GST & Bitcoins – Potential Pitfalls

Matthew Cridland, Partner

Melbourne

10 July 2014

AGENDA

When does GST apply?

Are Bitcoins "money"?

Do the foreign exchange provisions apply?

Example

Practical issues

Cross border transactions

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If a GST registered business owns bitcoins, it will likely do one of two things: sell the bitcoins to convert to AUD or another currency; or

use the bitcoins to purchase goods, services or other things.

If the above occurs in Australia, should a GST liability arise?

What is the result under the current GST Act?

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When does GST apply?

GST applies to "taxable supplies"

GST Act, section 9-5:

You make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of your enterprise; and

(c) the supply is connected with Australia; and

(d) you are registered or required to be registered.

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When does GST apply?

What is a "supply"?

GST Act, section 9-10:

(1) A supply is any form of supply whatsoever.

(2) Without limiting subsection (1), a supply includes any of these:

(a) ….

(e) a creation, grant, transfer, assignment or surrender of any right.

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When does GST apply?

Exclusion for "money"

GST Act, section 9-10(4):

However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

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When does GST apply?

An AFL Club has agreed to provide sponsorship rights to a mobile phone company for $200,000, plus GST of $20,000.

AFL Club is making a supply of sponsorship rights – GST applies.

The mobile phone company is paying money, which is not a supply – no GST applies.

The only party liable for GST is the AFL Club.

The mobile phone company can claim back the $20,000 as a full credit.

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Example One

Another AFL Club enters into a sponsorship arrangement with a competing mobile phone company. The sponsorship is also worth $200,000, plus GST of $20,000.

Instead of paying cash, the mobile phone company agrees to provide mobile phones and services to the club valued at $220,000.

The AFL Club is making a supply of sponsorship rights – GST applies.

The mobile phone company is supplying phones / services – GST applies.

Both parties have a GST liability of $20,000 and can claim a credit of $20,000.

This is a "barter" transaction.

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Example One (continued)

Another AFL Club enters into a sponsorship arrangement with a competing mobile phone company. The sponsorship is also worth $200,000, plus GST of $20,000.

Instead of paying cash, the mobile phone company agrees to provide mobile phones and services to the club valued at $220,000.

The AFL Club is making a supply of sponsorship rights – GST applies.

The mobile phone company is supplying phones / services – GST applies.

Both parties have a GST liability of $20,000 and can claim a credit of $20,000.

This is a "barter" transaction.

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Example One (continued)

Example One (continued)

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• What would be the result if one of the mobile phone companies provided $220,000 worth of bitcoins?

• Is that:

• a payment of "money" which is ignored for GST purposes; or

• a barter transaction which triggers a GST liability?

Definition of "money"

GST Act, section 195-1:

Money includes:

(a) currency (whether of Australia or of any other country); and

(b) promissory notes and bills of exchange; and

(c) any negotiable instrument used or circulated, or intended for use or circulation, as currency (whether of Australia or any other country); and

(d) postal notes and money orders; and

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Are Bitcoins money?

(e) whatever is supplied as payment by way of:

(i) credit card or debit card; or

(ii) crediting or debiting an account; or

(iii) creation of transfer of a debt.

However, it does not include:

(f) a collector's piece; or

(g) an investment article; or

(h) an item of numistic interest; or

(i) currency the market value of which exceeds its stated value as legal tender in the country of issue.

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Are Bitcoins money?

Coffee Co, a GST registered coffee machine retailer, accepts Bitcoins.

Coffee Co sells a Nespresso coffee machine to Rebecca. The price is either AUD $220 or BTC 0.38. The GST payable depends on whether Rebecca chooses to pay in AUD or BTC. If Rebecca pays in AUD, the GST payable on the sale is AUD 20

(1/11th of AUD 220).

If Rebecca pays in Bitcoins, the GST payable on the sale depends on the Bitcoin price at the time of payment. If the Bitcoin price at the time of purchase was BTCAUD 600, then the GST payable on the sale is AUD 20.73 (1/11th of AUD 228 (0.38 x 600)).

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Example Two

After selling the coffee machine, Coffee Co decides to retain the bitcoins for use in funding its own purchases of new stock.

Using the BTC 0.38 received from Rebecca, Coffee Co orders two new Nespresso machines (market value of $110 each) from a wholesaler who also accepts Bitcoins.

The wholesaler is liable for GST on the sale of the coffee machines to Coffee Co.

Is Coffee Co liable for GST on its supply of BTC 0.38 to the wholesaler?

Is this a barter transaction, or a payment of "money"?

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Example Two (continued)

Even though Coffee Co receives bitcoins, it needs to notionally convert the payment received to AUD so that it can: calculate the GST payable on the sale of the coffee machine; and

state the amount of GST on any "tax invoices" that are issued to customers.

Any GST payments must be made in AUD, even if the total invoice amount is received in bitcoins.

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Practical Issues

GST does not apply to foreign exchange transactions.

GST Regulations, Reg 40-5.09(3), Item 9:

Australian currency, the currency of a foreign country, or an agreement to buy or sell currency of either kind.

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Foreign Exchange Provisions

Assume Rebecca purchased her coffee machine in bitcoins. Coffee Co decides to immediately sell the 0.38 BTC it received from Rebecca. The sale is to an Australian buyer who pays $220.

If that sale is a taxable supply, a second GST liability of $20 will arise.

This arguably results in "double GST", being: GST of $20.73 on the sale of the coffee machine; and

GST of $20 on the sale of 0.38 BTC.

In net terms, Coffee Co will only retain approx $180 on a $220 sale.

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Example Three

Supplies of rights can be in some instances be "GST-free".

GST Act, section 38-190(1) Item 4

"a supply that is made in relation to rights if:

(a) the rights are for use outside of Australia; or

(b) the supply is to an entity that is not an Australian resident and is outside of Australia when the thing supplied is done."

Travellex Case involving Fijian currency

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Cross Border Transactions