In a filing with the Australian Parliament the Tax Institute proposed a number of changes and suggestions for future measures the Australian Government could consider with respect to Bitcoin. Among those changes were treating Bitcoin as a currency rather than a good which would end the burden of processing GST taxes on Bitcoin purchases, a bane which has lead at least one startup to leave Australia. Also proposed is a "voluntary registry" of Bitcoin addresses in order to:
assist in proving that the entity owns the Bitcoin held atthose addresses. This could assist in tax compliance (as well as auditing requirements for disclosing entities), as the register could be used by a business to substantiate the date and value of their transactions in and holdings of Bitcoin. The entity would be able to prove the date and amount of payments sent and received from these addresses, which could assist in showing that allowable deductions were incurred, or confirm when amounts of income were received.
As well as serve under the Australian Tax Office as a sort of licensing office for businesses dealing in Bitcoin. It is hard to conceive though the ways in which a voluntary registry could be a licensing agency or a licensing agency be voluntary.
Another matter the Tax institute addressed was the treatment of digital currencies other than Bitcoin, where out of several options they outlined a preference for limiting any changes in present law to addressing Bitcoin on its own. Supporting this position they cite that Bitcoin is the only digital currency being used in commerce to any appreciable extent. The Tax Institute specifically singles out Litecoin as the second place digital currency behind Bitcoin and its substantially lesser market capitalization and acceptance.
The full filing is available on the Parliament website as well as in plaintext below:
Digital currency
Submission 16
1 December 2014
Dr Kathleen Dermody
Committee Secretary
Senate Standing Committees on Economics
PO Box 6100
Parliament House
Canberra ACT 2600
By email: economics.sen@aph.gov.au
Dear Dr Dermody
Digital currency inquiry
The Tax Institute welcomes the opportunity to make a submission to the Senate
Economics References Committee (the Committee) in relation to its Inquiry into digital
currency.
Overview
1. Given the broad terms of this Inquiry, we have limited this submission to the
tax issues relating to digital currency.
2. The majority of our submission refers specifically to Bitcoin, which is the most
valuable and widespread digital currency and therefore the most significant
from a tax perspective. We comment on other digital currencies in
paragraphs 244 to 300 below.
3. It is the Tax Institute’s view that Bitcoin should be treated as currency for tax
purposes. This view is not currently shared by the Australian Taxation Office
(ATO), who have recently issued guidance treating Bitcoin as property but
not money or foreign currency for tax purposes. This gives rise to additional
administrative costs and the potential for anomalous tax outcomes. We
recommend that the Committee consider the merits of a legislative change to
clarify that Bitcoin is currency for tax purposes.
4. We also recommend that the Committee consider the red-tape burden and
tax administration issues involved in ensuring compliance with the tax
treatment of digital currencies.
Level 10, 175 Pitt Street
Sydney NSW 2000
Tel: 02 8223 0000
Fax: 02 8223 0077
info@taxinstitute.com.au
taxinstitute.com.au
ABN 45 008 392 372
Digital currency
Submission 16
5.
The Tax Institute would be pleased to assist the Committee further, either by
providing additional details on matters set out in this submission or by
appearing as a witness before the Committee.
Tax law definition of digital currency
6.
The ATO currently interprets the tax law in a way that results in digital
currencies (like Bitcoin) being treated as a form of intangible property and not
currency for tax purposes. An alternative interpretation of the existing tax law
is that Bitcoin is treated as foreign currency. It is our view that this alternative
interpretation is desirable from a tax policy perspective. For certainty and
consistency of treatment, we recommend that the Committee consider the
merits of a legislative change to confirm that Bitcoin is currency for tax
purposes.
GST
7. The most pressing issue from a taxation perspective in relation to digital
currencies is the way that the GST system applies to Bitcoin transactions.
Earlier this year, the ATO issued a draft GST Ruling (GSTR 2014/D3) which
treats transactions involving Bitcoin as barter transactions, resulting in
payments of Bitcoin being taxable supplies in their own right, and subject to
GST. This approach causes an unnecessary red-tape compliance burden for
businesses, including the need to issue two tax invoices for a single
transaction, and anomalous outcomes for unregistered parties such as
consumers transacting in Bitcoin. Most notably, Australian individuals who
are not registered for GST who buy Bitcoin from an Australian supplier must
bear the cost of GST on what is in substance a foreign exchange transaction
which should be an input taxed supply. The Tax Institute would be happy to
provide further examples of the practical problems caused by the current
ATO interpretation if required.
