The Australian Senate Economics Reference Committee released a report discussing various aspects of digital currencies (DC). The report gave a broad overview of digital currencies, opportunities and risks, tax treatment under Australian law, regulatory frameworks and finally discussed AML/CTF aspects as well. The report comes after a wide consultation initiated in late 2014 and received 48 responses.
Before this report, the the Australian stance on digital currency, driven by the Australian Tax Office (ATO), was that DCs were a commodity rather than a currency and thus:
“Transacting with bitcoins is akin to a barter arrangement, with similar tax consequences. The ATO’s view is that Bitcoin is neither money nor a foreign currency, and 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”
In practice, this had several effects in terms of CGT such as the application of this tax if they digital currency disbursed was worth more than AUD$10,000. In addition, GST would also be applied when digital currency was both bought and sold. Moreover, profits deriving from the the provision of exchange services (e.g. fiat-to-DC & DC-to-fiat conversion) as well as mining were also subject to income tax. Lastly, Fringe Benefits Tax (FBT) is also applicable whereby if an individual is paid in DC they will be subject to this tax.
Whilst the Reserve Bank of Australia is still unsure how to regulate DCs, as they “[do not] yet raise any significant concerns with respect to competition, efficiency or risk to the financial system” the Australian Securities and Investment Commission (ASIC) had previously expressed the view that DCs would not fall within the scope of a ‘financial product’ (PDF download). In practice this means that:
“[A] person is not providing financial services when they operate a digital currency trading platform, provide advice on digital currencies or arrange for others to buy and sell digital currencies”
Within the report, the Committee put forward several recommendations with regards to the treatment of DCs in relation to (i) tax, (ii) regulation and (iii) AML/CTF.
Recommendation 1 in relation to GST stated 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”
If implemented then this effectively would overturn the current stance that results in double-taxation for purchases made with DCs as well as goods and services where GST would only be applied to the latter.
Recommendation 2 concerned the application of tax in relation to CGT and FBT. Here, the approach was less certain as the Committee referred back to the Reserve Bank of Australia’s position whereby further investigation would be required.
The White Paper mentioned in the Report is due to be completed in the second half of 2015. The Committee stated:
“further examination of appropriate tax treatment of digital currencies should be included in the taxation white paper process, with particular regard to income tax and fringe benefits tax”
Recommendation 3 concerned the establishment of a taskforce to continuously monitor DCs. The aim is to collect information so that it may be used by regulators in Australia to potentially or better develop regulations for DCs in the future. The Recommendations reads:
“The committee recommends that the Australian government consider establishing a Digital Economy Taskforce to gather further information on the uses, opportunities and risks associated with digital currencies. This will enable regulators, such as the Reserve Bank of Australia and ASIC, to monitor and determine if and when it may be appropriate to regulate certain digital currency businesses. In the meantime, the committee supports ADCCA’s continued development of a self-regulation model, in consultation with government agencies”
Recommendation 4 focused on the application of AML/CTF regulations to DC exchanges. This approach has also been applied in other jurisdictions such as the UK, Canada and Singapore. However, it would appear that further investigation is required and the Attorney-General’s Department is conducting a statutory review. As such, the Recommendation stated that:
“The committee recommends that the statutory review considers applying AML/CTF regulations to digital currency exchanges”