Mining tax gone but watch for associated tax changes

Following the speedy passage of the mining tax repeal legislation, on 9 September 2014 the Government announced that it will be recommending to the Governor-General that he proclaim 30 September 2014 as the commencement date for Schedules 1 to 5 to the Minerals Resource Rent Tax Repeal and Other Measures Bill 2014 (which received Royal Assent on 5 September 2014 as Act No 96 of 2014). As a result, the Government said the Schedules will have the following dates of effect for most taxpayers:

• Schedule 1 – abolition of the mining tax from 1 October 2014, with taxpayers final MRRT year (even if it is a part year) ending on 30 September 2014;
• Schedule 2 – abolition of the company loss carry-back from 1 July 2013;
• Schedule 3 – reduction of the instant asset write-off from 1 January 2014;
• Schedule 4 – abolition of accelerated depreciation for motor vehicles from 1 January 2014; and
• Schedule 5 – abolition of geothermal energy concessions from 1 July 2014.

Taxpayers with a substituted accounting period may have a different date of effect.

The Government said the above dates are consistent with the Exposure Draft to the mining tax repeal legislation, and with the dates announced in November 2013 at the time of the introduction of the first mining tax repeal Bill to Parliament. The Government further added that the tax measures can be reconsidered in the context of the Government’s review into taxation through the Tax White Paper.

At the time of writing (15 September 2014), the Governor-General had yet to make the anticipated proclamations.

ATO administration and assistance

The Government said it has consulted with the ATO in relation to the administration of the measures and their dates of effect to ensure that assistance is provided to affected businesses. The ATO has issued a separate media release (dated 9 September 2014) outlining how this assistance will be provided. Key points are as follows.

Mining tax repeal

The effect of the repeal is that entities will not accrue further minerals resource rent tax (MRRT) liabilities from 1 October 2014. The ATO said it will be consulting with industry to implement the administrative approach.

Company loss carry-back provisions

The repeal of the company loss carry-back provisions applies from 1 July 2013 for most taxpayers. Companies who have claimed the offset and are now no longer eligible will be contacted by the ATO about their circumstances. The ATO said it will amend the affected assessments and taxpayers will not be subject to penalties and interest if payment is made “within a reasonable time”.

Small business instant asset write-off

The repeal of the provisions allowing small businesses asset write-off concessions apply from 1 January 2014 for most taxpayers (ie the write-off threshold falls from $6,500 to $1,000 from 1 January 2014). From 1 January 2014, only assets costing less than $1,000 (acquired and installed ready for use after 31 December 2013) will be eligible for immediate write-off. Assets costing $1,000 or more will need to be depreciated in the general small business pool. Assets costing less than $6,500 – acquired and installed ready for use by the small business between 1 July 2013 and 31 December 2013 – will still be eligible to be immediately written-off. Those taxpayers who have lodged their 2013–2014 tax returns under the previous law should now seek amendments to reduce their depreciation claim. The ATO said it does not intend to apply penalties or the shortfall interest charge (SIC) if taxpayers request to amend their assessments “within a reasonable period of time”.

Accelerated deduction for motor vehicles

From 1 January 2014, motor vehicles will only be immediately deductible if they cost less than $1,000. Motor vehicles costing $1,000 or more, acquired and available for use after 31 December 2013 will need to be depreciated in the general small business pool. Under previous legislation, small businesses could claim up to $5,000 as an immediate deduction for motor vehicles costing $6,500 or more that were acquired from the 2012–2013 income year onwards. Note that motor vehicles acquired and available for use between 1 July 2013 and 31 December 2013 will still be eligible for an immediate initial deduction of up to $5,000. The ATO said no shortfall penalty will apply if taxpayers seek to amend their return “within a reasonable time” and the SIC will also be remitted to nil.

Abolition of geothermal energy exploration expenditure

From 1 July 2014:

• geothermal energy exploration and prospecting expenditure will no longer be immediately deductible; and
• if a geothermal exploration right is exchanged for a geothermal energy extraction right relating to the same, or a similar area, then a CGT rollover applies to defer the liability until the sale of the extraction right. These changes do not affect deductions or balancing adjustments for geothermal exploration rights or geothermal exploration information that started to be held before the income year in which the amendments commence.

