There have been a number of updates to the current regulatory regime relevant to the digital currency market in Australia. The update below will cover new guidance from the ATO, ASIC, ASX and AUSTRAC.
1. Australian Tax Office (ATO)
The ATO has published an expanded note on digital currency such as bitcoin. The ATO reiterates its view that digital currency is not legal tender, while bitcoin is an asset for capital gains tax (CGT) purposes. At the same time, ATO states:
Digital currency is a method of payment and the consequences of using it as payment are the same as the consequences of using money as payment.
In the GSTR 2014/3W dated 18 December 2017, the Commissioner of Taxation states:
From 1 July 2017, digital currency will have the equivalent treatment to money and in certain circumstances supplies of digital currency will be treated as financial supplies.
The ATO confirms that from 1 July 2017 sales and purchases of digital currency such as bitcoin are no longer subject to Goods and Services Tax (GST) (GSTR 2014/3W). However, this only applies to entities which are not carrying on a business. Any business, and especially a business carried in relation to digital currency, accepting digital currency as a payment will need to consider any GST consequences that may arise.
(a) Definition of digital currency
For GST purposes, digital currency is defined as a unit of value that has all of the following characteristics:
- Fully interchangeable with another unit of the same digital currency for the purpose of its use as payment;
- Can be provided as payment for any types of purchases;
- Generally available to the public free of any substantial restrictions;
- Not denominated in any country’s currency;
- The value is not derived from or dependent on anything else; and
- Does not give an entitlement or privileges to receive something else.
The ATO specifically excludes from this definition:
- Loyalty points provided by retailers that can only be redeemed for products and services specified by that loyalty scheme;
- ‘Currency’ used in online multiplayer games, that cannot be used outside the game under which the ‘currency’ is made available; and
- ‘Digital currency’ with value based on something else or that gives an entitlement or privileges to something else. For example a token that is aligned with an Australian or foreign currency, or gives you an entitlement to use software application services.
The latter will most likely be subject to GST because it provides a right or entitlement to goods or services.
(b) Initial coin offerings
For the purposes of the Initial Coin Offerings (ICOs), the GST treatment will depend on the particular features of the coins or tokens. If the ICO is designed in a way that a coin or token offers:
- A share of profits in a product, it may be a security (such as a share, a managed investment scheme or a derivative), the sale and purchase of such coins will be a financial supply;
- Digital currency falling within the definition above, the sale and purchase of such coins will be a financial supply; and
- A right or entitlement to goods and services, the sale and purchase of such coins may be a taxable supply on which GST is payable.
(c) GST registration
Registering for GST is required if a business’s GST turnover is $75,000 or over, excluding any input taxed sales (financial supply). The ATO confirms that sales of digital currency are input taxed sales. For businesses that only make sales of digital currency (as defined above), no GST registration is required.
(d) Making and receiving payments in digital currency
The following guidance is provided in relation to making and receiving payments in digital currency:
- GST-free sales: no GST is charged on sale of digital currency to non-residents, although GST credits can be claimed for costs incurred in relation to making the sale;
- Normal GST rules apply whenever a business receives digital currency as a payment for sale of goods and services, i.e. 1/11th of the payment received on a taxable sale of goods must be remitted and reported in the Business Activity Statement with the requirement that it be represented as an amount in Australian currency;
- Tax invoices issued in relation to digital currency payments have an additional requirement for the following information to be included in the document:
- the GST payable in Australian currency; or
- ‘sufficient information’ so as to enable the recipient to work out the GST payable on the sale in Australian currency (e.g. the price or value expressed in Australian currency, or a conversion rate from digital currency to the Australian currency used by the Seller as well as the GST payable, the price or value expressed in a digital currency).
(e) Salary or wages in bitcoin
For businesses considering paying salary or wages in bitcoin, the ATO suggests either treating it as normal salary or wages, so that the employer can meet their pay as you go obligations as usual or, if there is a valid salary sacrifice arrangement, the payment in bitcoins will be regarded as a fringe benefit and the employer will be subject to the provisions of the Fringe Benefits Tax Assessment Act.
