Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)
Chapter 1 - GST treatment of digital currency
Outline of chapter
1.1 Schedule 1 to this Bill amends the GST Act to ensure that supplies of digital currency receive equivalent GST treatment to supplies of money, particularly foreign currency.
1.2 All legislative references are references to the GST Act unless the contrary is indicated.
Context of amendments
Operation of the existing law
GST and money
1.3 Supplies of money receive special treatment under the GST law. Generally, a supply of money is not a supply (subsection 9-10(4)). This means that entities paying consideration in money are not liable for GST on the supply of the money. Money is treated in this way because it is generally considered purely a medium of exchange that is not consumed and is therefore not subject to GST which seeks to effectively apply tax to final private consumption.
1.4 However, a supply of money is a supply if it is provided as consideration for another supply of money. In cases where one entity is paying another entity for money, the money is not being used exclusively as a medium of exchange to purchase goods, services or property - a valuable service is being provided (for example, activities involving the exchange of money for other money such as debt trading and foreign currency speculation are carried on for profit).
1.5 If a supply of money is a supply, the supply will generally be an input taxed financial supply see section 40-5 and item 9 of the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).
Money and digital currency
1.6 Money has a specific definition under the GST law. The definition, set out in section 195-1, provides that money includes:
- currency (both Australian and foreign);
- promissory notes, bills of exchange;
- negotiable instruments used, circulated or intended for use or circulation as currency;
- postal notes and money orders; and
- payments by way of credit or debit cards, crediting or debiting an account or the creation or transfer of a debt.
1.7 However, the definition also provides that money does not include:
- collector's pieces;
- investment articles;
- items of numismatic interest; and
- currency the market value of which exceeds its stated value as legal tender in the country of issue.
1.8 In Goods and Services Tax Ruling GSTR 2014/3, the Commissioner of Taxation (Commissioner) has advised that bitcoin is not money for the purposes of the GST Act. Specifically, while digital means of exchange such as bitcoin are often referred to as digital currencies, the Commissioner considers they are not 'currency' as the term is used in Australian law as they are not issued by a government (see for example Leask v Commonwealth  HCA 29).
1.9 As digital currencies have independent value rather than being a debt, credit or promise to make a payment, they are currently unlikely to meet any other items specifically included in the GST definition of money. The limited use of digital currencies in Australia also does not support an argument that they may be money in some broader sense.
GST and digital currency
1.10 As digital currency is not money for the purposes of the GST law, a payment of digital currency is considered to be a supply. If it is a payment that is made by an enterprise that is registered or required to be registered for GST, the supply will generally be a taxable supply.
1.11 The GST treatment of digital currency was considered by the Senate Economics References Committee and the Productivity Commission in separate inquiries in 2015.  Both bodies identified the current treatment as a deterrent to the use of digital currency in Australia and recommended changes to the law to provide GST treatment more consistent with money.
1.12 In March 2016, the Treasurer announced that the Government was committed to addressing the 'double taxation' of digital currency in the GST law in the 'Backing Australian FinTech' statement.
Summary of new law
1.13 The amendments provide that supplies and acquisitions of digital currency are generally disregarded for the purposes of GST. Consistent with supplies of money, supplies of digital currency are only recognised for the purposes of GST if the supply is made in exchange for money or digital currency.
1.14 For the purpose of these amendments, digital currency means fungible digital units of consideration that do not have a value based on the value of any other thing or associated entitlements.
1.15 The amendments make a number of additional changes to ensure consistent treatment between money and digital currency.
Comparison of key features of new law and current law
|New law||Current law|
|Digital currency supplies and acquisitions|
|Supplies and acquisitions of money and digital currency are disregarded for the purposes of the GST, unless the supply or acquisition is undertaken in exchange for a payment of money or digital currency.
Digital currency means fungible digital units of consideration that do not have a value based on the value of any other thing or associated entitlements.
|Supplies and acquisitions of money are disregarded for the purposes of the GST, unless the supply or acquisition is undertaken in exchange for a payment of money.
No special rules apply to supplies and acquisitions of digital currency.
|Commissioner may determine method for valuing foreign or digital currency|
|The Commissioner may determine how to work out the value in Australian currency of a taxable supply where consideration was provided in foreign currency or digital currency.||The Commissioner may determine how to work out the value in Australian currency of a taxable supply where consideration was provided in foreign currency.|
Detailed explanation of new law
1.16 The legislation amends the GST law so that digital currency receives equivalent treatment to money, in particular foreign currency.
