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Around the world, regulators are realising Bitcoin is money

By Professor Miranda Stewart | August 13th, 2015

The tax treatment of digital currencies is a challenge for governments around the world, as it is for other aspects of the “disruptive” digital economy.

In October 2014, the Commonwealth Senate Economics Committee launched an inquiry into digital currencies. The Committee released its report last week, with a particular focus on tax.

Last year, the ATO published several rulings outlining how bitcoin and similar cryptocurrencies should be treated under the Australian income tax and GST regimes.

The rulings provided useful clarity on bitcoin’s tax treatment, but the ATO’s approach received widespread criticism.

Bitcoin purportedly functions as money, but the ATO rulings treat bitcoin as a commodity for tax purposes. This disparity creates a number of tax inconsistencies.

The impact is particularly acute under the GST regime, where bitcoin transactions are taxed as barter transactions. Australia’s GST regime applies somewhat clumsily to barter transactions, which may cause double taxation, or at least double tax administration, as we emphasised in our submission.

Why should the law be changed?

Imposing 10% GST on bitcoin transactions increases the price of purchasing bitcoin from Australian vendors, affecting the commercial viability of operating a digital currency business in Australia, as we have highlighted before. Submissions to the inquiry outlined the potential benefits the industry could offer Australia, but many argued the GST treatment stood in the way of success.

From a regulatory perspective, supporting Australian digital currency intermediaries to establish an industry here is likely to make financial supervision and taxation easier for government.

The ATO’s characterisation of digital currencies as a commodity is probably the best interpretation of the current law, which emphasises wide use and sovereign backing for currencies. But it’s not clear cut. There is a legal basis to treat digital currencies as money based on their function as a medium of exchange, especially as this becomes more widespread.

Digital currency and GST

The Senate report identified the GST anomalies arising from the ATO’s characterisation of digital currencies and recommends the government amend the GST regime to treat digital currencies as money. This would promote fairness and neutrality in the taxation of both modern and traditional forms of money.

Implementing the necessary changes to the GST Act and Regulations will ultimately require approval from the Commonwealth and all State governments, as it affects the GST base.

Adopting the report’s GST recommendation would bring Australia’s GST treatment in line with the UK, and some other EU nations. Last year, the UK changed its VAT laws (the UK’s GST) to exclude digital currenciesfrom taxation as a commodity.

When the UK first introduced this approach, it was praised for supporting the local digital currency industry, although there is little empirical evidence at this early stage.

Digital currencies are also treated by the ATO as commodities for income tax. The evidence before the Committee, although limited, suggests most bitcoin holders are investors not traders.

The report did not recommend any alterations to the income tax treatment at this stage – and we agree that caution is needed before altering income tax treatment. The report recommended further research to determine whether change is needed.

The regulatory future of digital currencies

The Committee concluded that digital currencies fall outside the scope of many of Australia’s financial, banking, and consumer protection regulations. It recommended that Australia’s anti-terror and anti-money laundering regimes should be extended to ensure they encompass digital currency activity.

However, the report does relatively little to address the longer-term regulatory concerns surrounding digital currencies. At this early stage, the report proposes to allow the industry to self-regulate, with oversight from a proposed “Digital Economy Taskforce”, rather than introducing a specific regulatory framework.

The Committee accepted that extensive regulations might stifle the growth of the digital currency industry. Although digital currencies’ utility has been emphasised recently, their future remains uncertain. Bitcoin, the largest digital currency, has seen a steady, significant price decline over the past two years. Further, much of the industry’s innovation comes from small start-ups, which have relatively few resources to comply with regulations. Regulatory simplicity seems proportionate at this stage.

It will be interesting to see how effective the self-regulation approach is, particularly given digital currencies’ historic involvement in illicit activities and the regulatory concerns voiced by other governments and the OECD.

The combination of introducing a more favourable GST treatment, and a relatively simple regulatory framework will hopefully foster this nascent industry’s development. If the industry experiences any major growth in Australia, the greater number of users (and more tax dollars at stake) may heighten regulatory attention surrounding the technology.

Ultimately, the self regulatory approach and Digital Economy Taskforce is the beginning, not the end, of the government’s involvement in regulating and taxing this new technology.

This article was originally published at The Conversation. Co-author is Joel Emery.

