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SMSFs, Audit & Bitcoin
It has been asked, how and if, developments in Bitcoin will affect self-managed super funds? 

Advocates of Bitcoin speak of it becoming a “universal currency” or a “barter system without borders”.  One observer has suggested “in the last 4 months in Australia Bitcoin has picked up some legitimacy”.  Then in September it was noted some of the world banks were working together to “draw up industry standards and protocols for using blockchain in banking”. 

Some investors are now speaking of Bitcoin as a legitimate investment SMSFs. Like many, I initially reacted with scepticism when asked to consider Bitcoin. I was even more sceptical when Bitcoin was proposed as an investment inside self-managed super. And …you can only imagine how wound-up I got when I started to think ….how could it be examined as part of a “proper” SMSF audit?

Some key questions around Bitcoin and SMSFs are:

  • Can Bitcoin be held as an investment of a SMSF?
  • Can Bitcoin be used to purchase SMSF assets?
  • Can Bitcoin be accepted as consideration for the sale of an SMSF asset?
  • Is it possible for SMSF members to make contributions in Bitcoin?  
  • How does a SMSF Auditor effectively audit a fund which has used or accepted Bitcoin? 

Bitcoin as an Investment

  • There will be those that say “Bitcoin does not pay income so is not an appropriate investment for a SMSF”. It may be argued that gold bullion is an investment that doesn’t pay income either.  However there is the potential for capital gains, which may constitute Taxable Income in the Fund.  So it could be argued Bitcoin is similar to holding gold bullion.
     
  • The means of acquiring Bitcoin can vary from purchasing the asset directly (via an electronic intermediary) to investing via a dedicated fund (e.g. Bitcoin Exchange Traded Fund). Therefore long term Bitcoin investors can acquire, hold and sell Bitcoin. Also year-end price can be captured to record “market" value.
  • An auditor will of course check the Trust Deed and the Investment Strategy to ensure Bitcoin or other online/virtual/crypto currency may be held as an investment of the Fund.

Acquiring and Transacting Bitcoin 
The current price of a Bitcoin is around $US320 per unit (or BTC).  The price has fluctuated significantly.  From a start of $ US 1, the price moved up to around $ US 1,200 in 2013, then dropped significantly afterwards.

In order to use Bitcoin to pay for something, first you need to have acquired Bitcoin.  This can be done using a nominated bank account where money is transferred to an electronic intermediary (such as “Coinjar”) that converts standard currencies (e.g. $US) into Bitcoin.  With Bitcoin, the purchaser receives a “wallet” which is “a collection of electronic keys that unlock Bitcoin addresses” to enable a specific transaction.

Transactions then occur between “addresses”.  Every 10 minutes all transactions are time-stamped and published as a “block”, hence blockchain.  Intermediaries, such as Coinjar, produce a ledger which records the owner's transactions in Bitcoin.

There have been some examples of large assets (such as real estate) being sold in exchange for Bitcoin. It therefore appears feasible that SMSFs may acquire real estate investments with Bitcoin (to the exclusion of Stamp Duty and other such taxes).

Auditing Bitcoin Transactions
As an auditor, I immediately ask…how are the key audit assertions of OWNERSHIP, EXISTENCE & VALUATION satisfied? Does this electronic environment allow the “correct name of the fund” to be recorded on the Bitcoin asset? Is there an electronic trail (or ledger) of Bitcoin transactions? Is this reliable and transparent? Can an electronic “confirmation” be obtained on closing balances? How do we prove the Bitcoin asset actually exists?

The audit of a Bitcoin account appears similar to an audit of other bank accounts. A holder of BTC obtains their own Bitcoin address and the Blockchain ledger maps that address.  This essentially becomes an account, showing movements and balances.  The Bitcoin address will allow multiple subsets and there are tools to explore transactions.  The BTC history appears with time stamps, so BTC transactions are readily identifiable.

Further, it is possible to have a Bitcoin address in the name of a company, as well as individuals. At face value, Bitcoin can be used, no matter whether the the SMSF has a corporate or individual trustees. From an audit perspective – it is critical that any such assets are held in correct names.

Another important factor is “who has authority to transact on the Bitcoin account”? This is an extremely important question when talking about long term retirement savings in an SMSF environment.

Contributions Paid with Bitcoin
At this stage it would be extremely difficult to say that Bitcoin is a “currency” that would enable employers or members to make contributions. However it seems possible that it may be used (indirectly) to acquire assets (such as commercial real estate) that may be later contributed to an SMSF. For now it seems prudent to maintain contributions in the form of Australian dollars.

Auditor Reservations
Most SMSF auditors work to ensure investments and transactions carefully comply with SIS (Superannuation Industry Supervision) Act and and Regulations, especially provisions such as the sole purpose test.  Why would a Fund choose to use Bitcoins and would it draw extra attention to the Fund?  Certainly it would appear there would be extra costs auditing the Fund.

Whilst Bitcoin appears to have potential as an SMSF asset….any SMSF must factor in an appropriate level of RISK when auditing funds that carry Bitcoin as an investment and whether the Trustees have adequately factored this into their Investment Strategy (including their proper consideration of Liquidity, Risk and Diversification).

Further Developments  
It is said there are Bitcoin ATMs around the world, including “a few in Sydney” and at least “one in Melbourne”.  The ATM scans the code of your Bitcoin and dispenses Australian dollars.

The Future
It is noted in Australia there are some investors who are said to be keen to explore the potential of using Bitcoin in association with their SMSFs, so this will happen, if it has not already done so.  Auditors may need to amend their work flow processes and also their fee estimates.

For most, Bitcoin is still a great unknown, but SMSF Auditors will need to quickly acquire an appropriate understanding so that they are fully capable of auditing any SMSF that chooses to hold Bitcoin as an investment. Without proper care, the Bitcoin experience could turn ugly for retirement savings in self-managed super.

Saul SMSF
As the most trusted and reliable SMSF audit service in Australia, we would be happy to have a complimentary meeting with you to discuss how we can provide quality advice and support for your SMSF audits.