The ATO has advised the Government that it will waive all penalties and interest in instances where taxpayers have chosen not to prepare their returns on the basis of the Government’s announcement of the measures, if they seek to have their income tax assessments amended in “reasonable time”.

Families and superannuation savers – take note

In order to pass the mining tax repeal legislation through the Senate, the Government made a deal with the Palmer United Party and Senator Muir (Australian Motoring Enthusiast Party) to defer the abolition of:

• the Income Support Bonus to 31 December 2016;
• the Schoolkids Bonus to 31 December 2016 (and the bonus will be restricted to families earning less than $100,000 per annum); and
• the Low Income Super Contribution to 30 June 2017.

The Government also agreed to freeze the superannuation guarantee (SG) rate at 9.5% for seven years. Under the changes, the SG rate will increase to 10% from 1 July 2021 and by 0.5% per year from 1 July 2022 until it reaches 12% for the year beginning 1 July 2025. The “rephased” SG percentage is summarised in the table below.

 

Financial year	SG charge percentage (%)
	Rates as amended	Rates proposed in original Bill	Law before changes
starting on 1 July 2014	9.5	9.5	9.5
starting on 1 July 2015	9.5	9.5	10
starting on 1 July 2016	9.5	9.5	10.5
starting on 1 July 2017	9.5	9.5	11
starting on 1 July 2018	9.5	10	11.5
starting on 1 July 2019	9.5	10.5	12
starting on 1 July 2020	9.5	11	12
starting on 1 July 2021	10	11.5	12
starting on 1 July 2022	10.5	12	12
starting on 1 July 2023	11	12	12
starting on 1 July 2024	11.5	12	12
starting on or after 1 July 2025	12	12	12

Sources: Minerals Resource Rent Tax Repeal and Other Measures Bill 2014, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=r5327; Treasurer and Acting Assistant Treasurer’s joint media release, 9 September 2014, http://jbh.ministers.treasury.gov.au/media-release; ATO media release, 9 September 2014, https://www.ato.gov.au/Media-centre/Media-releases/ATO-provides-advice-on-MRRT-repeal.

Professional firms and profit distribution under scrutiny

The ATO has released draft guidelines on how it will assess Pt IVA risk applying to the allocation of profits from a professional firm carried on through a partnership, trust or company, where the income of the firm is not personal services income.

ATO Deputy Commissioner Michael Cranston said the draft guidelines explain how professionals can assess the tax risks flowing from the use of partnerships of discretionary trusts and similar structures. “Professional practices may legitimately operate as a partnership of discretionary trusts or through similar structures. The ATO is reviewing remuneration arrangements used by accountants, lawyers and other professionals to make sure people are using these structures appropriately,” he said. Firms which could be affected include, but are not limited to, those that provide accounting, architectural, engineering, financial, legal and medical services.

The ATO’s concerns

The ATO said that in some cases practice income may be treated as being derived from a business structure, even though the source of that income remains, to a significant extent, the provision of professional services by one or more individuals. The ATO said it was concerned that Pt IVA may apply to schemes which are designed to ensure that the individual practitioner professional (IPP) is not directly rewarded for the services they provide to the business, or receives a reward which is substantially less than the value of those services. Where an individual attempts to alienate amounts of income flowing from their personal exertion (as opposed to income generated by the business structure), the ATO said it may consider cancelling relevant tax benefits under Pt IVA.

The ATO said it acknowledged that the general anti-avoidance provisions have historically been applied to assess individuals on income generated by their personal exertion or application of their professional skills, rather than profits or income generated by a business. However, the ATO said it considers that Pt IVA could apply where an IPP arranges for the distribution of business profits or income to associates without regard to the value of the services the individual has provided to the business. This is particularly the case, where for example, the level of income received by the individual, whether by way of salary, distribution of partnership or trust profit, dividend or any combination of them, does not reflect their contribution to the business and is not otherwise explicable by the commercial circumstances of the business.