8. The GST applies to supplies and not to consideration for supplies. The
operation of the GST in this way is supported by the broad inclusive definition
of “money” in s 195-1 of A New Tax System (Goods and Services Tax) Act
1999 (the GST Act). It is our view that Bitcoin should be treated as “money”
under this broad definition. A payment of “money” is not subject to GST
unless it is a money exchange transaction.
9. The operation of the GST Act is based on the widest possible definition of
“supply” together with the application of a number of exclusions. One of the
most important exclusions is to exclude “money” from being a supply and
from being an acquisition (except for money exchange transactions).
10. A supply of money is outside of the GST system in order to prevent GST
from inappropriately being applied twice to one transaction. The Explanatory
Memorandum to the Bill introducing the GST Act states at para 3.7:
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Submission 16
“Money that is provided as consideration (payment) for a supply is not in
itself a supply – subsection 9-10(2). Otherwise money supplied as
payment for a supply could be a taxable supply in itself.”
11. A fundamental premise of the GST system is that the payment of money for a
supply should not in itself be treated as a supply. The GST system is not
intended to apply to consideration that is, in the context of the transaction,
nothing more than a medium of exchange which facilitates the transaction.
Therefore, the operation of the GST system requires a sensible interpretation
of the definition of money.
12. The only use of Bitcoin in a transaction is as a medium of exchange. The
purpose of Bitcoin is to function as money within the economy. It has no
other purpose or use. Although the technology on which Bitcoin is based has
a range of other potential uses, the only uses of Bitcoin are consistent with
those traditionally associated with money, as a medium of exchange, store of
value and unit of account.
13. Finally, under the ATO interpretation, an anomalous situation would arise if
any foreign country decided to adopt Bitcoin as legal tender. Bitcoin would
then clearly fall within the meaning of ‘currency of a foreign country’ and
‘currency other than Australian currency’. Bitcoin would then automatically be
required to be recognised as foreign currency for income tax and GST
purposes, and money for FBT purposes. It is anomalous that such a
situation could arise independently and outside the control of the Australian
legislature or government bodies.
Fringe Benefits Tax
14. The ATO’s treatment of Bitcoin as property rather than money also results in
payments from employers to employees in Bitcoin being treated as a non-
cash benefit which is subject to FBT (see TD 2014/D14). A non-cash benefit
is defined as property or services in any form except money: s 995-1 of the
Income Tax Assessment Act 1997 (the Tax Act).
15. If Bitcoin is treated as money, payments by employers to employees in
Bitcoin would, in most cases, be treated as salary and wages and therefore
not subject to FBT. Instead, employers would be required to withhold under
the PAYG withholding regime.
16. The Tax Institute urges the Committee to consider recommending legislative
change to clarify that, where Bitcoin is paid as salary and wages, it is not a
fringe benefit. This would have a number of positive outcomes including:
(i)
being more consistent with the substance of the arrangement
where salary and wages are paid in Bitcoin;
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Submission 16
(ii) (iii) being more familiar to employers and reducing compliance costs
especially for small businesses for whom an FBT return may not
otherwise be necessary; and
(iv)
17.
preventing an anomaly where an employer must pay FBT at 47%
(49% from 1 April 2015) on Bitcoin provided as wages to an
employee who is on a lower marginal tax rate;
allowing innovative and startup businesses more flexibility to
attract and retain Australian employees, and remain in Australia, in
an increasingly competitive global market for talent.
We understand that an increasing number of technology businesses that
operate internationally and pay employees in Bitcoin. The current FBT
treatment makes it unfeasible for such businesses to employ Australian
workers.
Income Tax
18. The ATO also currently treats Bitcoin as property rather than currency for
income tax purposes (see TD 2014/D11, D12 and D13). In relation to income
tax, the treatment of Bitcoin as property results in CGT and trading stock
rules applying to transactions involving Bitcoin. Bitcoin can fluctuate in value
and treatment as property means that there is less clarity as to how these
fluctuations in value should brought to account for tax purposes.
19. If Bitcoin is treated as foreign currency, there is a specific code within the Tax
Act to deal with these fluctuations, in Division 775. Division 775 is a
comprehensive set of rules which take into account not only foreign
exchange transactions but transactions which have a similar effect, including
rights and obligations which are denominated in foreign currency.
