Tax and Bitcoin in Australia
Bitcoin adoption is increasing globally. Global jurisdictions are working through the tax implications for business and consumers. In Australia the local Bitcoin Association (BAA) is currently working with the relevant authorities, exploring the tax outcomes which are most appropriate.
The following represents a summary of the full position paper prepared by the BAA for presentation to the relevant authorities. A full version of this position statement is available by contacting the Bitcoin Association of Australia. The full version includes all relevant case and legislative citations.
Adoption of Bitcoin
Major Australian exchanges estimate that combined they have approximately 40,000 local users. Australian adoption growth mirrors the global trend.
Australia now has an estimated 192 businesses accepting Bitcoin. While these numbers are low compared to the traditional banking network, they indicate high growth rates created by rapidly increasing user and merchant adoption.
Bitcoin’s market capitalisation currently sits at $6 billion USD. The Bitcoin Association of Australia estimates that the Australian share of this market capital is approximately 2%. This means that the market capitalisation for Australia is approximately $120 million.
Two separate local businesses have launched Bitcoin ATMs, with ABA Technology installing machines in high traffic retail areas like Westfield Shopping Centres.
Internationally there are strong signals of growth in the Bitcoin economy. At this point hundreds of millions of dollars worth of venture capital investment has flowed into Bitcoin companies internationally.
Australia holds approximately 7% of the world’s investment in Bitcoin ventures. CoinJar has secured AUD 500,000 from Blackbird ventures and digitalBTC has raised AUD 9.1 million.
A new AUD 30 million investment fund has also been launched to invest in companies that are leveraging Bitcoin and crypto-currency services. The investors in this fund have stated that:
“We view the emerging Bitcoin ecosystem as an investment opportunity that has transformative potential across a raft of social, technology- based and cultural applications and we see great scope for the broader adoption of Bitcoin and its related applications to redefine the global payment status quo”.
An AUD 30 million dollar local investment in innovation will result in a meteoric rise in the adoption of Bitcoin in the Australian community and it has the potential to deliver significant returns for local investors, the local community and the local government.
So the approach taken by the Australian Taxation Office (ATO) is of the utmost importance. Any tax rulings which counteract the efficiency and simplicity of the Bitcoin process could push innovators and investors offshore. This will see alternative jurisdictions benefit from Australian innovation and capital.
Bitcoin as ‘money’ under the GST Act
The Goods and Services Tax (GST) in Australia is a value added tax of 10% on most goods and services transactions. GST applies to transactions in the production process. It is refunded to all parties in the production chain, with final burden resting with the consumer.
There are a number of reasons which together mean that Bitcoin should be treated as “money‟ under the GST Act. These are the reasons being put forward by various Australian industry members and the Bitcoin Association of Australia. Not least of which is that there would be a significant compliance burden for taxpayers and administrative burden for the ATO if Bitcoin is not treated as money.
An interpretation of Bitcoin as “money” under the GST Act would not necessitate the same conclusion in respect of the general definition of money under other legislation, so the ATO could adopt a sensible, practical approach without disturbing the potential interpretations for other areas of law.
Definition of ‘money’ supports this interpretation
The definition of money in the GST Act is intended to enlarge the ordinary meaning of the word and modify the general definition of the word. The clear intention here is to include things used as money and to exclude situations where money is not being used as money.
This broad definition of money is required to support the fundamental operation of the GST system, by correctly classifying things which are used as consideration or payment. It correctly classifies these things by reference to their use and purpose in the context of the transaction, rather than their legal form.
Definition of ‘money’ includes bitcoins under the Act.
The argument being presented by the Australian Association is that, in line with the GST Act, the definition of money is “whatever is supplied as payment by way of credit card or debit card; or crediting or debiting an account; or creation or transfer of a debt.”
At a fundamental level, a Bitcoin transaction involves the crediting and debiting of an account.
The definition of the word “account” is only found in the GST Regulations, not the GST Act. Parliament’s intention is clearly that this definition should only apply in the context of the financial supply provisions, and not to the GST Act itself. There is precedent where the ATO has previously accepted this.
The Australian Association contends then that a supply of bitcoins is therefore a supply of money under the definition of money in the Act.
Tax cost, compliance and administrative burden
If bitcoins are not considered “money” for the purpose of the GST Act, there would be significant negative impacts on a taxpayer who is registered for GST and who uses bitcoins to pay for goods or service. Also, the burden will extend to a taxpayer who is registered or required to be registered for GST and operates as an exchange.
Bitcoin as a financial supply for GST purposes
In order to prevent the unintended operation of the GST Act where bitcoins are exchanged for Australian Dollars, Bitcoin Australia supports a sensible, practical view that a supply of bitcoins is a financial supply, under appropriate regulations.
Unless a supply of bitcoins is treated as a financial supply, there are anomalous and inconsistent results in situations where a Bitcoin exchange supplies bitcoins to a private individual or GST registered entity.
There would also be anomalous and inconsistent results between situations where a GST registered entity converts bitcoins to Australian Dollars using an Australian based exchange and a non-resident exchange operating outside Australia (GST-free export).
Bitcoin as ‘property’
It is the position of the BAA that bitcoins should be considered property under Australian law.
In Australia the legal concept of property has been historically flexible in order to keep up with innovation and evolution in technology and commerce. Although Bitcoin is a new technology, it satisfies the general law test for property because a bitcoin is definable, identifiable to third parties, capable of assumption, has permanence and a bitcoin holder has proprietary legal rights.
On high court precedent the conceptual novelty of a bitcoin does not preclude its definition as property. Specifically, this precedent establishes that “property” does not refer to a thing. It is a description of a legal relationship with a thing. It refers to a degree of power that is recognised in law as power permissibly exercised over the thing.
The legal relationship that is key is the relationship between the owner and the property itself. Bitcoins are owned, controlled, transferred, sold and traded as property. The holder of a bitcoin can use and enjoy it, exclude others from it, and alienate it. The holder exercises a degree of power or control over the bitcoin that defines bitcoin as property.
A bitcoin owner can enforce his rights against third parties
It is also important to note that a bitcoin owner can enforce his proprietary rights against third parties. There is a circular relationship between proprietary interests and the ability to enforce those interests against third parties. Enforceability against third parties is not the central indicator of property, but the ability to enforce rights against third parties is a strong indicator that the rights are proprietary in nature.
Bitcoin as a CGT Asset
Bitcoin Australia believes that a bitcoin should be treated as a CGT Asset, because it is property as discussed above.
Bitcoin is a global phenomenon that will continue to grow. It is important for the ATO to form a logical and practical approach to the taxation of bitcoins to ensure that investment in the local Bitcoin industry is not moved offshore.
Bitcoin Australia believes that the broad definition of “money” in the GST Act 17 can be interpreted to include Bitcoin. This approach would be an accurate representation of the use and purpose of Bitcoin as a currency and it is in keeping with the fundamental operation of the GST system by correctly classifying a bitcoin as a form of consideration or payment.
Bitcoin Australia also believes that a bitcoin can be considered property under Australian law. Incorporating this approach into the CGT treatment of Bitcoin will avoid significant uncertainty and a complex administrative regime for users of Bitcoin.
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