Sectors: Government

Retailers to reap the benefits from Budget’s tax break for small businesses

By Sydney Morning Herald | May 13th, 2015

Retailers are set for a sales rush in the wake of a generous tax break for small businesses that will encourage spending on everything from office supplies and computers to fencing and cars.

Diane Smith-Gander, a non-executive director at Wesfarmers which includes Coles supermarkets, Bunnings and Officeworks in its stable, said the measure would likely lead to a “bump” in sales for many retailers.

But to have longer-term economic benefits the money would need to be spent on productive assets that allowed businesses to grow and employ more people.

“You don’t want the small business equivalent of the flat screen TV phenomenon,” said Ms Smith-Gander, who is also chairman of Transfield and president of Chief Executive Women.

“I think this is a bit more generous than people were expecting.”

Ms Smith-Gander said that the budget’s other key focal points – on encouraging greater workforce participation – would only have longer term benefits for the economy if there were also more jobs created.

Segments within retail that could benefit from the measure included car retailers and office supplies, she said, and its impact was likely to appear in business confidence surveys.

Wesfarmers owns some of the country’s largest retailers including, Coles, Target, Kmart, Bunnings, and Officeworks.

While some businesses would be able to fund the purchases from their cash flow, there may also be an increase in demand for bank credit, she said.

“There will be some small business loans, and the banking industry will have to respond quickly.”

“It’s truly amazing,” said Robbie Sefton, who runs a communications consultancy and has just finished a three year term on the Reserve Bank of Australia’s small business advisory board.

“This will definitely create opportunities for people to upgrade that phone system, upgrade software or replace daggy office chairs, it will definitely make a difference.”

Ms Sefton said the measures would have a psychological impact.

“It is a really powerful message about saying ‘don’t give up’,” she said.

Ms Sefton said small businesses would look to grasp the detail of the opportunity which made the explanation of it important.

“If it is packaged up in a way that is simple and communicated well to their accountants they will, they rely on their accountant to give them advice particularly tax advice,” she said.

ANU institute of tax and transfer policy’s Miranda Stewart said the package was very similar to that rolled out as part of the Rudd government’s stimulus efforts in the global financial crisis although, crucially, this package was more generous with a $20,000 cap compared to a $5000 cap in Labor’s version.

She said there was empirical evidence that such programs would stimulate spending.

At the same time there was still an “open debate” about whether that spending was simply the bringing forward to investment that would have happened in future years and now would not, she said.

This article was originally published at the Sydney Morning Herald and was written by Mathew Dunckley and Clancy Yeates.

Corporate tax needs global approach

By Jennifer Westacott | February 20th, 2015

The Senate Inquiry into Corporate Tax Avoidance and Minimisation is a welcome opportunity for considered and informed discussion about the performance of our corporate tax system.

It is crucial that commentary is evidence-based. It would be disappointing if the inquiry conflates issues and undermines the community’s confidence in the integrity of the system and the Australian business community more generally.

The Business Council’s submission is built on four core principles:

  • Businesses must accept their obligations to pay tax and be transparent in their tax arrangements. Where companies do not adhere to the law, authorities should act.
  • Where companies act beyond accepted community norms, governments need to respond, but changes must be carefully considered to avoid unduly deterring investment, reducing our competitiveness or creating unnecessarily complex tax arrangements.
  • Australia’s company tax arrangements must support investment, growth and jobs in an increasingly competitive and dynamic global environment.
  • Global tax issues require global solutions.

There are two broad issues to be considered. The first is how multinational corporations are taxed around the world. The second related but distinct issue is the robustness of Australia’s company tax laws.

There are legitimate questions about how well long-standing international tax conventions are performing in the face of increasing globalisation and digitisation. Company taxes traditionally are paid where profits are sourced. But disaggregated global supply chains and the growth of ‘intangibles’ in production, particularly intellectual property, have made it much harder to measure profits and determine where they come from.

This is why the G20 has commissioned the OECD to act as the prime multilateral forum for progressing tax integrity reforms through the Base Erosion and Profit Shifting Action Plan (BEPS). The plan focuses on a range of issues including transfer pricing, the digital economy, treaty abuse and the definition of permanent establishment.

Success of the BEPS process is of great importance. A multilateral solution will be vital to avoid countries going it alone with ‘beggar thy neighbour’ responses that could result in double taxation, much higher compliance costs and the undermining of legitimate commercial arrangements. Such outcomes would be to the detriment of global investment, trade, jobs and growth, and especially harmful for Australia as a medium-sized open economy heavily dependent on trade and foreign investment.