(f) Mining bitcoin
For bitcoin miners, there is now some specific guidance on taxation. Any income derived by a bitcoin miner from the sale of the mined bitcoin to a third party should form part of the assessable income. Any expenses incurred in bitcoin mining activity, such as electricity used up for example, could be claimed as deductions. Losses made from such activity could be subject to the non-commercial loss provisions. Any bitcoins held by businesses carrying on mining and selling of bitcoins should be treated as trading stock and accounted for at the end of each financial year. Other tax consequences may be applicable depending on the business activities.
(g) Exchanging bitcoin for cash (including bitcoin ATMs)
Businesses providing bitcoin-cash exchange services are required to report as assessable income any proceeded from the sale of bitcoin, at the same time any expenses incurred, such as acquisition of bitcoin for sale, constitute allowable deductions. Any bitcoins held by businesses selling bitcoins should be treated as trading stock and accounted for at the end of each financial year. Other tax consequences may be applicable depending on the business activities.
(h) Disposal of investment bitcoins
Exempting bitcoin acquisition for personal transactions, where bitcoins are acquired as an investment, CGT could apply. Businesses involved in investing in bitcoin should include any profits resulting from the disposal of bitcoin in their assessable income, while also being allowed to make deductions for any losses made.
2. Australian Securities and Investment Commission (ASIC)
ASIC has issued an additional publication on ICOs on ASIC’s MoneySmart website which provides financial guidance for consumers. The publication recommends that consumers check ASIC’s registers for the registration status of the companies running the ICOs and for their Australian Financial Services Licensee status. The general vibe of the publication is evidence from the very first line: “Investment or scam?” which ends with the following admonishment:
ICOs are highly speculative investments in blockchain technology projects. While the potential returns may look attractive, these types of fundraising projects are mostly unregulated and the chance of losing your investment is high.
Interestingly, the publication also refers Australian consumers to the consumer warning issued by the Financial Conduct Authority in the UK titled “Consumer Warning about the Risks of Initial Coin Offerings (ICOs)” dated 12 September 2017. The first item on the list of risks is “unregulated space”.
3. Australian Securities Exchange (ASX)
On 16 February 2018, the ASX has published a compliance update with a section on cryptocurrency listings and announcements. ASX’s position is that “cryptocurrency-related businesses raise significant legal, regulatory and public policy issues. Their regulatory status in a number of overseas jurisdictions is subject to considerable uncertainty and rapid change“.
(a) For entities seeking listing
According to ASX, the range of cryptocurrency-related listing queries includes entities that propose to:
- Develop own cryptocurrency tokens to be used as part of their business offering and/or to conduct an ICO;
- Advertise ICOs by other parties;
- Trade or make markets in cryptocurrencies;
- Build and operate cryptocurrency exchanges;
- Acquire entities doing any of the above; and/or
- List new Listed Investment Companies (LICs), Listed Investment Trusts (LITs) or Exchange Traded Funds (ETFs) investing in cryptocurrencies or cryptocurrency derivatives.
Any entity seeking to list a cryptocurrency-related business must satisfy ASX that:
- It has a structure and operations appropriate for a listed entity;
- Its business is bona fide;
- It will comply with all applicable legal requirements in Australia and in all jurisdictions where it is proposes to carry on business;
- Proper disclosure has been made to investors of the risks (including emerging regulatory risks) involved; and
- It has considered, where applicable, the legal and regulatory issues outlined in ASIC Information Sheet 225 and has taken legal advice on those issues and any applicable overseas legal and regulatory requirements.
ASX’s position is that entities wishing to list a new LIC, LIT or ETF investing in cryptocurrencies or cryptocurrency derivatives will need to satisfy ASX about:
- The proposed investment strategy, including how and when the entity will provide a return to investors and, if applicable, how the entity will hedge the risks in the underlying investments and any related currency risks;
- If the entity intends to invest in cryptocurrencies directly, the entity’s understanding of the market volatility and liquidity risks associated with cryptocurrencies and how those risks will be managed;
- If the entity intend to invest in, or hedge using, cryptocurrency derivatives, the entity’s understanding of the margin risks associated with cryptocurrency derivatives and how those risks will be managed (including in particular what liquidity lines will be available to meet margin calls);
- The names of the individual fund managers who will be making the entity’s investment decisions and otherwise managing their portfolio and:
- a copy of their CVs;
- how, and for how long, have their services been secured;
- their specific knowledge of and experience in cryptocurrencies;
- if the applicant intends to invest in cryptocurrencies directly, their experience in managing highly volatile asset portfolios;
- if the applicant intends to invest in, or hedge using, cryptocurrency derivatives, their experience in managing highly volatile derivative portfolios; and
- why they consider their LIC/LIT/ETF is a suitable investment for retail investors.
