The ATO finally released their draft paper on bitcoin in Australia and its tax treatment. It provides a lot of clarity and sometimes it’s easy to forget how far we’ve come, to the point where governments around the world are having serious discussions about it. However there were some troubling potential outcomes.
Firstly it must be understood that the ruling is a draft, and that every aspect, from CGT to GST has an invitation to comment, the contact details for the party you must submit your comment to are at the bottom of this piece.
Secondly this is in no way legal advice, and you should consult a professional when considering how to manage your affairs.
You can find a summary of the position here as well as links to the draft papers.
Capital Gains Tax (CGT)
Bitcoin is to be treated as an Asset for the purposes of CGT. This means that if you sell bitcoin and there is an increase in value you must pay tax on the sale price, less the cost base (the amount you paid for it). This comes as no surprise. Frankly the only reason that money is excluded (aside from complexity), is that it deprecates in value, so you’d be able to write off inflation against your cost base.
The most interesting thing here is that transactions with a cost base under 10k are exempt, this means that you avoid the ‘micro-capital gain’ situation, which would occur if you were to spend bitcoin that had increased in value on a coffee or a pair of fancy shoes.
Employees receiving bitcoin in lieu of fiat for wages need to pay tax on the bitcoin based on the market value at the time of payment. There isn’t a lot of clarity about what happens if that bitcoin then subsequently goes up in value, however it could be assumed the difference will be added to your taxable income.
There are also potential fringe benefit implications for employers paying out in bitcoin, though this would only arise if the bitcoin didn’t fall into the employee’s taxable income.
Goods and Services Tax (GST)
While most of the rulings were to be expected the most contentious issue is the GST implications. The ATO has ruled that the supply of bitcoin is a taxable supply for the purposes of the GST act. This means that a 10% GST applies. The problems arise because they assert that it doesn’t fall under any exemptions. For example the supply of money, vouchers or derivatives are all expressly excluded from GST under the tax act.
This may cause issues for merchants who accept bitcoin, who may have an issue when they on sell it (i.e conversion) as the paper suggests this is another taxable supply, effectively causing merchant to pay double GST. Major bitcoin businesses in Australia have stated this may force them to take operations off shore, which will have the effect of actually reducing the ATO’s revenue.
This may also affect the way bitcoin is distributed by exchanges in Australia, as they may be required to apply GST to the supply of bitcoin to consumers, effectively making bitcoin (a transactional token) 10% more expensive in Australia than anywhere else in the world. The UK did something similar in applying VAT to bitcoin, but they quickly back-pedalled as they clearly realised the potential innovation and subsequent economic growth that can come from supporting a new technology that disrupts finance.
ATO and the law
It needs to be pointed out that this is not a new law, or one written by the ATO, this is their interpretation of the law as it stands today. For this position to be changed they would need to add an exclusion or extend an existing one, for example by successfully arguing that bitcoin falls under the definition of money for the purposes of the act. This change then needs to move through parliament, who aren’t exactly progressive at the best of times.
Have your say
Remember, this is a draft interpretation and application of the law. While all the other aspects were expected, the implications of their GST interpretation may have a stifling effect on this burgeoning new technology in Australia.
By creating double GST on bitcoin transactions the ATO is double dipping, and diminishing the potential of this more efficient payment protocol. Their proscriptive application of the law means Australia will miss out on the chance to take advantage of bitcoin’s efficiencies, and all the economic benefits that it may bring.
As set out in appendix 2 of the Draft Goods and Services Tax Ruling, you can speak to the person taking comments about the GST implications with the contact details below. If you are impacted we recommend you let them know the implications this ruling will have on your business.
Have your say
3 October 2014
(08) 9268 5171
(08) 9268 8371
Australian Taxation Office
GPO Box 9977
Perth WA 6848