Edited version of private advice

Authorisation Number: 1051956860722

Date of advice: 30 March 2022

Ruling

Subject: Business - income - capital vs revenue

Question 1

Are the tokens foreign currency?

Answer

No. The tokens are not foreign currency.

Question 2

Are the tokens subject to the trading stock rules in Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997) in the hands of Company Pty Ltd?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company Pty Ltd (the company) carries on a business of providing computer programming services. The company is not in the business of trading tokens for profit.

The company receives tokens, whose value is tied to the USD, as payment for their services instead of a fiat currency, such as the Australian dollar. The company also pays for outsourcing of services to third parties using tokens rather than fiat currencies. The vast majority of its transactions are facilitated through the use of tokens rather than fiat currency.

The company encourages customers to pay in tokens, and also encourages its suppliers to accept tokens as payment for goods and services instead of a fiat currency. Where a supplier is unwilling to accept tokens as payment, the company will convert those tokens to fiat currency and use the fiat currency to pay the expense.

The company converts tokens into fiat currency to pay for other operating expenses normally paid for with a fiat currency, such as wages and overhead expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 subsection 70-10(1)

Income Tax Assessment Act 1997 Subdivision 70-B

Income Tax Assessment Act 1997 Subdivision 70-C

Income Tax Assessment Act 1997 Subdivision 70-D

Income Tax Assessment Act 1997 paragraph 118-25(1)(a)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Foreign currency

Foreign currency is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as meaning a currency other than Australian currency. The Currency Act 1965 (Currency Act) established the official currency of Australia.

A 'foreign currency' is a currency legally recognised and adopted under the laws of a country as the monetary unit and means of discharging monetary obligations for all transactions and payments in that country. It is one that is recognised and adopted by the laws of a sovereign State, other than Australia, as the monetary unit and means of discharging monetary obligations for all transactions and payments in the respective sovereign state.

As the tokens are not a currency recognised and adopted by the laws of any another sovereign State as its monetary unit and means of discharging monetary obligations for all transactions and payments, it is not a foreign currency.

Trading stock

Per subsection 70-10(1) of the ITAA 1997, trading stock includes 'anything... acquired that is held for purposes of... sale or exchange in the ordinary course of a business'.

As the company holds its tokens for the purpose of exchange in its ordinary course of business, it is therefore trading stock in the hands of the company. As the tokens are trading stock of the company, they are subject to the trading stock rules in Division 70 of the ITAA 1997. Some key provisions include:

•         Subdivision 70-B of the ITAA 1997 which deals with deductions for the acquisition of trading stock;

•         Subdivision 70-D of the ITAA 1997 which deals with proceeds from the disposal of trading stock; and

•         Subdivision 70-C of the ITAA 1997 under which the taxpayer must also account for the value of trading stock on hand at the end of the year and include this in their assessable income.

Further issues to consider

Per paragraph 118-25(1)(a) of the ITAA 1997, any capital gain or capital loss you make from disposal of the assets will be disregarded to the extent they are brought to account under the trading stock rules.