Low risk and high risk arrangements

Mr Cranston said the draft guidelines set out what the ATO considers to be low risk, legally effective arrangements, and what it considers to be high risk arrangements that might attract attention. The draft guidelines set out circumstances that the ATO considers low risk and not subject to compliance action on the issue. Broadly, a case would be considered low risk if the IPP meets one of the following guidelines regarding income from the firm:

• the IPP receives assessable income from the firm in their own hands as an appropriate return for the services they provide to the firm. In determining an appropriate level of income, the taxpayer may use the level of remuneration paid to the highest band of professional employees providing equivalent services to the firm, or if there are no such employees in the firm, comparable firms or relevant industry benchmarks eg industry benchmarks for a region provided by a professional association, agency or consultant; and/or
• 50% or more of the income to which the IPP and their associated entities are collectively entitled (whether directly or indirectly through interposed entities) in the relevant year is assessable in the hands of the IPP; or
• the IPP and their associated entities both have an effective tax rate of 30% or higher on the income received from the firm.

Where none of the low risk guidelines are met, the ATO will consider the arrangement to be “higher risk”. In these cases, the lower the effective tax rate, the higher the ATO will rate the compliance risk and the greater the likelihood of compliance action. For example, an arrangement with an effective tax rate of 15% would be rated as higher risk than one with an effective tax rate of 25%. Note that in cases where other compliance issues are evident (eg late lodgment of returns, income injection to entities with carry forward losses, avoidance of Div 7A, inappropriate access to low income tax offsets or other benefits etc), the taxpayer will be rated as higher risk.

Date of effect and review

The draft guidelines have been co-designed with industry representatives and have been issued as a working draft for ongoing public consultation. The ATO said the draft guidelines will be applied from the 2014–2015 income tax year. The ATO said the guidelines will be reviewed during the 2016–2017 year, subject to the possibility of judicial guidance pending an appropriate test case being identified.

Sources: ATO publication, “Assessing the risk: allocation of profits within professional firms”, 2 September 2014, https://www.ato.gov.au/Business/Starting-and-running-your-small-business/In-detail/Professional-practice-income/Assessing-the-risk–allocation-of-profits-within-professional-firms; ATO media release, 1 September 2014, https://www.ato.gov.au/Media-centre/Media-releases/ATO-provides-guidance-on-discretionary-trust-partnerships-for-professionals.

Dividend washing compliance still on ATO’s radar

The ATO says it will soon commence the next phase of its dividend washing compliance program by issuing letters to 500 taxpayers who did not respond to the ATO’s initial letters. The ATO will also issue letters to another 1,500 taxpayers whose updated data suggests they may have entered into a dividend washing transaction. The letters will ask those taxpayers to self-amend their tax returns for the income years ending 30 June 2011, 2012 and 2013 in order to reverse franking benefits they may have obtained from dividend washing transactions.

In line with an earlier commitment, the ATO says it will not impose any penalty on taxpayers who have entered into dividend washing transactions and who come forward to self-amend their tax returns before the date specified in the ATO letter. In addition, the ATO says that taxpayers who have entered into dividend washing transactions but do not receive a letter from the ATO will not be subject to penalties provided they amend their tax returns by 22 September 2014.

The ATO reiterated its position in Taxation Determination TD 2014/10 that obtaining two sets of franking credits from one dividend event is not allowed. The ATO says taxpayers who are unsure about their own circumstances should seek independent advice or apply for a private ruling from the ATO. Taxpayers can call the ATO on 1800 177 006 if they require further assistance.

In March 2014, the ATO issued letters to taxpayers who it identified may have been involved in dividend washing transactions. As at 30 June 2014, approximately 1,300 of the taxpayers contacted in March had responded by coming forward to make voluntary amendments under which the franking benefits obtained from dividend washing transactions have been removed from their tax returns.

The ATO says it will continue to monitor dividend washing and apply the law to disallow additional franking credits.

Sources: ATO media release, 11 August 2014, https://www.ato.gov.au/Media-centre/Articles/ATO-targets-dividend-washing/; ATO publication, “New law preventing dividend washing”, 12 August 2014, https://www.ato.gov.au/Tax-professionals/News-and-updates/Income-tax/New-law-preventing-dividend-washing.

Rental property deductions – avoid common errors

The ATO says it is increasing its focus on rental property deductions. It says common errors made by rental property owners include the following:

• claiming rental deductions for properties not genuinely available for rent;
• incorrectly claiming deductions for properties only available for rent part of the year, such as a holiday home;
• incorrectly claiming structural improvement costs as repairs when they are capital works deductions, such as re-modelling a bathroom or building a pergola;
• overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property.

