To Bitcoin or not to Bitcoin?

GAFFNEY Dermot
Dermot Gaffney, Head of Indirect Tax

The Senate Inquiry into digital currency will tomorrow look at the initial treatment of Eftpos as a framework to monitor the use of Bitcoin and other crypto-currencies in Australia. The bigger question is are the authorities at risk of over-regulating and potentially killing off this new source of disruption and competition in Australia’s financial services industry?

As with so much of the ‘digital economy’, the reality is that traders in digital currencies operate highly mobile businesses. The news that Coinjar, Australia’s largest crypto-currency platform, has just announced its re-location from Australia to London, citing the UK’ s more favourable tax treatment is a clear warning sign.

In August, the Australian Tax Office took precisely the opposite view from other tax authorities, notably the UK, and proposed a GST treatment of crypto-currencies that seems at odds with the fundamental principles of a consumption tax.

The ATO ruled that the transfer of Bitcoins is a ‘supply’ for GST purposes – and not a ‘financial supply’, and hence has to be a taxable supply. This would be a little like my bank taxing a withdrawal of funds from my account as a supply, subject to GST at 10%, and if I was in business (and the transaction is for business purposes) I would get a credit. I would further pay GST when I used the funds to purchase taxable goods and services in Australia, and so on. But if I am just a consumer (or the transaction is not for business purposes) the tax will be an absolute cost, and in effect restrict the wide spread adoption of such currencies.

The distinction being drawn is that Bitcoins are not currency issued by a government and therefore somehow fall out of the definition of money within the GST Act. The question that we need to ask however is whether or not tax legislation is being predominantly used to hold back the tide of an unregulated trading platform and as such represents a form of regulation by the back door?

Dr Oskar Henkow of the University of Lund in Sweden has written extensively on Indirect Taxes and Financial Services and he observes that tax authorities should distinguish crypto-currencies because of the character of VAT (equivalent of our GST in the EU). He says that “the pure transfer of wealth is not, in itself, a production or consumption activity” and cannot fall within the scope of a tax on consumption. Simply put if I give you money, that in itself is not a supply for VAT/GST purposes, but rather it’s what you give me in return for the money that is the supply.

The UK tax authority determined in March (almost six months before the ATO pronouncement) that,  pending further developments in what is after all an emerging topic, Bitcoins will be outside the scope of VAT because there is an “insufficient link between any services provided and the consideration received” – in other words the diametrically opposite view to the ATO draft position.

Further, the Swedish Supreme Administrative Court has now referred the question as to the correct VAT treatment of Bitcoin transactions to the European Court of Justice (ECJ) in the Hedqvist Case and judgement is awaited. Commentators are saying that if VAT does apply it could have the adverse effect of lessening government revenues by weakening economic momentum and that tax legislation cannot hold back emerging business models – yet that is happening in Australia.

Given that the ECJ ruling is pending, and will set the direction throughout Europe, one has to wonder why the ATO has rushed to establish a position here, which threatens to stifle the new currency at birth?

We are told that the growth of peer to peer lending platforms have sprung from disenfranchisement with traditional forms of banking. So one can argue that Bitcoins have emerged from our apparent need/desire for a currency that isn’t issued by government. Entrepreneurs are crying foul, and calls have grown for a review of the draft tax proposals

If the forthcoming ECJ verdict supports the UK approach and leaves Australia out on a limb, it will be interesting to see if the ATO considers reviewing its decision.

Feature Image:©: audioundwerbung / 123RF Stock Photo

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