The Senate Economics References Committee (Committee) recommended in a report last week that digital currency should be treated as money for Goods and Services Tax (GST) purposes, and as a result transactions involving the exchange of digital currency would not be subject to GST.
The report, entitled Digital currency – game changer or bit player1(Report) also examined anti-money laundering and counter terrorism financing (AML/CTF) regimes, creating a unified regulatory treatment for digital currencies and further taxation issues, and could spark major change in Australia’s digital currency industry.
ATO’s rigid treatment of digital currency
Driven by the reaction to the Australian Tax Office’s (ATO) suite of rulings on the tax treatment on digital currencies, which resulted in the relocation of digital currency businesses, such as Coinjar to more favourable jurisdictions, the Committee examined “how best to define digital currency within the regulatory frameworks in order to support innovation and the needs of the growing Australian digital currency industry.”2
The ATO’s rulings issued in December 2014 determined that:
- Transacting with digital currency was akin to a barter arrangement,
- Digital currency is neither money nor a foreign currency and the supply of digital currency is not a financial supply for GST purpose,
- GST will be charged when (1) individuals or businesses buy digital currency and (2) businesses supply digital currency,
- Businesses providing an exchange service, buying and selling digital currency, or mining Bitcoin will pay income tax on the profits, and
- Remuneration paid in digital currency will be subject to Fringe Benefits Tax (FBT).
The ATO’s ruling that digital currency is a commodity rather than a currency is similar to guidance provided by relevant authorities in Canada and Singapore. However, it is at odds with the position in the UK and Spain. The ATO stated that its rulings were based on its impartial interpretation of the current law. It had no role in determining whether digital currencies should be treated as money – rather these were decisions for Government.
As observed in the Committee hearings, the digital currency community’s key point of contention was that the ATO’s application of GST to digital currency. The double taxation levied on Australian digital currency transactions effectively rendered the industry uncompetitive compared to both fiat-based competitors and international Bitcoin-based competitors.
A global currency
As digital currency exists in cyberspace, entities will exercise jurisdictional arbitrage to operate in the most favourable regulatory environment. The ATO’s ruling stonewalled Bitcoin and other digital currency businesses in Australia. For example, following the ATO’s ruling, Coinjar, a Bitcoin trading platform, reincorporated in the UK where digital currency trading is exempt for VAT.
Following the UK’s lead on tax?
Unlike the ATO, the Committee considered that digital currency transactions should be treated in the same manner as national or foreign currency for the purposes of GST.
This shift in the government’s view on digital currencies in Australia mirrors the UK’s treatment of Bitcoin and other cryptocurrencies. Initially, Her Majesty’s Revenue and Customs (HMRC) classified digital currencies as vouchers, which incurred 20% VAT. However in March 2014 HMRC reversed its initial view and classified bitcoin and digital currencies as ‘private money’ and removed the requirement to pay VAT on the transfer of Bitcoin.3
AML/CTF – essential to digital currency’s mainstream viability
The report also addressed a number of issues including how digital currency fits within the regulatory frameworks for financial and payments system and whether digital currency should be brought within Australia’s AML/CTF regimes. Interestingly, the report noted that although digital currency businesses are unable to access the AML/CTF protocols and procedures, some such businesses conduct similar ‘know your client’ procedures on an ad hoc basis.
Back in the UK, the Bank of England has recently invited discussion on whether central banks should issue digital currencies.4 In doing so, like the Australian Senate Committee, the Bank identified AML/CTF concerns as one of the current limitations on digital currencies. Both the Bank of England and the Committee recommended considering applying AML/CTF legislation to digital currency.
Regulators stamp of approval?
It appears bitcoin and other digital currency will only be widely used when they are appropriately regulated as this will provide appropriate consumer protection. To strike the appropriate balance, the Committee recommended establishing a taskforce with the Reserve Bank and ASIC to gather further information on uses, opportunities and risks associated with digital currencies to achieve a “clear regulatory approach” for both consumers and the digital currency industry. This would ensure a consistent approach across the relevant regulators.
Other tax issues
Implementing the Committee’s GST recommendation will require amendments to both the legislation and regulations. Further, as it will affect the GST base, any change will require the unanimous support of the State and Territory Governments and the passage of legislation through the Federal Parliament. While this should not be controversial, it will delay the progress of amendments coming into force.
GST is only one aspect of the treatment of digital currency, the Committee also recommended that the appropriate income tax and FBT treatment of digital currencies be included in the taxation white paper process.
It appears that the Committee has a rather favourable view of digital currency’s future viability and resilience. The Committee’s report seems to recognise the importance of ensuring that both the tax treatment and regulatory strategies protect consumers while not unduly stifling innovation. Perhaps, if our regulatory framework is amended digital currencies can be brought out of the shadows and into the mainstream.
This article was written by Toby Eggleston, Director, Greenwoods & Herbert Smith Freehills, Melbourne and Hannah Glass, Solicitor, Herbert Smith Freehills, Sydney.
- Senate Economics References Committee, Parliament of Australia, Digital currency – game changer or bit player (2015)
- Senate Economics References Committee, Parliament of Australia, Digital currency – game changer or bit player (2015) 1.3.
- Her Majesty’s Revenue and Customs, Revenue and Customs Brief 9(2014): Bitcoin and other cryptocurrencies (3 March 2014).
- ‘One Bank Research Agenda’ (Discussion Paper, Bank of England, February 2015).
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021