BILLS DIGEST NO. 44, 2017–18              17 October 2017

Treasury Laws Amendment (2017 Measures No. 6) Bill 2017

Liz Wakerly
Economics Section 

Date introduced:  14 September 2017

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1 to 3 on Royal Assent; Schedule 1, 1 July 2017; Schedule 2, the first 1 January, 1 April, 1 July or 1 October after the day the Act receives Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at October 2017.

Purpose of the Bill

The purpose of Schedule 1 to the Treasury Laws Amendment (2017 Measures No. 6) Bill 2017 (the Bill) is to amend the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) to ensure that supplies of digital currency receive equivalent goods and services tax (GST) treatment to supplies of money, particularly foreign currency.

The purpose of Schedule 2 to the Bill is to amend the Income Tax Assessment Act 1997 (ITAA 1997) to include the Centre for Entrepreneurial Research and Innovation (CERI) on the list of deductible gift recipients (DGRs).

Structure of the Bill

The Bill is comprised of two Schedules:

•       Schedule 1 to the Bill amends the GST Act to ensure that supplies of digital currency receive equivalent GST treatment to supplies of money, particularly foreign currency and

•       Schedule 2 to the Bill amends the ITAA 1997 to include the CERI as a DGR.

Structure of this Bills Digest

As the matters covered by each of the Schedules are independent of each other the relevant background, stakeholder comments (where available) and analysis of the provisions are set out under each Schedule number.

Committee consideration

Senate Standing Committee for the Selection of Bills

At its meeting of 14 September 2017, the Senate Standing Committee for the Selection of Bills deferred consideration of the Bill to its next meeting.[1]

Senate Standing Committee for the Scrutiny of Bills

At the time of writing, the Bill had not been considered by the Senate Standing Committee for the Scrutiny of Bills.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[2]

Parliamentary Joint Committee on Human Rights

At the time of writing, the Bill had not been considered by the Parliamentary Joint Committee on Human Rights.

Schedule 1—GST measure

GST is payable on taxable supplies.[3] Supplies of money do not constitute a supply unless the money is provided as consideration for a supply that is a supply of money.[4] At its simplest, this might be an exchange of Australian dollars for an equivalent amount in a foreign currency.

Whether digital currency such as bitcoin is or may involve money is relevant for determining whether the transfer of bitcoin from one entity to another is a supply for GST purposes. According to the Oxford Dictionary of English, bitcoin is:

… a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.[5]

In Goods and Services Tax Ruling GSTR 2014/3, the Commissioner of Taxation (the Commissioner) advised that digital currencies such as bitcoin are not money for the purposes of the GST Act. However,

5. A transfer of bitcoin from one entity to another is a ‘supply’ for GST purposes.[6]

And further:

The value of a taxable supply is calculated by reference to the price which is made up of consideration which is expressed as an amount of money and the GST inclusive value of any non-monetary consideration. Further, the value of that taxable supply must be expressed in Australian currency or translated into Australian currency if the consideration is expressed in a foreign currency. Having regard to these provisions, money is a central concept in determining whether there is a supply for GST purposes, and the calculation of the GST payable on a taxable supply.[7]

Inquiries by the Senate Economics References Committee and the Productivity Commission in 2015 identified this treatment of digital currency as a deterrent to the use of digital currency in Australia, and recommended changes to the law so that it would be treated, for GST purposes, in a way that is more consistent with the treatment of money.