On the issue of domestic tax compliance and our corporate tax rates, Australia has some of the toughest tax integrity measures in the world, which together with high levels of compliance and enforcement, contribute to large corporate tax revenues. Company tax receipts are expected to be around $70 billion this year. Within the OECD, Australia’s corporate tax revenues as a share of GDP are second only to Norway. The priority for governments is to maintain the integrity and transparency of the system while supporting Australia’s economic competitiveness.

Successive governments, with bipartisan support, have sought to maintain this integrity by continually adjusting transfer pricing rules, the foreign source income anti-tax-deferral regime, general anti-avoidance rules and thin capitalisation rules. Recent changes to the transfer pricing and thin capitalisation laws make these regimes arguably the most robust in the world.

The government’s upcoming tax white paper process provides an opportunity to ensure our tax system retains its integrity while supporting investment, growth and jobs.

The mobility of capital, and competition for it, has increased. Countries have responded with more competitive tax regimes to attract investment. The United Kingdom, Japan and Spain will all lower their corporate tax rates this year to boost investment and growth. There is now hard-won bipartisan support for lowering Australia’s company tax rate, which is among the highest in the OECD.

The Business Council is acutely aware that the community must have confidence in the integrity of the corporate tax system if it is to support broader tax reform.

This is why a careful and well-informed debate is now a national imperative.

Jennifer Westacott is chief executive of the Business Council of Australia.

This article was originally published at the AFR.

Tags: Taxation
Sectors: Government

Is Australia spending over $100 million a day more than collected in revenue?

By Professor Miranda Stewart | February 16th, 2015

“At the moment, we are spending over $100 million a day more than we’re collecting in revenue. Now that’s unsustainable, particularly given we’re spending nearly $40 million a day on the interest on the debt that we have.” – Treasurer Joe Hockey, interview with Alison Carabine on RN Breakfast, February 3, 2015.

Mr Hockey has made similar statements in multiple interviews to support the government’s position that cuts to spending are needed to reduce the deficit.

To get $100 million of “overspending” a day, the Treasurer has relied on the Commonwealth Government fiscal balance recorded in the Mid Year Economic and Fiscal Outlook statement (MYEFO). The MYEFO, released in December mid-way through our financial year, updates the figures from the May Budget – including the deficit.

MYEFO states that the 2014-15 estimated deficit is $40.362 billion. It’s listed in MYEFO as the underlying cash balance.

The estimated deficit is a net fiscal balance for the entire year, so it does not really make sense to think about it on a daily basis. But ignoring that quibble for now, the numbers in Mr Hockey’s statement more or less check out.

In fact, dividing $40.362 billion by 365 and rounding produces a figure of $111 million – even more than the $100 million a day that the Treasurer stated.

That’s up from the estimate of the annual fiscal deficit of $29.8 billion – $80 million a day in the Treasurer’s language – that was in the May Budget.

MYEFO also tells us that the expected 2014/15 deficit, or underlying cash balance, is 2.5% of GDP.

The interest of $40 million a day also comes from MYEFO. It’s a figure for the interest on Commonwealth government-issued debt, listed in table D7 of that document as $14.2 billion. Divide that by 365 and you get $39 million: Mr Hockey’s “nearly $40 million a day”.

Let’s put it in context: with a population of 23,742,527 as I write, each Australian is “overspending” by $4.66 per day, or just over $1,700 per year. And we’re each paying $1.64 in interest a day on our debt.

What do the numbers mean?

Internationally, we are doing OK. In 2012, the latest year with full comparable figures, all OECD members except for Norway and Germany had an operating fiscal deficit and most of them had a larger deficit than Australia.

What about government debt? This is difficult because there are different measures, including net or gross debt, central or general government debt, or the value of Commonwealth-issued securities.

In 2012, Australia’s gross general government debt (at all levels) was 57% of GDP as recorded by the OECD here. But at the Commonwealth level, the May budget indicated that government debt on issue would have a face value of 23.3% of GDP, while Commonwealth net debt is estimated as 15.2% of GDP in Table 3.4 in MYEFO.

Most other governments had higher gross debt than Australia. Some governments, like Germany, had a fiscal surplus but high debt (89% of GDP in 2012). The UK had debt of 101% of GDP and a deficit of 6% in 2012.

