To ensure the Australian Fintech industry remains globally competitive, and driven by the findings of the Senate Economics Committee, the Government has announced that from 1 July 2017, digital currency (also commonly known as cryptocurrency) will be treated like money for GST purposes.
Currently, consumers who use digital currencies may effectively bear GST twice: once on the purchase of the digital currency and again on its use in exchange for other goods and services subject to GST. However, the above changes are aimed at resolving this anomaly.
The Government has released exposure draft legislation and explanatory material to give effect to this announcement and proposed that the draft legislation will have a retrospective start date of 1 July 2017.
1. Overview of proposed changes
The draft legislation proposes to amend A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in the following ways:
- Section 9-10(4) will be amended to state that a 'supply' does not include a supply of digital currency, unless the digital currency is provided as consideration for a supply that is a supply of digital currency or money;
- mirroring the changes to the definition of supply in section 9, section 11-10(3) will be amended to state that an 'acquisition' does not include an acquisition of digital currency unless the digital currency is provided as consideration for a supply that is a supply of digital currency or money; and
- various minor changes throughout the GST Act to provide for digital currency to function in the same way as money.
For purposes of GST, at section 195-1, 'digital currency' will mean digital units of value that:
a. are fungible;
b. can be provided as consideration for a supply;
c. are generally available to members of the public without any restriction on their use as consideration;
d. are not denominated in any country’s currency;
e. do not have a value that depends on, or is derived from, the value of anything else; and
f. 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.
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 units to which a) to f) apply.
The changes will also provide at section 9-85(2) that in working out the value of a taxable supply in Australian currency (important to calculating one's GST liability), the Commissioner of Taxation (Commissioner) may determine a specific acceptable method (similar to the Commissioner's current power in relation to foreign currencies).
2. Impact on entities involved with digital currency
The proposed changes above may give rise to three main issues for entities involved with digital currency in Australia:
- in relation to the definition of digital currency;
- how valuation for calculating GST liabilities is to be established; and
- how entities involved with digital currency may have their GST recovery on costs impacted.
2.1 Definition of digital currency: inclusions and exclusions
In accordance with the majority of submissions to the Senate Economics Committee and Treasury during the consultation period, the legislation has been drafted on a principles-based approach. Should a digital currency satisfy the elements outlined above while not triggering negative tests at g) and h), it will constitute a digital currency for GST purposes.
We note that despite equivalence in many consumers' eyes, not all digital currencies may be able to satisfy this test. Where a digital currency functions in a way generally equivalent to money (i.e. it can be used as consideration for goods/services) but also entitles a holder to access some underlying service or supply (so called, hybrid digital currency), they may fail to satisfy element f) of section 195-1 and so are not considered a digital currency for GST purposes.
Further guidance may need to be provided as part of the Explanatory Memorandum to the changes in relation to element f) and what 'mainly' means in the context of determining the value of a digital currency.
2.2 Valuation: how to calculate GST liability when accepting digital currency
Due to the immaturity of digital currency markets and lack of a single clearing house for trades, variances exist in the price of digital currencies. This means that it is critical that clear and fair advice is provided by the Commissioner in relation to how an entity that has accepted digital currency may calculate its GST liabilities on its supplies.
This situation may particularly arise where an entity does not immediately convert digital currency into AUD/other fiat, but holds digital currency to pay its suppliers. We note that the existing ruling GSTR 2001/2 - foreign exchange conversions may need to be amended to a relatively flexible method of GST liability calculation for entities accepting digital currency.
2.3 GST recovery: applicability of existing reduced input tax credit regime
As with supplies of foreign currency (or agreements to buy/sell foreign currency), under the proposed changes supplies of digital currency for money or digital currency will be input taxed financial supplies. Accordingly, where the Financial Acquisitions Threshold (FAT) is reached (currently AU$150,000 or 10% of total GST credit claim) an entity will be blocked from recovering any GST incurred on acquisitions relating to the supply.
While this change is not different to the current law for suppliers of foreign currency, it will represent a marked shift for entities currently involved with digital currency, who while having to wear the impact of double taxation, have been able to access full GST credits on costs incurred.
While some entities may be blocked from recovering GST credits in full, there may be reduced GST credits available for certain costs. We note that currently the reduced GST credit regime is prescriptive and the ATO and Treasury may consider additional reduced GST credit items for costs more suited to entities in the digital currency industry.
3. Where to now: next steps for entities impacted by the changes
The proposed changes are currently undergoing a period of consultation with industry. At present, due to the retrospective application of the changes, the Commissioner is allowing an entity to calculate its GST liability under either the current GST law, or the proposed digital currency changes. The Commissioner will not seek to impose any penalties on a decision to use either of the approaches that may result in a shortfall GST amount until 28 days following Royal Assent of the new law.
In particular, it is critical for entities impacted by the changes to consider their GST recovery position should they exceed the FAT and experience restrictions on input tax credits.