14 August, 2015
Majesty’s Revenue and Customs (HMRC) classified digital currencies as vouchers, which incurred 20% VAT. However in March 2014 HMRC reversed its initial view and classified bitcoin and digital currencies as ‘private money’ and removed the requirement to pay VAT on the transfer of Bitcoin.3
AML/CTF – essential to digital currency’s mainstream viability
The report also addressed a number of issues including how digital currency fits within the regulatory frameworks for financial and payments system and whether digital currency should be brought within Australia’s AML/CTF regimes. Interestingly, the report noted that although digital currency businesses are unable to access the AML/CTF protocols and procedures, some such businesses conduct similar ‘know your client’ procedures on an ad hoc basis.
Back in the UK, the Bank of England has recently invited discussion on whether central banks should issue digital currencies.4 In doing so, like the Australian Senate Committee, the Bank identified AML/CTF concerns as one of the current limitations on digital currencies. Both the Bank of England and the Committee recommended considering applying AML/CTF legislation to digital currency.
Regulators stamp of approval?
It appears bitcoin and other digital currency will only be widely used when they are appropriately regulated as this will provide appropriate consumer protection. To strike the appropriate balance, the Committee recommended establishing a taskforce with the Reserve Bank and ASIC to gather further information on uses, opportunities and risks associated with digital currencies to achieve a “clear regulatory approach” for both consumers and the digital currency industry. This would ensure a consistent approach across the relevant regulators.
Other tax issues
Implementing the Committee’s GST recommendation will require amendments to both the legislation and regulations. Further, as it will affect the GST base, any change will require the unanimous support of the State and Territory Governments and the passage of legislation through the Federal Parliament. While this should not be controversial, it will delay the progress of amendments coming into force.
GST is only one aspect of the treatment of digital currency, the Committee also recommended that the appropriate income tax and FBT treatment of digital currencies be included in the taxation white paper process.
Conclusion
It appears that the Committee has a rather favourable view of digital currency’s future viability and resilience. The Committee’s report seems to recognise the importance of ensuring that both the tax treatment and regulatory strategies protect consumers while not unduly stifling innovation. Perhaps, if our regulatory framework is amended digital currencies can be brought out of the shadows and into the mainstream.
Endnotes
1. Senate Economics References Committee, Parliament of Australia, Digital currency – game changer or bit player (2015)
2. Senate Economics References Committee, Parliament of Australia, Digital currency – game changer or bit player (2015) 1.3.
3. Her Majesty’s Revenue and Customs, Revenue and Customs Brief 9(2014): Bitcoin and other cryptocurrencies (3 March 2014).
4. ‘One Bank Research Agenda’ (Discussion Paper, Bank of England, February 2015).
For further information, please contact:
Toby Eggleton, Director, Greenwoods & Herbert Smith Freehills
toby.eggleston@greenwoods.com.au
