After deciding to invest in cryptocurrencies, you will need to make a choice of which structure you would like to invest or do business in.
There are a variety of structures available in Australia, and each can make a significant difference to your future. The main structures currently include:
- Sole trader/investor
As everybody is in unique circumstances, there will be some structures that do and do not suit your needs. To assist you with identifying what structures could be appropriate for you, their predominant features are listed below.
If you’re a sole trader, you’re an individual and the sole owner of the investments.
The income your investments make belongs to you. You report the income on your individual tax return and pay tax on your capitals gains or trading income at your individual marginal income tax rate.
You’re responsible for all decisions and losses for your investments. This means you have complete control over your investments, but it also means your personal assets are at risk if things go wrong.
The benefits of being a sole trader include an easy setup and low costs.
In a partnership structure, you and your partners own the investments together and share the income/losses of the investments. A partnership can have two or more partners.
Each partner reports their share of the capital gains or trading income in their own individual tax return, and pays tax at their individual marginal income tax rate. The partnership must lodge a partnership income tax return every year with the Australian Taxation Office (ATO).
The setup process for partnerships is relatively easy, and running costs are low.
A company structure means that your crypto investments are owned by a separate legal entity from you. This means the company has the same rights as a natural person and can have debt, sue and be sued. A company is owned by its shareholders and run by its directors.
The personal assets of directors and shareholders are separate from the company, so they can’t be used to pay company debts. In certain cases where directors breach their duties, they may be held personally responsible for company losses.
The income and losses that the crypto investments make belong to the company, and is reported on a company tax return. A company needs its own TFN.
Companies have higher establishment costs and can be more complex to run in comparison to sole traders and partnerships.
In a trust, a trustee is responsible for dealing with the trust, including lodging returns and distributing income or losses to the beneficiaries. A trustee is also responsible for overseeing the payment of debts.
Using a trust structure means that investment activities are held and controlled by a trustee for the benefit of others (the beneficiaries).
A trustee is responsible for everything in the trust, including income and losses, and must report income in a trust income tax return. A trustee can be an incorporated company or a person.
Self-managed super funds (SMSFs) are becoming popular amongst those who wish to increase their level of control over their superannuation funds, reduce complexity of their superannuation, minimise costs for management and administration expenses, and work purposefully toward fulfilling their financial retirement and lifestyle goals.
SMSFs can be a particularly good tax planning tool when acquiring crypto investments however caution needs to be taken to ensure the Trustee of the Fund maintains a diversified asset allocation portfolio to minimize risk. Lack of diversification or concentration risk can expose the Fund and its members to unnecessary risk if a significant investment or asset class fails.
At retirement upon switching to pension phase, the income earned by superfunds is tax free and the allocated pension paid by the superfund is taxed concessionally, giving tremendous tax planning benefits to the recipients.
Superannuation has the lowest tax rate available and is a great vehicle for maintaining control.
What structure suits you and your cryptocurrency trading?
Ultimately, the best structure for you will depend upon your unique goals and needs. If your investments or investment trading business is new and small, being in a sole trader structure may likely suffice. However, larger investment trading or growth portfolio’s may need to investigate company and trust structures.
If you require any further assistance with investment structuring and comprehending your tax obligations as a cryptocurrency investor or trader, you can contact the Cryptotax team on 0456 248 264.
Cryptotax, a division of Paris Financial, was the first tax accounting firm establishing solely for the cryptocurrency community. It is our objective to give you a greater understanding of your taxation obligations in Australia, and highlight the benefits that may be derived in structuring your investments differently.