Defining digital currency
1.17 To ensure digital currency has equivalent GST treatment to foreign currency, it is necessary to define what is meant by digital currency for the purposes of the GST law.
1.18 These amendments are being made because of the growth in the use of a particular type of medium of exchange - digital assets secured by cryptography operating through a public, automated and consensus-based distributed ledger that records and validates transactions (often taking the form of a blockchain). These cryptographic currencies, which most prominently include bitcoin, are commonly referred to as 'digital currency'.
1.19 However, this is an area subject to ongoing technical change and development. There is a significant risk that any definition based on the current architecture of cryptographic currencies may lose relevance if new technical approaches emerge.
1.20 At the same time, there are a number of types of digital assets that bear some similarities to currency or digital currencies but which are not treated as a currency, generally because they either are rights to particular things rather than having value only as a medium of exchange or they are dealt with appropriately under the existing law.
1.21 The amendments define digital currency as needing to broadly have the same features as state fiat currencies. In particular, in the same way as state fiat currencies, the value of a digital currency must derive from the market's assessment of the value of the currency for the purposes of exchange, despite it having no intrinsic value. [Schedule 1, item 27, the definition of digital currency in section 195-1]
Requirements of the digital currency definition
1.22 Consistent with this overall purpose, the definition identifies a number of requirements that digital units of value must satisfy to have the required similarity to state fiat currencies.
1.23 The units must be designed to be fungible - that is fully interchangeable for the purposes of their use as consideration. Digital assets that are valuable because of their specific features, such as photographs, are not digital currency. [Schedule 1, item 27, paragraph (a) of the definition of digital currency in section 195-1]
1.24 The condition that units must be designed to be fungible does not require that units are unable to be individually identified, merely that they are designed to be used interchangeably as consideration. This is similar to how notes of Australian currency are separately identifiable by serial numbers, but the separate identity of each note does not affect their value.
1.25 In some circumstances, certain units of a digital currency that are designed to be fungible may cease to be interchangeable in practice because of how the units are used or because of the identity of the entity that is or has been holding the units. For example, many large digital currency exchanges will not accept units that have been held by entities known to be associated with criminal activities. Such units remain a digital currency as they are still designed to be fungible.
1.26 The units must also be capable of being consideration for any type of supply and generally available to the public free of any substantial restrictions on their use as consideration. [Schedule 1, item 27, paragraphs (b) and (c) of the definition of digital currency in section 195-1]
1.27 This requires that digital currencies must be suitable for use as a medium of exchange. Digital assets that are not suitable for use as consideration, or which are only available to the public subject to substantial restrictions on their use are not digital currency. Such assets cannot be used in the same way as money. Examples of such digital assets include:
- loyalty points provided by retailers that may only be redeemed for products; and
- 'currencies' used in many online multiplayer games, that cannot be used outside of the context of the game under the terms under which the 'currency' is made available.
1.28 The requirement that the restriction must be substantial makes clear that the GST treatment of digital currencies is not affected by minor impediments to their use in contrast to restrictions that are features of the currency or how it is made available. Examples of restrictions that are generally not substantial include restrictions imposed by the laws of foreign governments and practical difficulties using digital currencies without internet access.
1.29 While digital currencies must be suitable for use as a medium of exchange, there is no minimum level of use required to meet the definition. For example, when a digital currency is first launched there may be few, if any, parties that initially accept it as payment, but it can still be a digital currency provided the design and features of the currency allow it to be used in this way. This ensures that there are no barriers to entry for new digital currencies.
1.30 It should also be noted that the use of distributed ledger technology for other applications such as record-keeping or 'smart' contracts (programs that operate to automatically execute or enforce actions where agreed conditions are satisfied) does not result in these applications being digital currency. A record or contract is not a fungible unit suitable for use as consideration. However, a payment made under a smart contract may be made in digital currency.
1.31 The definition also requires that digital currency must not have a value based on the value of anything else. Hence, units are not digital currency if they are denominated in another currency, for example with a value pegged to the Australian or US dollar. [Schedule 1, item 27, paragraph (d) of the definition of digital currency in section 195-1]
1.32 Similarly units with a value that is derived from or dependent on anything else are not digital currency. Accordingly, financial instruments, such as derivatives, and other valuable rights are not digital currencies. Their value is not derived from their ability to be used as consideration. This is the case whether the unit is or represents a property interest, like an option or an instrument with a value dependent on something that is not property, such as an interest rate or market index. [Schedule 1, item 27, paragraph (e) of the definition of digital currency in section 195-1]
1.33 The value of a unit is not dependent on or derived from something else merely because it may have a remote or abstract connection with it. For example, the value of most fiat currencies and many other assets such as digital currencies is linked to the performance of the world economy, but this does not mean the values of these assets are dependent on or derived from its performance. Similarly, while digital currency is, by its nature, closely linked to its underlying technology, this relationship does not make it dependent on or derived from the technology for the purposes of the legislation.
