Earlier today, the Australian Taxation Office published guidance about how it believes bitcoin transactions should be taxed in Australia. The income tax treatment is similar to that of shares and seems quite sensible. But the GST treatment (GST is Australia's 10% federal sales tax) is completely unworkable.
Basically, the ATO's Ruling proposes that bitcoins are neither currency, nor are they financial supplies, so anyone who's dealing with bitcoins as part of a business has to charge GST on bitcoin transactions.
This will make it very difficult to run a bitcoin exchange in Australia.
Sorry, CoinJar, you're out of business.
Simplifying a little, if you're in business and you sell more than $75k/year of products to Australians, you have to register for GST. Once registered, you have to charge your Australian customers 10% GST, but any GST that you pay to suppliers is refundable to you.
This works fine for things that are actually goods and services, but it would be a bit weird if it applied to financial instruments like shares. Imagine someone who's not registered for GST that wants to buy some shares. It would cost them 10% more to buy them from someone who is registered for GST than from another person who is not. Charging GST on shares also makes it impractical for trading to happen on an exchange, because traders would need to know whether their counter-party is Australian, and if so, their identity, whether they're registered for GST, and the traders would need to be able to provide each other with tax invoices.
For these and other reasons there is a carve-out for financial supplies like shares, which are exempt from GST.
Today's draft ruling states that bitcoin is not a currency, nor is it a financial supply. This has all sorts of unworkable consequences. Let's look at some examples:
Australian business accepting bitcoin
You're an Australian business. You sell a product to an Australian consumer for 1 BTC before GST. You collect 1.1 BTC from them, of which you owe 0.1 BTC to the Government. Now you want to convert your 1.1 BTC into dollars. If you sell them for their market value to another Australian, you have to charge GST, so you collect the equivalent of 1.1 BTC in dollars, but now you owe another 0.1 BTC to the Government. Effectively you've paid GST twice.
This is annoying, but not a disaster as there are a number of workarounds to avoid the double tax:
- Use an intermediary and never take possession of the bitcoins.
- Sell the bitcoins to someone overseas. Then you don't have to charge GST.
- Sell the bitcoins to another Australian who's registered for GST. They should be willing to pay the equivalent of 1.21 BTC, which covers the extra GST, because they themselves will be entitled to an input tax credit of 0.11 BTC.
Here is a post by Matthew Cridland, a lawyer at DLA Piper, about this double taxation.
Overseas bitcoin exchanges
I don't understand how Australian businesses are supposed to trade bitcoins on exchanges while remaining in compliance with their taxation obligations.
We need to consider two sorts of exchanges:
- The exchange facilitates it so that customers trade with each other, or
- Each customer trades with the exchange as principal.
Let's start with the first case. If you're selling bitcoins for business purposes, you have find out if the counter-party is an Australian, and if so you have to somehow add 10% of GST and, on request, send them a tax invoice. Likewise if you're buying bitcoins in the course of your business, you have to find out if the counter-party is Australian and, if so, ask them to quote their ABN, otherwise you have to withhold 46.5% of the payment. How are you supposed to do any of this on an exchange?
The second case is better, where both parties trade with the exchange, as long as the exchange is outside Australia. Then the seller doesn't have to charge GST and the buyer doesn't have to withhold... well, so long as the buyer and seller are not interposing the overseas intermediary just to avoid GST, which the ATO will not like.
Australian bitcoin exchanges
For exchanges that facilitate trade between users, the same problem applies as for overseas exchanges. But it's worse in this case, because there will probably be the presumption that if you're trading on an Australian bitcoin exchange then your counter-party is Australian, so you should probably charge GST even if you can't identify your counter-party.
Australian exchanges that trade as principal are screwed. They'll have to charge GST when selling bitcoins, but won't always get input credits when they buy it, i.e., whenever the person selling the bitcoin isn't Australian and registered for GST. And who's going to buy bitcoins that cost 10% more?
What is the ATO trying to achieve
I don't know if the ATO is trying to achieve something with this ruling. Maybe it's just that the law is unworkable and neets to be updated. The definition of a financial supply in the GST Regulations is deliberately drafted narrowly and does not apply to bitcoins. Maybe what the ATO actually wants is for these Regulations to be amended so that bitcoins are a financial supply, to help avoid the Courts deciding that bitcoin is a currency. They've put out this unworkable ruling to gather support for amending the Regulations.
What does this mean for Australian bitcoin businesses
It's time to move offshore.
It's important to note that this is not new law, it's just the ATO's interpretation of existing law. So if a company has been carrying on a bitcoin business for some time, the ATO may now think that the company owes it lots of GST for all its past transactions.
It's also important to note that rulings issued by the ATO are binding on the ATO, but not on anyone else. It's for the Courts to decide whether the ATO's position is correct. It's possible for a company to continue operating under the position that bitcoin is a currency, as long as the company concludes that this is reasonably arguable, but good luck finding investors who will tolerate the risk of operating a bitcoin business in Australia.