GST-registered businesses are still awaiting guidelines from the Australian Tax Office regarding the legal status of cryptocurrencies such as Bitcoin, after the department pushed back its June 30 deadline.
Proper consideration of the myriad submissions from industry and other stakeholders is warranted, as the ATO’s interpretation of the GST Act could dramatically affect many Australian business who accept -- or are considering accepting -- Bitcoin payments.
The ATO has pledged to do its best to ensure GST-registered businesses have the right advice in time to file their tax returns. But will the guidelines fall in their favour? And what does it all mean, anyway?
Potential GST pitfalls
The tax office has assembled a multidisciplinary working group consisting of experts in income tax, corporate tax, employment tax and GST, to assess how Bitcoin is viewed for tax purposes.
The working group’s job is merely to issue legal guidance on the matter, based on Australia’s existing tax law -- not based on what makes the most sense economically or what is in the best interest of business.
Matthew Cridland, a partner at global law firm DLA Piper, says there’s no question that if a business receives payment in Bitcoin for a good or a service they are liable to pay GST just as if they had been paid in Australian dollars. It’s what happens after thereafter that may cause them headaches.
“What will the retail merchant do once they’ve got the bitcoins? Generally the merchant’s going to do one of two things: they’re either going to use the bitcoins to make their own purchases to buy stock and other goods and services, or they’re going to sell the bitcoins to an exchange or to another party to convert back into Australian dollars,” says Cridland.
“The risk area that I see is in relation to those latter transactions.”
The key issue here hinges on whether Bitcoin qualifies as money, or as property.
While monetary payments and foreign exchange transactions are exempt from GST, exchanging property for money essentially qualifies as a barter transaction, which may incur GST on both sides of the transaction -- in addition to the GST the business has already paid on the sale of the good or service. In other words, they may have to pay GST twice.
Which way will the ATO go?
Cridland says it’s “difficult” to see how bitcoins can either qualify as money or be exempt as a foreign exchange transaction based on the limited definitions within the GST Act, which was drafted back in 1998 (Bitcoin emerged in 2009 and is not fiat currency issued by any particular country).
“For those reasons I think that there are real risks for businesses and I do think that there’s potential for GST to apply to Bitcoin transactions, which could result in ‘double GST’ in some instances,” says Cridland.
Advice from taxation offices overseas has been mixed, reflecting the diversity of various countries’ individual tax legislation. Both the US and Singapore view Bitcoin as property, not money, for VAT and GST purposes, respectively.
Britain, on the other hand, views Bitcoin more like fiat currency -- converting bitcoins is not considered a barter transaction and does not incur VAT.
“Even within single markets you are seeing different views adopted,” says Cridland.
“For example, the EU has 28 member states, they have a common system of VAT or GST which is intended to apply across the entire EU … and what we’re seeing at the moment is the UK saying 'no VAT on Bitcoin transactions', while Poland has come out and issued a private ruling to a taxpayer saying a private VAT would apply.
“The VAT rate in Poland is 25 per cent, too -- much higher than our current 10 per cent.”
ATO guidelines may just be the beginning
The forthcoming ATO guidelines are intended as advice and won’t be legally enforceable upon taxpayers. However, Cridland warns that businesses who ignore them may run into serious problems down the line.
“Taxpayers may adopt a different or contrary position to the ATO -- obviously there are business risks associated with doing that and it may be the case that some of these issues need to be judicially resolved through court cases or tax litigation,” he says.
Indeed, the release of the ATO guidelines may just be the beginning. If tax office working group can’t find a basis on which to define Bitcoin as money, it will then be incumbent on pro-Bitcoin businesses to lobby for legislative change in order to properly enshrine such a definition or to exempt Bitcoin transactions from GST, as with foreign currency exchange.
Is it really worth getting on the Bitcoin bandwagon?
As if all this uncertainty weren't enough to put businesses off accepting Bitcoin payments, one thing they should also be wary of is increased compliance costs.
As with payments made in foreign currencies for goods incurring GST, any Bitcoin payment must be converted back into Australian dollars for GST purposes.
“When merchants or retailers or suppliers make a supply in exchange for a bitcoin, it’s going to give rise to valuation issues,” says Cridland.
“They’re going to need to work out what was the value of the bitcoins that they’ve received, and they’ll need to retain evidence of that so they can substantiate the values that they’ve used in the event of a GST audit."
Tax invoices issued to customers must also itemise GST in Australian dollars, or at the very least include an exchange rate.
While the global momentum behind Bitcoin is growing every day, it may yet be some time before tax incentives are in place that support Australian businesses accepting the cryptocurrency. How long that takes may hinge on the size of the passion of its proponents.
Matthew Cridland spoke at the Inside Bitcoins conference in Melbourne.