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Australia

Supplies of digital currency now treated as supplies of money
27 October 2017
Report from our correspondent Tom Toryanik, Singapore

Further to the Budget 2017-18 (see Australia-1, News 9 May 2017), the Bill changing the Goods and Services Act (GST Act) to make sure that supplies of digital currency receive equivalent GST treatment to supplies of money, was passed by the Senate on 19 October 2017. Once the Bill receives Royal Assent, the changes will apply retrospectively to the relevant supplies and payments made on or after 1 July 2017.

Briefly, the GST law does not treat a supply of money as a supply because money is used as a medium of exchange that is not consumed. This is a logical treatment; otherwise GST would need to apply not only to a supply of goods or services, but also to the payment for the supply (for completeness, where money is not used as a medium of exchange, the supply of money may be a supply for GST purposes, albeit it is likely to be an input-taxed supply). This treatment of money is contrasted with a barter trade, where both parties make a separate supply, with GST applicable separately to each supply.

Money is defined as Australian or foreign currency and specified money equivalents (promissory notes, negotiable instruments, etc.). In 2014, the Australian Tax Office (ATO) issued a GST Tax Ruling GSTR 2014/3, in which it expressed its view that digital currencies (or cryptocurrencies) are not currencies for GST purposes and therefore are not money. This is because digital currencies are not issued by a government and, in any case, it is difficult to define a cryptocurrency (eg. would an in-game credit qualify as such). As a result, currently, the supply of digital currencies can be considered as a taxable supply. As such, an acquisition of digital currency (i.e. the purchase of digital currencies with a regular currency or in exchange for another item) or its supply (i.e. payment with the digital currency) is treated as an acquisition or supply of goods. This treatment gave rise to complex GST compliance issues for businesses dealing in digital currencies, and made the business of Australian digital currency exchanges somewhat unviable. This treatment was identified by both the Senate Economics Reference Committee and the Productivity Commission as a significant deterrent to the use of digital currency in Australia, therefore in March 2016, the Treasurer announced that this treatment will be changed.

The Bill will ensure that the supplies of digital currency are only recognized for GST purposes if the supply is made in exchange for money or digital currency, which is consistent with the GST treatment of supplies of money. Further, GST regulations will be amended to make supplies of digital currency input tax supplies (for example in a sale of a digital currency for another currency, the supply will be input taxed, and no GST will need to be charged by the supplier, but also no input tax credits will be available in respect of acquisitions made in making the supply).

The Bill defines digital currency as fungible digital units of consideration that do not have a value based on any other thing or associated entitlements. This definition is intended to align the definition of digital currencies with that of fiat currencies. Items that do not meet all parts of this definition will not be considered digital currencies. For example, photographs may be digital units of consideration, but would not be fungible. Being fungible also implies being suitable for use as a medium of exchange. As such, loyalty points or in-game credits would not be able to meet this definition. Further, the mere use of a distributed ledger to record transactions does not make such transactions to be considered as digital currency. Also, digital units will not satisfy the definition of digital currency if their value is pegged to another currency. Similarly, financial instruments will not be considered digital currencies (which, incidentally, will make a supply of a Bitcoin derivative a taxable supply).

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