(b) For listed entities
ASX has provided some stern guidance to listed entities seeking to expand operations into cryptocurrency-related businesses. According to ASX, listed entities should approach their Listings Adviser before announcing any proposal to expand their operations into a cryptocurrency-related business. Listed entities are warned that they have an ongoing obligation under Listing Rule 12.5 requiring an entity’s structure and operations to be appropriate for a listed entity. ASX will require listed companies to provide similar satisfaction to the entities seeking listing, as described in the section above. Listings Advisers will be able to provide listed entities with guidance on the issues above and on what should be included in public announcements about cryptocurrency related ventures.
It is also a regulatory requirement for listed entities to comply with their obligations under Listing Rule 11.1 to notify ASX of any proposed significant change in the nature or scale of their business activities. ASX may require the entity to seek security holder approval and to re-comply with ASX’s admission and quotation requirements under Listing Rules 11.1.2 and 11.1.3.
4. AUSTRAC (AML/CTF regulation)
Digital currency exchange providers have become the first cryptocurrency-related businesses to be formally regulated under the AML/CTF Act, the amendment to which received Royal Asset and will come into effect from the date of Proclamation, which is expected to be 3 April 2018, or in June 2018 at the latest.
According to the AML/CTF Amendment Act 2017 (Cth), the digital currency exchange (DCE) providers that provide the service of exchanging digital currency for money (whether Australian or not) or exchanging money for digital currency, where the exchange is provided in the course of carrying on a DCE business, will need to register with AUSTRAC. AUSTRAC CEO will be administering the ‘Digital Currency Exchange Register (DCE Register). Non-compliance with the new AML/CTF regime is a strict liability offence attracting such sanctions as imprisonment ranging from 2 to 7 years and financial penalties.
Besides the mandatory registration, compliance obligations will include:
- Customer identification and due diligence;
- Adoption and maintenance of an AML/CTF program, which includes requirements to identify, manage and mitigate ML/TF risk;
- Suspicious matter reporting;
- Threshold transaction reporting (currently, transactions above $10,000); and
- Record-keeping requirements.
Section 76G of the AML/CTF Amendment Act 2017 also allows the AUSTRAC CEO to impose conditions to which the registration of a DCE Provider will be subject. For example, the conditions may relate to:
- The value of digital currency or money exchanged;
- The volume of digital currency exchanged;
- The kinds of digital currency exchanged; and
- Requiring notification of the exchange of particular kinds of digital currency, changes in circumstances, or other specified events.
AUSTRAC will be able to take up to 90 days to register a business and will have the power to deny registration on certain grounds.
While businesses will not be able to register with AUSTRAC until the new regime commences, DCE providers can start preparing their business for compliance by reviewing the guidance for businesses that are already regulated. AUSTRAC recommends that in anticipation of the new regulations coming into effect, businesses may do the following:
- Obtain national police certificates or national police history checks;
- Review the current registration application on which the new forms for DCE providers will be based;1
- Review the AML/CTF program currently in operation;2 and
- Review transaction reports requirements as DCE providers will have to submit suspicious matter reports (SMRs) and threshold transaction reports (TTRs) to AUSTRAC3.
This update is non-specific and does not constitute legal advice. We welcome your questions about application of the information provided in this update to your circumstances and will be able to provide you with the tailored legal advice. Please contact Thomas Kim, Partner, on +61 (03) 8644 3532 or firstname.lastname@example.org for legal advice.
This article was written by Thomas Kim, Partner, Anthony Seyfort, Partner, and Marianna Parry, Associate.
P: +613 8644 3532
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