Inquiry by the Senate Economic References Committee

The Senate Economics References Committee (Economics Committee) published a report on its Inquiry into Digital Currency, Digital Currency—Game Changer or Bit Player, in August 2015.[8] Under the terms of reference, the Economics Committee was to give particular attention to, among other things:

(a) how to develop an effective regulatory system for digital currency that:

              (i) ascertains the most appropriate definition of digital currencies under Australian tax law.[9]

The key concern expressed in submissions to the Economics Committee by the Bitcoin Foundation and Bitcoin Association of Australia was the GST treatment of bitcoin.[10] By treating bitcoin transactions as barter transactions, GST can effectively be applied twice to one transaction: GST would be applied to the goods or services being provided and to the ‘supply’ of digital currency used as payment.[11] Professor Miranda Stewart and Mr Joel Emery from the Tax and Transfer Policy Institute, Australian National University, suggested that an exemption to the application of a sales tax (GST) in Australia (as is the case with VAT in the UK), ‘would promote simplicity and neutrality, as it treats sales using digital currency as payment largely the same as sales using traditional cash’.[12] Recommendation 1 of the report concludes:

4.35 The committee is of the view that digital currency should be treated as money for the purposes of the goods and services tax. As such, the committee recommends that the government consults with the states and territories to consider amending the definition of money in the A New Tax System (Goods and Services Tax) Act 1999 and including digital currency in the definition of financial supply in A New Tax System (Goods and Services Tax) Regulations 1999.[13]

Inquiry by the Productivity Commission

Recognising that the requirement to charge GST on digital currency transactions may be a barrier to setting up a digital currency business in Australia, a Productivity Commission Business Set-up, Transfer and Closure report (published September 2015) recommended that:

Digital currencies, such as Bitcoin, should be treated as a financial supply for GST purposes. This would require that the definition of money be updated to include digital currency in both Division 195 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) and relevant GST Regulations.[14]

The report noted that ‘reducing impediments to digital currency businesses in Australia could facilitate innovation, not only in payment systems, but also a range of other industries’.[15] In addition, the current classification of digital currencies as intangible property for GST purposes places Australian-based businesses at a disadvantage to overseas competitors where sales tax is not charged on the supply of digital currency. In contrast to the supply of digital currency, the supply of foreign currency in Australia is a ‘financial supply’ and as such GST is not applied to the exchange.

Government response

In the Government’s Backing Australian FinTech statement of March 2016, it ‘committed to addressing the “double taxation” of digital currencies’ and to working with industry on legislative options to reform the GST law.[16]

The Government’s response to the Senate inquiry (published in May 2016) agreed that consumers should not be subject to GST twice when using digital currency to purchase goods and services.[17]

Consistent with these responses, on 9 May 2017, the Government announced that, from 1 July 2017, it would align the GST treatment of digital currency (such as bitcoin) with money:

Digital currency is currently treated as intangible property for GST purposes. Consequently, consumers who use digital currencies as payment can effectively bear GST twice: once on the purchase of the digital currency and again on its use in exchange for other goods and services subject to GST.[18]

International experience

In 2015, the European Court of Justice ruled that Bitcoin transactions ‘are exempt from VAT (value-added tax) under the provision concerning transactions relating to currency, bank notes and coins used as legal tender’.[19]

In Japan, Bitcoin is officially recognized as a payment method, with the sale of Bitcoin exempted from consumption tax as of 1 July 2017.[20]

In the United States, however, the Internal Revenue Service (IRS) issued a notice in 2014 providing that ‘virtual currency is treated as property for U.S. federal tax purposes’ and is therefore subject to capital gains tax.[21]

Policy position of non-government parties/independents

At the time of writing, non-government parties and independents have not commented publicly, other than as members of the Senate Economics References Committee Inquiry into Digital Currency.

Position of major interest groups

There were 48 submissions to the Senate Inquiry into Digital Currency.  Some of these have been referred to above. Where reference was made to the GST treatment of bitcoin, there appeared to be a consensus. In their submission, the Institute of Public Affairs (IPA):

… share[d] the concerns expressed by some Bitcoin exchange vendors that the ATO’s requirement that GST be imposed upon Bitcoin transactions could stifle the development of this technology.[22]

CoinJar, an Australian digital finance startup argued that the requirement for bitcoin gateway companies to charge customers GST had rendered them uncompetitive against non-Australian rivals.[23] Following the Australian Taxation Office (ATO) ruling in 2014, CoinJar relocated to the United Kingdom.[24]

