Australia Provides Relief for GST Treatment of Digital Currencies
The recent changes to the law in Australia align the GST treatment of digital currency with the GST treatment of money (particularly foreign currency). However, it will be important for purchasers and users to ensure that the particular tokens they are using come within the definition of “digital currency” in the GST legislation.
On October 30, 2017, the Australian Parliament enacted amendments to the Goods and Services Tax (“GST”) treatment of transactions involving digital currencies like Bitcoin to treat digital currencies like money for GST purposes. The legislation (Treasury Laws Amendment (2017 Measures No. 6) Act 2017) fulfils a Budget commitment of the government and has retrospective effect from July 1, 2017.
Before the changes, GST was payable first when a person bought the digital currency for money and again, when the person exchanged the digital currency for goods or services. The changes remove this “double” GST application. Under the changes, supplies and acquisitions of digital currency are generally disregarded for the purposes of GST. Consistent with the GST treatment of supplies of money, supplies of digital currency will only be treated as a GST supply if the supply is made in exchange for money or other digital currency and, in that case, the supply will generally be treated as an input taxed financial supply.
Previous GST Treatment of Digital Currencies
Australian GST legislation provides that a supply of money is not, in general, a supply attracting GST. This means that a person paying consideration for goods or services in money (including Australian currency or foreign currency) is not, in general, liable for GST on the supply of the money. Money is treated in this way because it is usually a medium of exchange that is not consumed and GST is intended to apply tax to final private consumption.
But if money is supplied as consideration for another supply of money (e.g. debt trading), it is treated as a supply for GST purposes and it will generally be an input taxed financial supply (A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”) section 50-5 and item 9 of the table in sub-regulation 40-5.09(3) of the GST Regulations).
The Commissioner of Taxation considered that Bitcoin was not money for the purposes of the GST law; in particular it was not currency like Australian or foreign currency issued by a government (Goods and Services Tax Ruling GSTR 2014/3).
So if a person paid the consideration for the goods or services in digital currency (and the person was required to be registered for GST) the supply of digital currency was a taxable supply by the payer and attracted GST. This created a significant deterrent to the use of digital currency for payments as opposed to the use of money to pay for goods or services. That was considered to disadvantage not only digital currency businesses, like exchanges, but broader FinTech innovation and development which leveraged the use of digital currency.
New Regime for Digital Currencies and GST
The changes align the GST treatment of digital currency (as defined) with the GST treatment of money (particularly foreign currency).
Under the changes, supplies and acquisitions of digital currency are generally disregarded for the purposes of GST, unless the supply or acquisition is undertaken for a payment of money or digital currency. So if the digital currency is supplied in consideration for the provision of goods or services, the supply of the digital currency is not a taxable supply.
But, consistent with the GST treatment of supplies of money, supplies of digital currency will be treated as a GST supply if the supply is made in exchange for money or other digital currency and, in that case, the supply will generally be treated as an input taxed financial supply.
Definition of a Digital Currency for GST Purposes
The amendments seek to define digital currency so that it has broadly the same features as government fiat currencies. In particular the value of the digital currency must not have any intrinsic value based on it giving rights to something else; instead its value is set by the market’s assessment of the value of the digital currency for the purposes of exchange.
The definition is as follows:
digital currency means digital units of value that:
(a) are designed to be fungible; and
(b) can be provided as *consideration for a supply; and
(c) are generally available to members of the public without any substantial restrictions on their use as consideration; and
(d) are not denominated in any country’s currency; and
(e) do not have a value that depends on, or is derived from, the value of anything else; and
(f) do not give an entitlement to receive, or to direct the supply of, a particular thing or things, unless the entitlement is incidental to:
(i) holding the digital units of value; or
(ii) using the digital units of value as consideration;
but does not include:
(g) *money; or
(h) a thing that, if supplied, would be a *financial supply for a reason other than being a supply of one or more digital units of value to which paragraphs (a) to (f) apply.
