We have seen a massive increase in Crypto Investments in our clients SMSF, which one would think was a logical and fair place to invest in these speculative investments.
The issue that has become evident this past financial year is that ALL of these investments have resulted in an Audit Qualification.
Why are these investments resulting in Audit Qualification?
An SMSF must annually conduct a Financial audit (checking the financial statements) and a Compliance audit (checking the laws are complied with).
A qualification occurs when a breach or misstatement is identified, this can be material or not.
Crypto investments are normally made and held via a platforms and these platforms currently are unable to provide the reporting confirmations needed by the auditor to ensure ownership, valuation and existence of the investment.
This is crucial to a SMSF audit.
The discussion our auditors have had with platform providers seems to indicate they are not interested in this issue, perhaps because they don’t wish to invest in the systems required because this issue is only a problem for their Australian SMSF clients and not the majority of their other clients.
An SMSF qualified audit report is not a good thing
An audit qualification is a flag to the ATO you have not complied with the rules, this could lead to your SMSF potentially becoming non-compliant.
Making a fund non-complying can have a significant financial impact on the SMSF because:
(i) for every year the fund remains non-complying, its assessable income is taxed at the highest marginal tax rate
(ii) in the year it becomes non-complying, it includes in its assessable income an amount equal to the market value of the fund’s total assets less any contributions the fund has received that are not part of the taxable income of the fund.
At this stage the sheer volume of audit qualifications are so large that it seems logical that the ATO will need to consider a different stance or require SMSF taxpayers to exit these investments (this is only an opinion and observation and may not prove to be the case).
What can you do if you have this type of investment in your SMSF?
There is no simple answer to this dilemma, with any qualification you are supposed to take action to rectify the issue asap.
So either the platforms become able to provide the assurances needed or your SMSF does not continue to hold and invest in this (or any) non-complying investment.
- To date we have not seen any platform that complies with the auditors requirements.
- Selling out of these investments may incur transaction costs or crystalise a loss so you should seek advice from your professional adviser.
- Some SMSF’s have chosen to sell investment and reinvest in another structure, again you should seek advice from your professional adviser.
If you have any queries, please do not hesitate to contact us.
From VJC Accounting Team.
General Advice warning: the information in this article is general in nature, it is not advice specific to your needs. If you want to act upon the information in this article then you should seek advice from a qualified professional. VJC and VJC WM accepts no liability to any party for acting from this information unless they have sought advice in a formal engagement for this purpose