The submission by the Bitcoin Foundation and the Bitcoin Association of Australia noted that the current GST treatment:

… is already hindering bitcoin adoption and innovative start-ups in Australia, and has the potential to severely hinder the growth of the nascent FinTech space in Australia. … The GST treatment of bitcoin is the main issue.[25]

The Australian Digital Currency Commerce Association argued for a new definition of digital currency to be incorporated into the GST Act and for the definition of money to be expanded to include digital currency:

Treating Digital Currency as a commodity or other good subject to value-added tax would impose tax on every transaction completed using Digital Currency and therefore guarantee its rapid demise.[26]

Citing additional administrative costs and the ‘potential for anomalous tax outcomes’, The Tax Institute argued that bitcoin should be treated as currency for tax purposes.[27]

The Australian Securities and Investment Commission did not, however, consider that digital currencies are money or currency for the purposes of the Corporations Act 2001 or the Australian Securities and Investments Commission Act 2001.[28]

Financial implications

According to the Explanatory Memorandum, the amendments to the GST Act are ‘estimated to have an unquantifiable impact on GST revenue over the forward estimates period’.[29]

In an analysis of bitcoin users, one submission to the Senate Inquiry notes that a minority of users (both in number and bitcoin balances) appear to use bitcoin as a medium of exchange; most bitcoins are held by investors.[30]

The Reserve Bank of Australia notes that, although the volume of bitcoin transactions has grown over the past years, transaction levels remain small relative to existing retail payment systems. In 2014, for example, average daily bitcoin transactions were less than 0.02 per cent of global purchases made by credit, debit or prepaid cards.[31]

Key provisions

Schedule 1 to the Bill amends the GST Act to ensure that supplies of digital currency receive equivalent GST treatment to supplies of money, particularly foreign currency.

Item 1 of Schedule 1 to the Bill amends the definition of supply to make it clear that a supply does not include a supply of digital currency unless the digital currency is provided as consideration for a supply that is a supply of digital currency or money.[32]

Item 2 of Schedule 1 to the Bill allows the Commissioner to determine methods for converting digital currency into Australian currency when valuing supplies, consistent with the Commissioner’s existing powers in relation to foreign currency.[33]

Item 27 amends section 195-1 of the GST Act to include a definition of digital currency being digital units of value that:

•       are designed to be fungible

•       can be provided as consideration for a supply

•       are generally available to members of the public without any substantial restrictions on their use as consideration

•       are not denominated in any country’s currency

•       do not have a value that depends on, or is derived from, the value of anything else and

•       do not give an entitlement to receive, or to direct the supply of, a particular thing or things, unless the entitlement is incidental to holding the digital units of value or using the digital units of value as consideration.

Digital currency does not include money or a thing that, if supplied, would be a financial supply for a reason other than being a supply of one or more digital units of value as described above.

If something meets the definition of digital currency, the amendments in Schedule 1 ensure that payments made using that digital currency receive equivalent treatment to payments made using money: items 1 and 4 provide that supplies or acquisitions of money or digital currency are generally not supplies or acquisitions under GST law, unless the supply of money or digital currency is in exchange for other money or digital currency.

Minor amendments to other provisions that make reference to money or currency, to include digital currency, are contained in items 2, 5–26 and 28–29. Item 3 is an applications provision that preserves the validity of existing determinations made by the Commissioner in relation to foreign currency.

Schedule 1 amends provisions referring to payments in money, including in the provisions dealing with insurance (items 5–11), third party payments (items 12–16 and 21–24), settlement sharing arrangements (items 17–18), gambling (items 19–20 and 28–29) and GST turnover (items 25–26). The amendments revise these provisions to also apply to digital currency where this is required to provide consistent treatment.