The ATO has also released a series of short videos which explain the tax implications of buying, owning and selling a rental property. The short videos are available on the ATO website at https://www.ato.gov.au/General/Property/In-detail/Rental-properties/Rental-Property-video-series.

Source: ATO publication, “Claiming rental property expenses?”, 18 August 2014, https://www.ato.gov.au/Tax-professionals/News-and-updates/Income-tax/Claiming-rental-property-expenses.

Data-matching offshore bank accounts

The ATO has gazetted a notice outlining details of a data-matching program targeting foreign bank accounts. The ATO will request and collect account details of bank customers from various financial institutions listed in the notice to identify Australian resident taxpayers with offshore bank accounts which may show undeclared income and/or gains for the years ended 30 June 2012 to 30 Jun 2015. The financial institutions listed in the notice include the following:

• Australia and New Zealand Banking Group Limited
• Bank of China (Australia) Limited
• Bank of China Limited
• Credit Suisse AG
• Deutsche Bank Aktiengessellschaft
• HSBC Bank Australia Limited
• Hongkong and Shanghai Banking Corporation Limited
• Investec Bank (Australia) Limited
• Macquarie Bank Limited
• Rabobank Australia Limited
• Rabobank Nederland
• UBS AG
• Citibank, N.A.
• Citigroup Pty Limited

The program will, among other things, help the ATO to identify Australian resident taxpayers who may be outside the tax system, and increase transparency of the worldwide dealings of Australian resident taxpayers. The program will also assist the ATO in building an understanding of taxpayer behaviour in international dealings, develop compliance profiles and improve fraud detection models. The ATO estimates that approximately 50,000 offshore records will be obtained under the program.

Other data-matching programs

The ATO has also gazetted notices announcing the following data-matching programs:

Taxable government grants and payments

The ATO will acquire details of entities receiving taxable grants and payments from various Federal, State and Territory and Local Government departments, agencies and authorities.

The ATO notes the gazette notice replaces previously issued notices re Local Government Contractor Payments (C2014G00139, 28 January 2014), Childcare and Educator Payments (C2014G00566, 2 April 2014), and Queensland Government Contractor Payments (C2014G00567, 2 April 2014).

The ATO says the program will enable it to do the following:

• identify and test the correct taxation reporting by recipients of taxable Government grants and payments from agencies across the Federal, State and Local levels of government; and
• identify areas that require improved educational and compliance strategies to encourage voluntary compliance for recipients of Government payments and grants.

Records matched under the program will exceed 5,000 individuals throughout Australia.

Music royalty payments

The ATO will acquire details of entities collecting and distributing music royalty payments for the 2011, 2012 and 2013 financial years from the following sources:

• Australasian Performing Right Association (APRA);
• Australasian Mechanical Copyright Owners Society (AMCOS);
• APRA New Zealand Limited; and
• AMCOS New Zealand Limited.

Among other things, the ATO aims to detect instances of potential non-compliance, especially with omitted income and alienation of personal services income. The ATO also aims to develop a profile of the industry, including any risks and trends of non-compliance with taxation and superannuation obligations, and tailor educational strategies specifically for participants in the music industry. It is estimated that records for more than 15,000 entities will be obtained, of which most will be individuals.

Further information

Documents describing the programs are available by emailing the ATO at SpecialPurposeDataSteward@ato.gov.au.

Sources: Commonwealth Gazettes, Banking Transparency (2012–2015) (C2014G01381, 21 August 2014), http://www.comlaw.gov.au/Details/C2014G01381; Taxable Government Grants and Payments (2014) (C2014G01382, 21 August 2014), http://www.comlaw.gov.au/Details/C2014G01382; Music Royalty Payments (2011–2013) (C2014G01380, 21 August 2014), http://www.comlaw.gov.au/Details/C2014G01380.

Settlement for damages subject to capital gains tax

The Australian Administrative Tribunal (AAT) has affirmed that a taxpayer was liable for capital gains tax (CGT) on a payment made to her in settlement of litigation she pursued for breach of contract and negligence. In doing so, the AAT dismissed the taxpayer’s claim that the payment of damages per se could not give rise to a profit or gain. It also found that she had failed to establish any relevant cost base for legal expenses that would otherwise reduce the assessable capital gain.

