool an SMSF could be to save more taxes.
Firstly, any income or gain acquired during the accumulation phase will be subject to a concessional tax rate of only 15%. (10% if held for more than 12 months). And as discussed before, your pension income will be tax-free if you’re in the preservation age and choose an account-based pension scheme.
Though there are limitations on how much you can contribute to your super funds every year, they are tax-deductible. This means you can lower your taxable income by investing in crypto. Crypto that will be subject to less tax rates than your typical capital gains or income tax rates anyway.
These are the perks of a crypto SMSF. Now, let’s talk about some drawbacks and risks associated with it.
Risks of a Crypto SMSF
Expensive & Stressful
SMSF is costly. Due to increasing competition, many super fund providers are offering low-cost SMSF, but you won’t have access to the same professional support. And realistically speaking, professional help is crucial for successfully running a crypto SMSF. It may include investing, accounting, auditing, tax advice, legal advice and financial advice.
Doing this on your own can be very time-consuming and ineffective. But that’s not all. Super laws in Australia are rather strict. Failing to adhere to them can result in harsh consequences such as penalties and civil suits.
Plus, there’s a lot of paperwork involved and requires you to constantly review your funds and everything related to it, which can be highly stressful at times. That’s partly why people avoid it – it’s highly complex and nuanced.
Poor Investment Choices
Since you’re in control of your own investment choices, you’re more vulnerable to making the wrong decisions.
Crypto is already a highly volatile asset, and unless you have in-depth knowledge about the crypto industry and the specific coin you’re investing in, you’re much more likely to make the wrong decisions. And these wrong decisions can cost you a lot.
The trustees of the SMSF undertake a lot of technical and legal responsibilities that they must adhere to at all costs. As mentioned before, since the laws around SMSF are very stringent and strict, failing to meet any responsibilities may cause you to face penalties and criminal suits.
The ATO doesn’t care about what you’re going through in your personal or professional life. Even if there’s a dispute among the fund members, the ATO still requires you to meet your responsibilities and your duty.
Setting up a Crypto SMSF
Before we start, keep in mind that you can only use an Australian crypto exchange to set up and run your crypto SMSF. The following are some of the best Australian crypto exchanges –
Next, you must open a new account for your SMSF separate from your personal account. This separate account can only be used for your crypto SMSF.
After that, you must also appoint an SMSF auditor who will review your SMSF yearly. And this is not optional. It’s a requirement per ATO rules.
Other than that, the ATO has outlined more rules and requirements around investment strategy, sole purpose test, restrictions on investments and more here.
For a more detailed step-by-step guide, refer to ATO’s guide to setting up an SMSF.
Is a Crypto SMSF Worth it?
Whether a crypto SMSF is worth it or not depends on your goals. If you’re viewing this purely from the lens of building the best retirement portfolio, you might be better off considering other options.
However, if you’re looking at this purely from a tax perspective, then it might make sense.
The better way to go about it is by consulting a financial advisor who can provide relevant advice that applies to your unique situation.