Other provisions

Application and transitional provisions

The amendments made by Schedule 1 apply to supplies and payments made on or after 1 July 2017 (item 30). As the date of effect was announced in the 2017–18 Budget, the ‘potential retrospective application is not expected to have any substantive adverse impact on taxpayers’.[34]

It is also intended that this start date will apply for the related amendments the Government intends to make to the GST Regulations (subitem 30(2)). Specifically, subsection 12(2) of the Legislation Act 2003 (retrospective application of legislative instruments) does not apply to amendments to regulations dealing with the GST treatment of financial supplies if these amendments relate to digital currency and are made within six months of the Schedule receiving Royal Assent.[35]

Schedule 2—Centre for Entrepreneurial Research and Innovation

CERI is a registered charity, an independent, not-for-profit organization based in Western Australia. Established in 2015, its purpose is to work with local researchers and assist them in developing entrepreneurial skills and commercializing innovative ideas.

Our mission is to work with our knowledge workers in entrepreneurship, innovation and startup company formation to drive a strong commercial ecosystem in WA.[36]

According to the Explanatory Memorandum to the Bill, CERI’s activities include:

• encouraging cross-collaboration between researchers in universities, research institutes and the private sector;

• working with researchers to assist in proof of concept and commercialisation; and

• assisting start-up companies by providing access to investors, as well as facilities at the CERI’s offices.[37]

Division 30 of the ITAA 1997 sets out the rules for working out deductions for certain gifts or contributions. The income tax law allows income tax deductions for taxpayers who make gifts of $2 or more to a deductible gift recipient (DGR). DGRs are defined in section 30-227 of the ITAA 1997.

An organisation must be registered with the Australian Charities and Not-for-profits Commission (ACNC) to apply for charity tax concessions. Many charities are also eligible to apply for DGR status, which means that donations made to the organisation are tax deductible.[38] DGR status helps eligible organisations attract public financial support for their activities. In order to be endorsed as a DGR, an organization must be established and operated in Australia.[39]

Policy position of non-government parties/independents

At the time of writing, non-government parties and independents have not commented publicly on the measures contained in Schedule 2 of the Bill.

Financial implications

According to the Explanatory Memorandum to the Bill, the measure in Schedule 2 is estimated to have a minimal financial impact over the forward estimates period.[40]

Key provisions

Schedule 2 to the Bill amends the ITAA 1997 to include the CERI as a DGR.

Item 1 amends the table in subsection 30-40(2) of the ITAA 1997 to insert the CERI: taxpayers can claim a tax deduction for gifts made to the CERI provided the gift complies with the existing requirements of the income tax law. The listing of the CERI applies to gifts made after 1 January 2017 and before 31 December 2021.

Item 2 amends the index for Division 30 of the ITAA 1997 to reflect the listing of the CERI.

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[1].              Senate Standing Committee for the Selection of Bills, Report, 11, 2017, The Senate, Canberra, 14 September 2017.

[2].              The Statement of Compatibility with Human Rights can be found at pages 18 and 21 of the Explanatory Memorandum to the Bill.

[3].              GST Act, Part 2–2, Division 9.

[4].              GST Act, Part 2–2, subsection 9–10(4). The definition of money, as set out in section 195-1 of the GST Act, includes: currency; promissory notes and bills of exchange; negotiable instruments used, circulated or intended for use or circulation as currency; postal notes and money orders; payments by way of credit or debit cards, crediting or debiting an account or the creation or transfer of a debt. The definition also provides that money does not include: collector’s pieces; investment articles; items of numismatic interest; or currency the market value of which exceeds its stated value as legal tender in the country of issue.

[5].              Oxford dictionary of English, Bitcoin, Oxford dictionary online.

[6].              Australian Taxation Office (ATO), Goods and services tax: the GST implications of transactions involving bitcoin, Goods and Services Tax Ruling, GSTR 2014/3, ATO, Canberra, 21 January 2015.

[7].              Ibid., p. 7.

[8].              Details of the terms of reference, submissions to the Economics Committee and the Committee’s final report are available on the inquiry homepage.

[9].              Senate Economics References Committee, Digital currency: game changer or bit player, The Senate, Canberra, August 2015, p. 1.