1.34 Finally units are not digital currency even if they have independent value and are fully transferrable, if they provide the holder with benefits, entitlements or privileges, such as memberships or vouchers, other than an entitlement that is incidental to holding the unit or its use as consideration. Unlike money, such units or instruments provide a benefit separate to their use as consideration and are appropriately dealt with under existing rules. [Schedule 1, item 27, paragraph (f) of the definition of digital currency in section 195-1]
1.35 This requirement excludes many dual purpose or hybrid currencies, such as units of digital currency that carry an entitlement to other property. It does not exclude digital currencies that have features that facilitate the use of the unit in particular contexts (for example a digital currency with inherent features that facilitate its use in smart contracts), provided the use of the currency as consideration is not restricted.
1.36 The exclusion of entitlements incidental to holding the currency or its use as consideration ensures it is clear that incidental features common to the functioning of many digital currencies, such as updating a distributed ledger to recognise transactions, do not affect the status of such currencies as digital currencies.
1.37 The definition of digital currency excludes both money and existing financial supplies. It is unlikely that there is currently any overlap between these definitions. At the time of the introduction of Schedule 1 to Parliament, no government issued currency that is digital currency, while other forms of money and existing financial supplies either carry valuable entitlements or have a value derived from something else. [Schedule 1, item 27, paragraphs (g) and (h) of the definition of digital currency in section 195-1]
1.38 However, it is possible this could change, such as if a government were to issue currency that is digital currency or adopt an existing digital currency as legal tender. If this occurred, the currency would be money (as a foreign currency) and thus, despite satisfying most of the elements of the definition, would not be digital currency. The definition provides clarity and avoids any future issues by making clear the relationship between money, digital currency and existing financial supplies and preventing any overlap.
Example 1.1 Digital currencies Ozcoin is a cryptographic currency utilising a public consensus-based distributed ledger. It is made up of interchangeable digital units called Ozcoins. Ozcoin has been designed to be used as consideration in a related smart contract framework, OzContract, but it can be freely used outside this framework. Holders of Ozcoin have no special entitlements in relation to OzContract.A large number of Ozcoins are held by OzCo, which created the currency, and more are issued which are provided to entities that collect and verify new transactions to update this ledger (ie miners). Entities that wish to transact in Ozcoins can purchase Ozcoins from OzCo, miners or other purchasers of the currency, generally without being subject to any restriction about the subsequent use of the currency.Ozcoin is only valuable for its use as a medium of exchange - it does not have a value derived from anything else and does not have valuable rights attached to it. The fact that Ozcoin is designed to be the only form of consideration suitable for use in the OzContract framework does not affect its value as a medium of exchange - the OzContract framework is just one context in which OzCoin is used as consideration.As a result, Ozcoin is a digital currency. It is made up of interchangeable digital units that are generally available to the public for use as consideration. The fact that each Ozcoin is individually identifiable does not prevent it from being designed to be interchangeable. Further, these units are only valuable as a medium of exchange. It should be noted that it does not matter that the current value of the Ozcoin may be low or that an entity may hold the currency for speculative purposes; if it is not valuable for any reason other than its use or future use as consideration then it satisfies the requirements of the definition.A number of countries have rules that restrict or prohibit the use of Ozcoin as payment in those jurisdictions as a result of foreign exchange controls or other regulations. These rules do not affect the conclusion that Ozcoin is a digital currency. Ozcoin is capable of serving as consideration for supplies, and it is available to the public generally without restriction on its use - externally imposed restrictions by foreign jurisdictions are not relevant to the outcome.
Example 1.2 Digital currencies - fungible units Following on from example 2.1, a number of Ozcoins are stolen. The stolen Ozcoins can be readily identified using the transaction history shown on the digital ledger. Subsequently, many entities dealing in Ozcoin refuse to accept those stolen Ozcoins.In practice these 'tainted' Ozcoins have ceased to be fungible (at least with other Ozcoins). However, this does not affect the status of Ozcoin generally or those Ozcoins specifically as a digital currency for the purposes of GST. All of the units of Ozcoin continue to have been designed to be fungible, satisfying the requirement of the definition.
