Now, what’s particularly interesting about this bill is that it clarifies the tax treatment of cryptoassets, and it has two proposed amendments which would exclude cryptoassets from GST and the financial arrangements rules.
The Taxation Annual Rates for 2021 to 2022 GST and Remedial Matters Bill
As the bill points out cryptoassets probably fall within the existing scope of GST rules, although it’s a little unclear. And that means that the supply of a cryptoasset could be subject to 15% GST, or it could be an exempt financial service or a zero-rated supply to a non-resident. And what this means is that GST supply to a non-resident is zero rated, but then subject to GST when applied to residents. And that creates a distortion and a preference to sell to offshore investors. Now, that’s slightly different from the zero rating we do for exports, but it’s not seen as an export service here.
But more importantly – and this is an issue that’s well known – is that there’s a big risk of potential double taxation. That is when an asset is purchased with Bitcoin and then, for example, that Bitcoins converted back into fiat currency.
This has been known for some time and what has happened is that the Government has decided they’re going to take cryptoassets out of the GST net. And the proposal is that the definitions of goods and services in the Goods and Services Tax Act will be amended to expressly exclude cryptoassets. Now, this amendment will apply from 1st January 2009, the date of the first cryptoasset, Bitcoin, was launched. By the way, the definition will exclude non fungible tokens, which are going to remain subject to GST if supplied by a registered person.
So this is a very welcomed development, clarifying the position that was causing some concern in the cryptoassets world.
Now, the other big amendment, which will be welcomed by investors in the cryptoassets world is that cryptoassets will be excluded from the financial arrangements rules. That will be done by amending Section EW5 of the Income Tax Act 2007 to define cryptoassets as an accepted financial arrangement.
Again, however, the issuing of non-fungible tokens are not financial arrangements and they do not meet the definition of a financial arrangements set up in the Section EW 3 of the Income Tax Act. This proposed amendment will also apply from 1st January 2009.
But there is one exception that people need to be aware of, that is cryptoassets will not be treated as an accepted financial arrangement if the owner receives amounts that are determined by reference to the purchase price of cryptoassets, and on the basis that is known by the owner in advance. The purpose of this exclusion is to say that cryptoassets that are economically equivalent to debt arrangements are still taxed under the financial arrangements rules.
An example, an investor invests in Bitcoin on a platform and Bitcoin is locked in for a set period and the investor is paid a guaranteed fixed return for the period that his Bitcoin remains locked into this particular platform. The commentary makes clear that the return on the growth will be taxable.
And the commentary also makes clear that the general rules still apply to cryptoassets. That if they’re acquired with the purpose of disposal, they’ll be taxable. Likewise, if you’re trading cryptoassets or you use cryptoassets for a profit-making scheme.
There are still some situations that cyrptoassets will not be required to be taxable, if you’d like further information and clarity on your individual situation, please do not hesitate to contact ask us.