Some key points about this definition are worth noting:
- The digital assets must be fungible, that is, designed to be fully interchangeable for the purposes of their use as consideration. They can still be individually identifiable (like banknotes) provided they are designed to be used interchangeably as consideration.
- The units of value must be capable of being consideration for any type of supply and generally available to the public without any substantial restrictions on their use as consideration. This excludes digital loyalty points which are only redeemable at certain merchants for products and services and digital gaming tokens which cannot be used outside the game.
- Digital units with a value derived from, or dependent on anything else, are not digital currency because the intention is that the value of digital currency should be derived only from its ability to be used as consideration. Some digital tokens produced in Initial Coin Offerings carry rights to a share in property or other financial assets or voting rights in a joint enterprise. Other digital units may have a value dependent on something else such as an interest rate or market index. Such digital tokens and digital units are not digital currency for the purposes of the GST definition. This criterion also excludes dual purpose or hybrid digital currencies which operate as a means of exchange but also provide the holder with other benefits such as memberships of vouchers or loyalty credits – the value of such units is derived only from their ability to be used as consideration.
- The Explanatory Memorandum to the Treasury Laws Amendment (2017 Measures No. 6) Act 2017 (“The Explanatory Memorandum”) states that the value of a unit is not derived from, or dependent on, something else merely because it may have a remote or abstract connection with it. The value of a nation’s currency is affected by its trade balance and its domestic interest rate policy. Likewise, the value of a digital currency is affected by perceptions of the reliability of any distributed ledger that underlies it. But this is not the type of derivation or dependency of value from something else contemplated in the definition.
A Worked Example of GST treatment of a Digital Currency
The Explanatory Memorandum provides the following worked example.
David, an Australian consumer, acquires 500 Ozcoins (a digital currency) from Ozco, an Australian resident company that is registered for GST, paying partly in Australian dollars and partly in U.S. dollars.
The supply of the Ozcoins by Ozco to David is a supply of digital currency—specifically a supply of digital currency for money (specifically Australian and foreign currency). As it is a supply of digital currency for money, the supply is not disregarded for the purposes of GST. Assuming the regulations are amended to make supplies of digital currency financial supplies, the supply by Ozco would be an input taxed financial supply.
In this case, the supply by Ozco would not be a taxable supply and input tax credits would not generally be available for any related acquisitions Ozco may have made.
David’s supply of money to Ozco is also not disregarded as it is a supply of money for digital currency. However, as David is not registered or required to be registered for GST no further consequences apply.
David subsequently uses 11 Ozcoins to purchase a coffee and donut from Loretta’s Bakery, an Australian resident company.
David’s supply of digital currency to Loretta’s Bakery is not considered a supply for the purposes of GST (although in this case it does not matter as David is not registered or required to be registered for GST).
The general rules in the GST law apply to the supply of the coffee and donut by Loretta’s Bakery—the fact that the consideration was digital currency does not change the outcome. If the supply is a taxable supply, Loretta’s Bakery must remit 1/11th of the consideration provided by David in relation to the supply (i.e., an amount of money equivalent in value to one Ozcoin in Australian dollars) to the Commissioner as GST.
All of these outcomes would be the same if David had instead acquired the coffee and donut with Australian currency.
The amendments should remove any disincentive from the application of Australian GST to acquiring and using common digital currencies like Bitcoin, Ether, Litecoin and Ripple instead of money (including Australian or foreign currency) to pay for goods or services. But digital currency exchange businesses and purchasers and users of digital value tokens will need to be careful that the particular tokens they are using come within the definition of “digital currency” in the GST legislation and do not, for example, give other rights and benefits so that the value of the token is derived from more than its ability to be used as consideration.
This article was first published in the November 2017 edition of the Bloomberg, BNA, Tax Planning International Indirect Taxes journal.
Author: Mark Sneddon (Partner)