Background

The taxpayer was a solicitor who ran a family practice (with her husband). In anticipation of the husband’s retirement, they entered into an agreement with another solicitor to, among other things, transfer clients to him and recover outstanding debts of their practice. However, following the apparent failure of the agreement, the taxpayer (and her husband) sued the other solicitor for breach of various contractual and equitable duties.

By deed of settlement dated 6 September 2007, the solicitor agreed to pay the taxpayer and her husband $700,000 (as indemnified by LawCover insurance). Importantly, the settlement deed did not set out any basis for apportioning the $700,000 amongst the various claims made under the statement of claim lodged by the taxpayer and her husband. Nor was there material available to indicate how the $700,000 was calculated.

The Commissioner assessed the taxpayer for CGT on her share of the settlement payment (ie $350,000 – later reduced to $175,000 due to the effect of the CGT 50% discount). He did so on the basis that CGT event C2 (ending of intangible asset) applied to the transaction and that the taxpayer had failed to establish a relevant cost base. The Commissioner also imposed 50% shortfall penalties for “recklessness”.

The taxpayer argued that CGT could not apply to a payment for “damages” per se. It did not give rise to a profit or gain, and all the payment did was return her to her “pre-damage” position. Alternatively, she argued that if CGT did apply, then she was entitled to a cost base for her share of legal costs in pursing the action which would reduce her gain to some $34,000. She also contested the imposition of shortfall penalties for recklessness.

Decision

In dismissing the taxpayer’s application, the AAT found that she had not discharged the burden of proving the assessment was excessive and what the correct assessment should be – and, in particular, that relevant legal expenses had in fact been incurred for cost base purposes.

The AAT first found that each of the causes of action pleaded by the taxpayer against the solicitor were CGT assets under the definition of “CGT asset” in s 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as they were either “a kind of property” or, alternatively, “legal or equitable rights that were not property”. It then found that CGT event C2 happened when the deed of settlement was executed because the CGT assets (being the causes of action or “choses in action”) ended by “release, discharge or satisfaction or by being surrendered” as required by CGT event C2. The AAT further found that this event happened in the 2008 income year, being the time the taxpayer entered into the settlement deed.

In terms of the amount of the capital gain from the event, the AAT stated that the payment made to the taxpayer was clearly the capital proceeds from the event. It then found that legal costs incurred by a taxpayer in respect of such an action could form part of the cost base of the assets in question, but the taxpayer had failed to establish that the expenses had in fact been incurred. In particular, the AAT noted that while invoices were provided, there were a number of problems with these invoices including:

• there was no clear evidence to support the fact that the invoices were ever paid;
• even if they were paid, there was no clear evidence they were paid by the taxpayer (ie “incurred” by the taxpayer for cost base purposes);
• even if paid, there seemed to have been no clear basis for establishing that the invoices that were paid related specifically to the damages received; and
• there was difficulty in reconciling the quantum of the legal costs and the net damages figures with the invoices.

The AAT also emphasised that the taxpayer had not maintained adequate records of cost incurred for CGT purposes as required by s 121-20. Accordingly, in all these circumstances, the AAT found that the taxpayer had not discharged her burden of proving the assessment was excessive and what it, instead, should have been.

Importantly, in relation to the taxpayer’s argument that damages cannot be a capital gain, the AAT stated that “there does not appear to be such a broad principle in operation and certainly since the introduction of taxes on capital gains in Australia, it is entirely possible for damages received by way of settlement of a claim to be treated as a capital gain after appropriate adjustment is made for any costs that can be used to reduce that amount under the relevant statutory formulation provided in the legislation”. It also noted that this was clear from the decisions in Tuite v Exelby (1993) 25 ATR 81 and Carborundum Realty Pty Limited v RAIA Architecture Pty Limited (1993) 25 ATR 192, for example.

Finally, the AAT found that the 50% shortfall penalties imposed for “recklessness” were appropriate in the circumstances and, in particular, in view of the taxpayer taking no steps to seek independent legal advice in relation to whether any tax might be payable on the payment, the failure to keep virtually any records as required by the tax law and the fact that the taxpayer lodged a tax return which was incorrect in a “material particular”.

