The Australian tax office has issued various rulings and drafts determining the tax consequences for using Bit coins. These guidelines are useful because it provides an in-depth analysis of digital currency and consider the tax consequences of using Bit coins. The ATO is of the opinion that Bit coin is not a foreign currency or money. The ATO considers Bit coin as a property. Bit coin is a digital currency and is protected by cryptography. The operation and effectiveness of the bit coins depends on the network of users online. It is regarded as soft cash and by virtue of programming strength; it can be used for dealing anonymously (Emery 2016). It is seen that increasing business in Australia and other countries of the world are using Bit coins as a legitimate mode of transactions. Therefore, it is important for the taxation authorities to determine appropriate rulings and transactions for dealing with transactions using Bit coins.
Bit coin as a CGT assets
The Australian Tax Office in the Taxation Determination 2014/26 states that for the purpose of subsection 108-5(1) of the Income Tax Assessment Act 1997 Bit coin is considered as a capital gain tax asset. The section 108-5(1) defines CGT assets as the property of any kind or right of any kind that is not property (Hassan 2016). The definition of the property is considered by the Australian tax office as held in the High Court decision of Yanner v. Eaton. In this case, it was accepted by the high Court the property does not refers to a thing but a legal relationship with a thing. In the Para 7 of the ruling it is stated that there are not a single test but multiple test for identifying whether set of legal relationship should be regarded as a property. The following factors are considered by ATO in determining whether Bit coins are property:
- The controlling right over Bit coins in the Bit coin wallets.
- In a number of communities, bit coins are treated as valuable and transferable property.
- The Bit coins are exclusive in nature because private keys that are in possession of the person protect the wallets.
The above discussion shows that Bit coins are decentralized in nature. Therefore, Australian Tax Office is of the opinion that bit coins should be regarded as property as it fulfill the definition of property given under statue. This decision of the Australian tax office have the capital gain tax consequences that is explained later in the report (Dysart 2014).
Bit Coin as a foreign currency
The Australian tax office has considered whether Bit coin should be regarded as foreign currency under the Tax Determination 2014/25. The ruling held that for the purpose of Division 775 of the Income Tax Assessment Act 1997 the bit coins should not be regarded as foreign currency. The ATO initially considered whether Bit coin should be considered as money as per general law. The money is referred to as a store of value and unit of account. It can be seen that the bit coin satisfies the meaning of money (Wicht 2017). However, the Commissioner did not find it sufficient that the bit coins should be treated as money. The main reason provided by the commissioner is that it is mainly or accepted by particular communities and the use is not wide spread. In addition to this, the Bit coins are mainly used for making payments or discharging debts.
The ATO considered the meaning of foreign currency with regard to Income Tax Assessment Act 1997. The section 995-1 of the Income Tax Act 1997 states that a currency that is not an Australian currency is known as foreign currency. In the Currency Act 1965, the currency is considered as the only legal form of monetary transaction in Australia. The statue requires that the law of other country should recognize the foreign currency so that it can be considered, as legal tender (Litwack 2015). Therefore, it can be said that as no foreign nation recognizes bit coin as foreign countries so the commissioner held that it should not be considered as a foreign currency for the purpose of Income Tax Assessment Act 1997.
Bit Coin as a money
The ATO has published rulings under the Income Tax Assessment Act and the ruling under Goods and services tax (GSTR 2014/D3) for determining whether Bit coin should be regarded as money in the New Tax System (Goods and services Tax) Act 1999. It is an important consideration because the supply of money is exempted from the meaning of “supply for consideration” on which the goods and services Tax is payable (Hampton 2015). In section 195-1 of the Goods and Services Tax Act, the term money includes:
- Currency of Australia and other countries;
- The bill of exchange and promissory notes;
- The negotiable instrument that is circulated as currency;
- Money Orders and postal notes;
- Payments made by the debit card, credit card or through transfer of debt.
The analysis shows that Bit coin has not satisfied any of the above requirements and does not fall under any of the meaning provided in the above paragraphs. Therefore, it was held that Bit coin cannot be considered as money and the supply of bit coins cannot be regarded as financial supply for the purpose of goods and services Tax Act.
The ruling discussed above shows that under Income Tax Assessment Act 1997 the Bit coins are regarded as property. The Bit coins are considered as capital gain tax assets so transaction in bit coins will give rise to CGT event. It is significant because it has been seen that historically the price of Bit coins have fluctuated widely. Therefore, on disposal of Bit coins if it is sold at a price above the price at which it was purchased the gain will be regarded as capital gain for the purpose of tax (Tu and Meredith 2014). Then in that case capital gain Tax is payable on disposal of Bit coins. On analysis, it can be seen that the above view of the commission will not affect the individual users of he Bit coins. The bit coins that are used for purchasing services and goods for personal use is exempted from the capital gain tax under the personal exemption provided under the Income Tax Assessment Act 1997. It should be noted that the exemption is applicable unless the value exceeds the threshold limit of $10000.
The determination of GST consequences for the transaction in bit coins are more complicated. As per the rulings, the supply of bit coins is a taxable supply and is subject to goods and services tax. The GST act provides exemption for supply of money from the meaning of the taxable supply. The discussion above shows that the Bit coins are not considered as money hence the supply of Bit coins will be treated as a barter transaction (Lambert 2015). Therefore, it will be regarded as a taxable supply under the Goods and services Tax. The ruling is not clear about the operation of Good and Services Tax and the availability of input tax credit on transactions made using bit coins. The actual impact of imposing goods and services tax on the supply of Bit coins is often taken as to be nil. In the opinion of Australian Tax Office, it does not expect to experience significant increase in revenue due to imposition of good and services tax on transactions using bit coins. However the administrative complexity associated with monitoring business transactions conducted using Bit coins are high. The increased complexity of monitoring the transaction has increased the cost of administration. Therefore, it can be said that the benefit of imposing GST on the transaction using bit coins is much less, than the associated costs (Neslund 2014). The law provides that individual purchasing good and supplies using bit coins will not be subject to good and services tax. It should be noted that the persons or company that are registered under GST is required to pay GST on the supply. That means if an individual purchase a computer from a retailer using Bit coins then this will not be subject to good and services tax. On the other hand, if a GST registered business or an individual purchases computer from the same retailer using bit coins then it will be regarded as a taxable supply and subject to good and services tax. This increases the complexity and confusion among the taxpayer about the impetrations (Descôteaux 2014).
FBT and Trading stock
The Australian tax office has stated that if an employer supplies bit coins to employee is then it will be regarded as fringe benefit. In this case, the fringe benefit tax will be applicable (Chodorow 2016). The Australian tax office states that if an individual or business holds bit coin for the purpose of resale then the bit coins should be considered as " trading stocks" as per section 70-10(1) of the income tax assessment act 1997.
Based on the above discussion it can be said that the popularity of bit coins is increasing in Australia and hence the tax complexity is also rising. The conclusion that can be drawn from the above discussion is that bit coins are property for the purpose of capital gain tax. The supply of bit coins are taxable supply as per good and services tax. In addition to this if an employer provides employees bit coins then it is a taxable fringe benefit.
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