Example 1.3 Things that are not digital currency - restrictions on use Yellow Co is an Australian retailer. It issues its customers Amber points when they spend money on its products. These points are awarded and tracked in an electronic database maintained by Yellow Co.The points can be redeemed from Yellow Co for discounts and specified products but the points are not transferrable and may only be used in the way specified by Yellow Co.Amber points are not a digital currency. While the points are fungible, they are not available to the public free of restrictions on how they may be used as consideration -given the nature of how they operate it is not clear they serve as consideration at all. Additionally, their value comes solely from the entitlement to redeem the points from Yellow Co for particular rewards.
Example 1.4 Things that are not digital currency - external value Finance Ltd is an Australian company that raises money by issuing bonds to investors. The bonds entitle the holder to an annual payment by Finance Co, indexed based on the cash rate published by the Reserve Bank of Australia.The bonds issued by Finance Co are digital, fungible and can freely be used as consideration. However, they are not digital currency. The bonds have a value that is dependent upon the Reserve Bank of Australia cash rate. Moreover, they are valuable solely because they entitle the bearer to payments from Finance Co.In addition, even if the bonds met the general requirements to be digital currency, their supply would be a financial supply, and so they could not be digital currency.
Example 1.5 Things that are not digital currency - hybrid currencies Hybrid Co is developing a new digital currency, NewCoin. It is designed to be the exclusive payment method for the DistStore distributed file storage network, and it is also intended to be freely used outside this network.The file storage network will rely on third party participants buying and selling file storage services, and setting their own prices in NewCoin.Under the terms of issue, all NewCoins contain a permanent right to a specified amount of file storage that will be supplied by Hybrid Co, when the right is exercised. The purpose is to ensure that any prospective DistStore users have confidence in being able to acquire file storage with their NewCoins, even if there are not sufficient providers offering file storage on DistStore at certain times,NewCoins are digital, fungible and can freely be used as consideration. However, they are not digital currency. They carry an entitlement to receive a supply of file storage from Hybrid Co that is not incidental to holding the currency or its use as consideration.
Supplies and acquisitions of digital currency
1.39 If something meets the definition of digital currency, Schedule 1 ensures that payments made using that digital currency receive equivalent treatment to payments made using money.
1.40 There are three elements to this treatment. First, subsections 9-10(4) and 11-10(3) provide that supplies or acquisitions of money are generally not supplies or acquisitions under the GST law. The amendments extend this so that supplies and acquisitions of digital currency are also generally not supplies or acquisitions under the GST law. [Schedule 1, items 1 and 4, subsections 9-10(4) and 11-10(3)]
1.41 Consistent with the existing provision relating to money, if money or digital currency is supplied together with something else, the supply of money or digital currency is generally treated separately to the other supplies. For example, if an entity provides digital currency worth $150, $100 of Australian currency and goods worth $50 in exchange for property, the entity is treated as making a supply of $150 of digital currency which is disregarded as a supply of digital currency, $100 of money, which is disregarded as a supply of money and $50 of goods, which is not be disregarded and could be a taxable supply.
1.42 Secondly, subsections 9-10(4) and 11-10(3) also provide a key exception to the rule that supplies of money are not supplies. Supplies of money in exchange for other money are treated as supplies. Acquisitions of money in exchange for other money are treated as acquisitions. The amendments extend this treatment to digital currency, making it interchangeable with money for the purpose of these provisions. [Schedule 1, items 1 and 4, subsections 9-10(4) and 11-10(3)]
1.43 In this context, being interchangeable means that the same treatment applies to a supply of money, digital currency or both, whether the consideration for that supply is money, digital currency or both. For example, if an entity supplied digital currency worth $300 and received $100 in Australian currency, digital currency worth $150 and goods worth $50, $100 of the $300 is a supply of digital currency for money, $150 is a supply of digital currency for digital currency and $50 is a supply of digital currency for goods. Both the supplies of digital currency for money and digital currency for digital currency are not disregarded.
1.44 Finally, where a payment of foreign currency is a supply (ie. because the consideration for the supply is money or digital currency), it is a financial supply (see item 9 of the table in subregulation 40-5.09(3) of the GST Regulations). The Government intends to amend the GST Regulations to provide equivalent treatment for supplies of digital currency and to make related technical amendments.