Comment

Note that this result accords with the Commissioner’s view in Taxation Ruling TR 95/35 which states that compensation will be considered to be capital proceeds for the right to sue per se, if it is not received in relation to an underlying asset or is received as an undissected lump sum.

Re Coshott and FCT [2014] AATA 622, 2 September 2014, http://www.austlii.edu.au/au/cases/cth/AATA/2014/622.html.

Bitcoin tax guidance from the ATO

The ATO has released its views on the tax treatment of Bitcoins and other crypto-currencies. The views are contained in four Draft Taxation Determinations and a Draft GST Ruling. The ATO has also released a guidance paper.

ATO Senior Assistant Commissioner Michael Hardy said the ATO has consulted extensively with Bitcoin experts, businesses, industry bodies and other external stakeholders to develop the guidance and explain the obligations of Bitcoin users. Mr Hardy said people should seek a private ruling if their circumstances are not covered by the guidance.

Guidance paper – tax consequences of Bitcoin transactions

The ATO released a guidance paper on the tax consequences of transacting with Bitcoins, which it considers akin to a barter arrangement, with similar tax consequences. It states that the records taxpayers are required to keep in relation to such transactions are the date of the transactions; the amount in Australian dollars (taken from a reputable online exchange); what the transaction was for; and who the other party was (eg their Bitcoin address).

According to the ATO, generally there will be no income tax or GST implications of taxpayers using Bitcoins to pay for goods or services if they are not in business or carrying on an enterprise (ie acquiring goods or services for personal use or consumption). However, where transactions using Bitcoins are conducted in a business, the following tax consequences may apply:

• the value of Bitcoins received for goods or services provided as a part of a taxpayer’s business needs to be recorded in Australian dollars as a part of their ordinary income;
• businesses may be able to claim input tax credits on GST charged on the Bitcoins they received as payment if the supply of goods or services was a taxable supply;
• a deduction is allowed for the purchase of business items using Bitcoins based on the arm’s length value of the item acquired;
• GST is payable on the supply of Bitcoins made in the course or furtherance of a taxpayer’s enterprise and the GST value is calculated on the market value of the goods or services; and
• capital gains consequences may apply where taxpayers dispose of Bitcoins as a part of carrying on a business. However, any capital gain is reduced by the amount that is included in their assessable income as ordinary income.

In instances where an employee has a valid salary sacrifice arrangement with their employer to receive Bitcoins as remuneration (ie salary and wages) instead of Australian dollars, the ATO notes the payment will be a fringe benefit. However, it states that in absence of a valid salary sacrifice arrangement, the remuneration will be treated as salary and wages and the employee will need to meet their usual PAYG obligations.

Mining Bitcoins

The ATO states that those in the business of mining Bitcoins need to include in their assessable income any income derived from the transfer of the mined Bitcoins to a third party. It says any expense incurred in relation to the mining activity would be allowed as a deduction. However, losses made may be subject to non-commercial loss provisions. Further, the ATO notes that Bitcoins are trading stock, and those in the business of mining Bitcoins are required to bring to account any Bitcoins on hand at the end of each income year. It notes that GST may be payable on supply, and input tax credits may be available.

Bitcoin exchange transactions

The ATO notes the following tax and GST consequences in relation to Bitcoin exchange transactions.

Taxpayers conducting a Bitcoin exchange (including Bitcoin ATMs)

Proceeds are included in assessable income. Expenses incurred are allowed as a deduction. Any Bitcoin on hand at the end of the income year needs to be accounted for as trading stock. GST may be payable on supply, and input tax credits may be available.

Taxpayers transacting with a Bitcoin exchange

Those taxpayers who acquired Bitcoins as an investment but are not carrying on a business will not be assessed on any profits resulting from the sale. Also, deductions will not be allowed for any losses made (CGT may apply). However, if the transactions amount to a profit-making undertaking or plan, then the profits on disposal will be assessable income. There will be no GST consequences where the Bitcoins were not supplied or acquired in the course or furtherance of an enterprise carried on.

Draft Taxation Determinations

The ATO has issued the following Draft Taxation Determinations.