[10].              Bitcoin Foundation and Bitcoin Association of Australia, Submission to the Economics References Committee, Inquiry into digital currency, 28 November 2014.

[11].              Senate Economics References Committee, Digital currency: game changer or bit player, op. cit., p. 28.

[12].              M Stewart and J Emery (Tax and Transfer Policy Institute) Submission to the Economics References Committee, Inquiry into digital currency, 28 November 2014, p. 13.

[13].              Senate Economics References Committee, Digital currency: game changer or bit player, op. cit., p. 34.

[14].              Productivity Commission (PC), Business set-up, transfer and closure, Inquiry report, 75, PC, Canberra, 30 September 2015, Recommendation 9.4 at p. 32.

[15].              Ibid., p. 241.

[16].              Australian Government, Backing Australian FinTech, Treasury, Canberra, March 2016, p. 22

[17].              K O’Dwyer (Minister for Small Business and Assistant Treasurer), Government response to Senate inquiry into digital currency, media release, 5 May 2016.

[18].              Australian Government, Budget measures: budget paper no. 2, 2017–18, p. 22.

[19].              Court of Justice of the European Union, The exchange of traditional currencies for units of the ‘bitcoin’ virtual currency is exempt from VAT, 128/15, media release, Luxembourg, 22 October 2015.

[20].              On March 27, the Japanese National Diet passed the 2017 tax reform bills which include amendments to the Fund Settlement Law to define virtual currency as a means of settlement. See Deloitte, ‘Japan: 2017 tax reform proposals’, Inbound Tax Alert, 19, December 2016.

[21].              Internal Revenue Service (IRS), Notice 2014–21, IRS, Washington, DC., 25 March 2014.

[22].              Institute of Public Affairs, Submission to the Senate Standing Committee on Economics, Inquiry into digital currency, November 2014, p. 6.

[23].              CoinJar, Submission to the Senate Standing Committee on Economics, Inquiry into digital currency, 28 November 2014.

[24].              PC, Business set-up, transfer and closure, op. cit., p. 246.

[25].              Bitcoin Foundation and the Bitcoin Association of Australia, Submission to the Senate Standing Committee on Economics, Inquiry into digital currency, 28 November 2014, pp. 18–19.

[26].              Australian Digital Currency Commerce Association, Submission to the Senate Standing Committee on Economics, Inquiry into digital currency, 2014, p. 10.

[27].              The Tax Institute, Submission to the Senate Standing Committee on Economics, Inquiry into digital currency, 1 December 2014, p. 1.

[28].              Australian Securities and Investments Commission, Submission to the Senate Standing Committee on Economics, Inquiry into digital currency, December 2014.

[29].              Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 6) Bill 2017, p. 3.

[30].              Finance Discipline Group, Submission to the Senate Standing Committee on Economics, Inquiry into digital currency, 2014.

[31].              Reserve Bank of Australia, Submission to the Senate Standing Committee on Economics, Inquiry into digital currency, November 2014.

[32].              GST Act, proposed subsection 9–10(4).

[33].              GST Act, proposed subsection 9–85(2).

[34].              Australian Government, Budget measures: budget paper no. 2: 2017–18, p. 22; and Explanatory Memorandum, op. cit., p. 17.

[35].              Subsection 12(2) of the Legislation Act 2003 prevents the provision of a legislative instrument from having retrospective effect in relation to a person if it would disadvantage the person or subject them to a liability.

[36].              Centre for Entrepreneurial Research and Innovation (CERI), ‘Vision and mission’, CERI website.

[37].              Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 6) Bill 2017, p. 19.

[38].              Australian Charities and Not-for-profits Commission (ACNC), ‘Charity tax concessions available’, ACNC website.

[39].              ATO, ‘Rules and tests for DGR endorsement’, ATO website, last modified 10 October 2017.

[40].              Explanatory Memorandum, Treasury Laws Amendment (2017 Measures No. 6) Bill 2017, p. 4.