The Commonwealth government is AAA rated. It does not have any problem borrowing.

As the deficit and debt trend up, the credit rating agencies have started to mutter. The agencies, like Moody’s, rely on the value of issued government securities – on this basis, Moody’s states that “consolidated gross general government debt, which includes state and local government debt, is about 32% of GDP, whereas the median for AAA-rated countries is around 45% of GDP”.

On any comparative measure of government debt, we are still ahead of the curve.

How can we fix it?

We don’t need to worry too much, not right now. Partly because, as others have recently explained, the government budget is not like your household budget.

However, both the Parliamentary Budget Office and the Grattan Institute argue that our fiscal deficit and government debt are structural and need fixing in the medium to long term.

To do that, the government can either cut spending or raise taxes.

Commonwealth government taxes this year are estimated to be $353.6 billion (total revenue is $385.9 billion) but government expenses are over $400 billion. More or less, that is what causes our “overspend”.

Today, our federal taxes are falling. They were estimated at $360 billion in the May budget for 2014-15, or 22.1% of GDP.

This is lower than a decade ago: under the Howard government, federal receipts reached 24% of GDP. And tax revenues are predicted to decline further in MYEFO, by several billions, because of lower commodity prices and because your wages are not growing as fast as before. The GST raises only a small percentage of GDP in revenue and revenue growth is slowing.

In the May 2014-15 budget, the government proposed to cut expenditures including unemployment benefits and the age pension, and raise fees for doctors and universities. The government claims that $10.6 billion in budget savings have not been enacted because of the Senate’s refusal to pass these unpopular budget measures.

We could collect more taxes, if we choose, to fund public goods, redistribution and services.


It is true we are spending over $100 million a day more than we’re collecting in revenue and nearly $40 million a day on the interest on the debt. However, we compare favourably to other countries on deficit and debt.

You don’t need to worry too much right now about your $4.66 a day in “overspend”. But you do need to join a debate about tax reform that asks what you want government to do, how we can reform taxes to ensure prosperity, and how we can fund public goods fairly and sustainably for the future.

This article was originally published at The Conversation.

Photo Credit: Ryan Rayburn/IMF

Sectors: Government

Don’t let the tax tail wag the investment dog

By Catherine Robson | December 4th, 2014

Most of us want to pay less tax and achieving tax efficiency is a critical wealth creation tool – the less tax you pay, the more money you have to either meet your needs today or to reinvest for the future.

However one of the best ways to lose money is to let tax have a disproportionate influence on investment decision-making.

The most obvious example are the managed investment schemes which proliferated in the late 1990s and early 2000s, such as films, olives, emus and trees. It’s not to say that all investors lost money from this sector, in fact the first Crocodile Dundee movie made millionaires from many of its investors.

The problem with most of the schemes, was that investors looked at the tax benefit first and enticed by its attractiveness, treated the underlying investment as somewhat incidental.

When many of these schemes collapsed under the weight of their own debt and high cost structures, investors had indeed received the promised tax benefits, but had also lost all of their invested capital.

It’s easy to point to the specifics of managed investment schemes, however we can all let tax override our investment judgement from time to time.

For example, negative gearing into property can encourage huge borrowings and big associated risks only to save a small amount of tax and Self-Managed Super Fund trustees have been known to see the words “fully franked dividend” and look no further before deciding to buy one share in preference of another.

Reluctance to pay tax can also be damaging. In 2005 I met a senior executive of an ASX100 listed company who had been issued shares in his employer at listing. The subsequent dramatic increase in the share price meant that they came to represent 90 per cent of his entire wealth.

The need to diversify into other assets to reduce risk was obvious but he didn’t want to pay the hefty capital gains tax bill. Instead, he chose to borrow against the stock, leveraging up his lifestyle in the process. As the share price fell by more than 75 per cent during the Global Financial Crisis, not only did his capital gains tax problem disappear, but he came very close to losing everything, including his house.

To ensure that the tax tail is not wagging the investment dog, ask yourself the following questions:
• What is the expected investment return in the absence of the tax benefits?
• How does this compare with similar investments subject to similar risks?
• Would I make the investment if the tax advantages were not available, in which case they become just one aspect of total return or ‘icing on the cake’?
• Am I taking additional risks to avoid paying tax?

This article was originally published at:


Sectors: Finance