Draft TD 2014/D11

This TD states that Bitcoins are not a “foreign currency” for the purposes of Div 775 of the ITAA 1997. The Draft states that the Commissioner’s view is that the current use and acceptance of Bitcoins in the community is not sufficiently widespread that it satisfies the test in Moss v Hancock [1899] 2QB 111, nor is it a generally accepted medium of exchange as per Travelex Ltd v FCT (2008) 71 ATR 216. Accordingly, the Draft indicates that Bitcoins do not satisfy the ordinary meaning of money. Since foreign currency is defined as a currency other than Australian currency, the Commissioner states that Bitcoins are not a foreign currency under Div 775 as it is not legally recognised as a unit of account and form of payment by the laws of any other sovereign country.

Draft TD 2014/D12

This TD says that Bitcoin holding rights amount to property and as such it is a “CGT asset” for the purposes of s 108-5(1) of the ITAA 1997. According to the Draft, the disposal of Bitcoins to a third party will usually give rise to CGT event A1 and taxpayers will be assessed on capital gains made. However, in circumstances where the Bitcoins are considered to be a personal use asset (ie kept for personal enjoyment or use) taxpayers may have access to s 118-10(3).

Draft TD 2014/D13

This TD indicates that when held for the purpose of sale or exchange in the ordinary course of a business, Bitcoin is trading stock for the purposes of s 70-10(1) of the ITAA 1997. The Draft states that this is evident from the context in John v FCT (1989) 20 ATR 1 that the trading activity to which the definition applies involves the passing of a proprietary interest in the things traded. In addition, it is also clear from FCT v Sutton Motors (Chullora) Wholesale Pty Ltd (1985) 16 ATR 567 that intangible property such as shares are capable of being trading stock.

Draft TD 2014/D14

This TD states that the provision of Bitcoins by an employer to an employee in respect of their employment is a property fringe benefit for the purposes of s 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). The Draft states that Bitcoin is not tangible property for the purposes of the FBTAA nor is it real property, and Bitcoin holding rights are not a chose in action. However, it states that as the definition of intangible property includes “any other kind of property other than tangible property”, Bitcoins will fall within this definition. In addition, the Draft indicates that since Bitcoins are not money, but is considered property for tax purposes, it satisfies the definition of a “non-cash benefit” and is excluded from PAYG withholding, which in turn means that it is not “salary or wages”.

Draft GST Ruling

The ATO also issued Draft GST Ruling GSTR 2014/D3 which considers whether Bitcoins are “money” as defined in s 195-1 of the GST Act and whether they are a “financial supply” under s 40-5(1) of the GST Act. The Draft states that a transfer of Bitcoins is a “supply for GST purposes” as Bitcoins are not “money” for the purposes of the GST Act. It also states that a supply of Bitcoins is not a “financial supply” and therefore is not input taxed.

Further, the Draft indicates that a supply of Bitcoins is a taxable supply under s 9-5 if the other requirements are met and the supply of Bitcoins is not GST-free under Div 38 (eg as a supply to a non-resident for use outside Australia). It also states that a supply of Bitcoins in exchange for goods or services will be treated as a barter transaction.

The Draft includes three examples outlining the various GST consequences of using Bitcoins in exchange for goods or services.

Public consultation

The Draft TDs and Draft GST Ruling are open to public consultation until 3 October 2014.

Date of effect

When the final Determinations and final GST Ruling are issued, it is proposed they will apply both before and after their date of issue.

Links to the Draft TDs, Draft GST Ruling and ATO Guidance Paper

• TD 2014/D11 – http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2014D11%2FNAT%2FATO%2F00001%22
• TD 2014/D12 –http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2014D12%2FNAT%2FATO%2F00001%22
• TD 2014/D13 –http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2014D13%2FNAT%2FATO%2F00001%22
• TD 2041/D14 – http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2014D14%2FNAT%2FATO%2F00001%22
• Draft GSTR 2014/D3 – http://law.ato.gov.au/atolaw/view.htm?docid=%22DGS%2FGSTR2014D3%2FNAT%2FATO%2F00001%22
• ATO publication, “Tax treatment of crypto-currencies in Australia – specifically bitcoin”, 20 August 2014 –https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia—specifically-bitcoin

Source: ATO media release, 20 August 2014, https://www.ato.gov.au/Media-centre/Media-releases/ATO-delivers-guidance-on-Bitcoin.

Important: Clients should not act solely on the basis of the material contained in Client Alert. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Client Alert is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.