The Australian Government recently announced it’s “committed to addressing the ‘double taxation’ of digital currencies.” Earlier in the week the Hon Scott Morrison MP, Treasurer of the Commonwealth of Australia, reportedly stated that digital currencies, including bitcoin, will be exempt from Goods and Services Tax (GST) as part of changes intended to boost the fintech sector.
"We will ensure access to concessional tax treatments for venture capital investments in fintech firms, will take action to prevent the double taxation of digital currencies – we won't be taxing digital currencies."
- Hon Scott Morrison MP
A report called “Backing Australian FinTech” was simultaneously released, which outlines the Australian Treasury's response to fintech development priorities. Among the responses was one to amend the Goods and Services Tax Act of 1999.
“The Government recognises that that the current treatment of digital currency under GST law means that consumers are ‘double taxed’ when using digital currency to buy anything already subject to GST,” states the Treasury department. “The Government is committed to addressing the ‘double taxation’ of digital currencies and will work with the industry on legislative options to reform the law relating to GST as it is applied to digital currencies.”
The problem all started in August 2014, when the Australian Taxation Office (ATO) issued a guidance paper and ruling on the taxation of Bitcoin and other crypto-currencies, viewing bitcoin transactions as a barter arrangement with similar tax consequences.
The ATO stated that Bitcoin is neither money nor a foreign currency: “The supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.”
Commenting on the ATO's move, the Head of Indirect Tax at KPMG, Dermot Gaffney, questioned whether the authorities risked over-regulating digital currency, and "potentially killing off this new source of disruption and competition in Australia’s financial services industry."
“This would be a little like my bank taxing a withdrawal of funds from my account as a supply, subject to GST at 10%, and if I was in business (and the transaction is for business purposes) I would get a credit,” Gaffney explained. “I would further pay GST when I used the funds to purchase taxable goods and services in Australia, and so on. But if I am just a consumer (or the transaction is not for business purposes) the tax will be an absolute cost, and in effect restrict the wide spread adoption of such currencies.”
The ruling disappointed many businesses accepting bitcoin, and put companies still using digital currency in Australia at an economic disadvantage. Personal finance company, CoinJar, quickly relocated to the UK following the ATO's ruling.
“The UK relocation will mean CoinJar customers will no longer be subject to 10 per cent GST (Goods and Services Tax) when they buy bitcoin using our services. HMRC (Her Majesty's Revenue and Customs) in the UK exempts digital currency trading from value added tax (VAT), so new and existing CoinJar customers will not be levied any additional taxes.”
The UK put bitcoin outside the scope of VAT almost six months before the ATO’s ruling. The ATO’s treatment of cryptocurrencies seems “at odds with the fundamental principles of a consumption tax,” Gaffney added. “Commentators are saying that if VAT does apply it could have the adverse effect of lessening government revenues by weakening economic momentum and that tax legislation cannot hold back emerging business models – yet that is happening in Australia.”
Following the industry response, the Australian Treasury issued a whitepaper in March 2015, admitting “new ways of transacting, including crypto-currencies such as bitcoin, were not contemplated when the current tax system was designed.” The paper cites bitcoin as a challenge when determining how to appropriately tax companies.
Opposing the ATO's view, the Australian Senate Economic References Committee published a report on digital currency in August 2015, recommending that digital currencies, including bitcoin, be treated as money for the purpose of GST. The ATO advised the committee that amendments to GST Regulations would then be required.
“The committee is of the view that digital currency should be treated as money for the purposes of the goods and services tax. As such, the committee recommends that the government consults with the states and territories to consider amending the definition of money in the A New Tax System (Goods and Services Tax) Act 1999 and including digital currency in the definition of financial supply in A New Tax System (Goods and Services Tax) Regulations 1999.”
- The Senate Economic References Committee
This wasn’t the only problem Australian bitcoin businesses have faced. Many have struggled to establish, or maintain, banking relationships.
Australian banks have increasingly taken a ‘de-risking’ approach, following the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF), leading to ‘de-banking.’
According to a World Bank Group survey both Money Transfer Operators (MTOs) and banks report an increased trend in closed and/or a restricted accounts between 2010 and 2014. A significant portion of MTOs declared that they can no longer access banking services.
“Data collected indicate that account closures for money transfer operators (MTOs) have become more pronounced over the last few years in some countries, including Australia, Canada, France, Germany, Italy, Mexico, the UK, and the US.”
- World Bank
A 2015 report by the Australian Transaction Reports and Analysis Centre (AUSTRAC) confirms that the number of remittance businesses using foreign-owned banks has also grown over the last two years. AUSTRAC is Australia's financial intelligence unit with regulatory responsibility for anti-money laundering and counter-terrorism financing.
Responding to this ongoing problem, in addition to committing to abolishing the double taxation of digital currencies, the government will also “improve banking access for digital currency companies,” by incorporating digital currency into the AML/CTF regulation. The government has established a roundtable of banks, regulators, government and industry participants to address the ongoing ‘de-banking’ problem of digital currency businesses.
“The largest remittance network providers (RNPs) have all been impacted by the bank account closures of some of their affiliate businesses and in some cases the RNP itself. Many have secured a bank account with another institution to conduct their remittance business.”
- Australian Transaction Reports and Analysis Centre
If digital currencies are exempt from GST and digital currency companies have better banking access in Australia, the country will back on track to compete for businesses with Europe. In October 2015, the European Court of Justice, Europe's highest court, ruled that bitcoin transactions are "exempt from VAT under the provision concerning transactions relating to 'currency, banknotes and coins used as legal tender'."