Example 1.6 Acquiring and spending digital currency David, an Australian consumer, acquires 500 Ozcoins (a digital currency) from Ozco, an Australian resident company that is registered for GST, paying partly in Australian dollars and partly in US dollars.The supply of the Ozcoins by Ozco to David is a supply of digital currency - specifically a supply of digital currency for money (specifically Australian and foreign currency). As it is a supply of digital currency for money the supply is not disregarded for the purposes of GST.If the regulations are amended to make supplies of digital currency financial supplies, the supply by Ozco would be an input taxed financial supply.In this case, the supply by Ozco would not be a taxable supply and input tax credits would not generally be available for any related acquisitions Ozco may have made.David's supply of money to Ozco is also not disregarded as it is a supply of money for digital currency. However, as David is not registered or required to be registered for GST no further consequences apply.David subsequently uses 11 Ozcoins to purchase a coffee and donut from Loretta's Bakery, an Australian resident company.David's supply of digital currency to Loretta's Bakery is not considered a supply for the purposes of GST (although in this case it does not matter as David is not registered or required to be registered for GST).The general rules in the GST law apply to the supply of the coffee and donut by Loretta's Bakery - the fact that the consideration was digital currency does not change the outcome. If the supply is a taxable supply, Loretta's Bakery must remit 1/11th of the consideration provided by David in relation to the supply (ie. an amount of money equivalent in value to one Ozcoin in Australian dollars) to the Commissioner as GST.All of these outcomes would be the same if David had instead acquired the coffee and donut with Australian currency.
Minor amendments - references to money and currency
1.45 Schedule 1 makes a number of minor amendments to other provisions that specifically refer to money or currency. [Schedule 1, items 2, 5 to 26 and 28 to 29, subsections 9-85(2) and 78-10(1), paragraph (a) of step 1 of the method statement in subsection 78-15(4), subsections 78-20(1), 78-35(1), 78-45(1) and 78-75(1), paragraphs 78-110(a), 79-65(1)(c), 79-90(1)(a), 79-90(2)(a) and 79-90(2)(b), paragraph (a) of step 1 of the method statements in subsections 79-95(3), 80-30(2) and 80-70(2), paragraph (b) of the definition of total monetary prizes in subsection 126-10(1), subsection 126-32(1), subparagraphs 134-5(1)(c)(i), (ii) and (iii), and 134-10(1)(c)(i), (ii) and (iii), paragraph 188-22(a), section 188-35 and paragraphs (a) and (b) of the definition of monetary prize in section 195-1]
1.46 Most importantly this 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. The amendments also ensure that this change does not affect the validity of existing determinations made by the Commissioner in relation to foreign currency. [Schedule 1, items 2 and 3, subsection 9-85(2)]
1.47 However, Schedule 1 also amends provisions referring to payments in money, including in the provisions dealing with insurance, third party payments and gambling. The amendments revise these provisions to also apply to digital currency where this is required to provide consistent treatment.
Application and transitional provisions
1.48 These amendments commence on 1 July 2017. [Clause 2]
1.49 The amendments made by Schedule 1 apply to supplies and payments made on or after 1 July 2017. [Schedule 1, subitem 30(1)]
1.50 This application date, which was announced in the 2017-18 Budget, ensures that the use of digital currency in Australia does not face additional disincentives that may otherwise arise from changes to the GST law in relation to offshore supplies to Australian consumers of things other than goods or real property that apply from 1 July 2017.
1.51 These changes benefit taxpayers by reducing GST and associated compliance costs. Further, the date of effect was announced in the 2017-18 Budget, and was supported in industry consultation. Given this, the potential retrospective application is not considered to have any substantive adverse impact on taxpayers.
1.52 However, the rules relating to input tax credits and financial supplies mean that this cannot be guaranteed. Specifically, with a supply of digital currency that is made to acquire other currency now being input taxed under Schedule 1, this may mean recipients that are registered or required to be registered for GST are technically disadvantaged as they are no longer entitled to claim an input tax credit for the acquisition. However, in practice overall they are no worse off as they have not borne GST on the supply (or are able to obtain a refund if the supply was treated as taxable on or after 1 July 2017 but before Royal Assent of this Bill) and the GST integrity rules prevent input tax credits being available for a supply without evidence that it was treated as taxable (ie. a tax invoice).
1.53 It is also intended that this start date will apply for the related amendments the Government intends to make to the GST Regulations. [Schedule 1, subitem 30(2)]
1.54 Subsection 12(2) of the Legislation Act 2003 generally prevents a 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.
1.55 In order to remove any doubt that these related amendments to the GST Regulation have effect for all taxpayers from the same date as Schedule 1, the amendments provide that subsection 12(2) of the Legislation Act 2003 does not apply to amendments to regulations dealing with the GST treatment of financial supplies (and related acquisitions) if these amendments relate to digital currency and are made within six months of this Schedule receiving Royal Assent. [Schedule 1, subitem 30(2)]