• GST and digital currency update

On Thursday 29 June 2017, the Australian Government released draft legislation on removing the double taxation of digital currency, aligning the GST treatment of digital currency with money.

These proposed amendments will apply to any supplies and payments made on or after 1 July 2017. The Government is currently accepting submissions on the exposure draft legislation and explanatory material, closing on Wednesday 26 July 2017.

Current Legislation

Currently, digital currencies, such as Bitcoin, are not considered a form of ‘money’ for the purposes of the GST Act. The Commissioner deemed in Goods and Services Tax Ruling 2014/3 that Bitcoin was not ‘money’ and, therefore also not a ‘financial supply’ under the GST Act.

As digital currency is not considered a form of money, a payment of digital currency is considered to be a supply of that currency, resulting in consumers bearing the cost of GST twice. GST is payable when the consumer initially acquires the digital currency, and then again when that digital currency is used in exchange for other goods and services subject to GST.

This ‘double taxation’ treatment of digital currencies not only financially disadvantages consumers, but also it creates a competitive disadvantage for the use of digital currencies as a means of exchange against government regulated or flat state currencies. This was recognised by the Senate Economics References Commission and the Productivity Commission in separate inquiries in 2015, both who recommended changes to the law to provide GST treatment more consistent with money.

Proposed Amendments

The proposed amendments would generally disregard supplies and acquisitions of digital currency for the purposes of GST and aim to ensure consistent and interchangeable treatment between supplies of money and digital currencies. Supplies of digital currency would, therefore, only be recognised for the purposes of GST if the supply is made in exchange for money or digital currency.

Under the proposed amendments, digital currency will be explicitly excluded as a supply in the GST Act, unless the supply of digital currency is provided as consideration for a supply that is a supply of digital currency or money. Further, consideration for a taxable supply that is expressed in digital currency will be treated as if it were an amount of Australian currency in working out the value of that supply. Amendments will also be made to provisions within the GST Act referring to payments in money to include digital currency, including those dealing with insurance, third party payments, and gambling.

A definition of digital currency will also be included in the GST Act. Due to the increasing growth of digital currency secured by cryptography being used as a medium of exchange, the definition identifies a number of requirements that digital units of value must satisfy to have the required similarity to state fiat currencies. The definition will include the following criteria:

  • Digital units of value that are made up of interchangeable units generally available to public without any restriction on their use or future use as consideration;
  • Only valuable as medium of exchange;
  • Do not have a value that depends on, or is derived from, the value of anything else;
  • Do not have a value solely or mainly because they give an entitlement to receive, or direct the supply of, a particular thing or things; and
  • Not denominated in any country’s currency.

Who this impacts

Currently, the total cryptocurrency market is worth $US75 billion ($AUS101 billion) with the top ten currencies (including Bitcoin and Ethereum) having a 94 per cent market share.

These amendments will be welcomed by the financial technology (FinTech) industry. Digital currency traders and investors will no longer be taxed for purchasing and selling through regulated exchanges and trading platforms. Further, there will likely be a higher demand and usage of digital currencies in Australia. This may also cause some disruption within the banking industry, with consumers that are using the digital currencies having access money that’s not controlled by a central government office.