20. The Tax Act defines foreign currency to be “currency other than Australian
currency”: s 995-1. The term “currency” is undefined in the Tax Act. It is our
view that Bitcoin can fall within the ordinary meaning of “currency”, and thus
be treated as a “foreign currency” for income tax purposes.
21. Ideally there should be consistency of the treatment of digital currencies
across taxes. For example, if Bitcoin is treated as foreign currency for GST
purposes, that treatment should also apply for FBT and income tax purposes.
22. As discussed above, it is our view that the existing tax law defines currency
and money in broad enough terms to include Bitcoin. However, as indicated
by the ATO’s recent guidance, the law as currently drafted could also support
the contrary view that such a widely used digital currency is property.
23. In the interests of certainty and consistency, we recommend that the
Committee consider the merits of a legislative change to clarify that the terms
money and currency in the tax law include Bitcoin.
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Submission 16
Digital currencies other than Bitcoin
24. There are a number of digital currencies (over 500 by some estimates1) in
existence, with more being created on a regular basis. However, these other
digital currencies do not have the wide use, acceptance or value of Bitcoin at
this stage. As at November 2014, Bitcoin represents approximately 90% of
the total value of all digital currencies2.
25. An issue arises as to whether the tax law should be amended in a way which
could accommodate these other digital currencies, should they become as
widespread as Bitcoin in future, or as a matter of policy consistency.
26. If the Committee considers it appropriate to recommend legislative change to
clarify the treatment of digital currencies under the tax law, we recommend
that the Committee also consider the merits of a legislative change to define
digital currency.
27. The options to define digital currency for tax purposes include:
(i) limit any definitional changes to Bitcoin alone;
(ii) encompass Bitcoin and all other digital currencies;
(iii) limit to digital currencies which meet a certain overall
value, use or acceptance threshold; or
(iv) delegate responsibility to make this decision to a
government body such as the ATO, Treasury or ASIC.
28. Our preferred course of action is Option (i). Although such a legislative
change would not incorporate digital currencies other than Bitcoin, it deals
with the immediate issue facing tax practitioners and their clients in relation to
digital currencies. If other digital currencies were to become as popular as
Bitcoin in future, they could be treated in the same way as Bitcoin through a
legislative instrument or Option (iv).
29. At this point, Bitcoin is the only digital currency being used in commerce to
any significant extent. For example, the most popular non-Bitcoin digital
currency is Litecoin. Only a handful of merchants accept Litecoin3 and its
total value is approximately $121 million compared to Bitcoin’s $4.9 billion.
30. The alternative ‘principles based’ approach in Options (ii) and (iii) may
become uncertain, complex and difficult to administer. Accordingly, we
propose that any definitional change be limited to incorporate Bitcoin
specifically.
1
www.coinmarketcap.com, www.coingecko.com/en
As above
3
https://coinreport.net/top-5-businesses-accept-litecoin-payments/
http://uselitecoin.com/
2
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Submission 16
Tax administration of digital currency
31. We recommend that the Committee examine the ability of the ATO to enforce
the tax outcomes intended for digital currencies, and the resources required
to do so. In particular, resources may need to be allocated to developing
systems to effectively read and monitor the blockchain (the record of all
Bitcoin transactions), in combination with traditional cash-economy tax
auditing techniques.
32. We also recommend that the Committee consider the concept of a 'voluntary
Bitcoin register' on which individuals or companies could register a Bitcoin
public address (or a number of addresses) as belonging to them.
33. This register would assist in proving that the entity owns the Bitcoin held at
those addresses. This could assist in tax compliance (as well as auditing
requirements for disclosing entities), as the register could be used by a
business to substantiate the date and value of their transactions in and
holdings of Bitcoin. The entity would be able to prove the date and amount of
payments sent and received from these addresses, which could assist in
showing that allowable deductions were incurred, or confirm when amounts
of income were received.
34. This register could be administered by an existing government agency (for
example ASIC or the ATO) which could serve as the regulator/licensing
authority for businesses dealing with Bitcoin. This register should not be
public due to privacy concerns i.e. a public Bitcoin register would be
analogous to publicly disclosing an entity’s bank statement.
Conclusion
The Tax Institute would be pleased to assist the Committee further, either by providing
additional details on matters set out in this submission or by appearing as a witness
before the Committee.
Please feel free to contact either me, or Tax Counsel, Thilini Wickramasuriya
Yours sincerely,
Michael Flyn