In the absence of a comprehensive definition of ‘foreign currency’ in the Australian tax legislation the ATO and Australian courts have interpreted ‘foreign currency’ to be currency issued or recognised by an overseas sovereign state.

The ‘recognition’ aspect of this interpretation created uncertainty for Australian taxpayers when El Salvador recognised bitcoin as legal tender during in 2021. At that time bitcoin, having been recognised by an overseas sovereign state, arguably was a foreign currency (as defined). However as we previously reported the Treasurer and the Assistant Treasurer confirmed in a joint media release on 22 June 2022 that:

Crypto currencies will continue to be excluded from foreign currency tax arrangements under the Albanese Government.

On 6 September 2022, the Government released exposure draft legislation in the form of the Treasury Laws Amendment (Measures for Consultation) Bill 2022: Taxation treatment of digital currency (Bill). The Bill has, along with draft explanatory material, been released for public consultation. The purpose of the Bill is in line with the earlier joint media release and intends to exclude all digital currencies (not just bitcoin), apart from government issued digital currencies, from being a foreign currency for tax purposes.

What are the proposed changes?

The Bill proposes to make the following two key changes:

Amendment of the existing definition of ‘digital currency’ in the A New Tax System (Goods and Services Tax) Act 1999; and
Exclude ‘digital currency’ from the definition of ‘foreign currency’ in the Income Tax Assessment Act 1997 (ITAA 1997).

What is the purpose of the changes?

The Government states in the draft Explanatory Memorandum to the Bill that the implications of El Salvador recognising bitcoin as legal tender has:

…unintended consequences…. This is inconsistent with the currency policy intent. Bitcoin and other similar digital currencies were never intended to be foreign currencies for Australian income tax purposes.

Indeed, it is unlikely at the time that the ITAA 1997 was drafted (to begin a re-write of the Income Tax Assessment Act 1936) that bitcoin or similar digital currencies were even considered. After all the bitcoin whitepaper was not released until 2008 being almost ten years after ITAA 1997 received royal assent.

Curiously, the Draft Explanatory Memorandum said “… an investment in bitcoin is typically held on capital account”. One wishes life (tax) were that simple and wonders whether that statement will survive into the Final Explanatory Memorandum.

Are there exclusions?

In perhaps an acknowledgement of the place of blockchain based currencies in the future, an exclusion (from the exclusion) for government issued digital currencies has been made. Digital currencies denominated in another country’s currency and issued by the authority of a government will be treated as foreign currency.

Is there more reform expected?

Amendments to the definition of foreign currency in Australian tax law appears to be a step in the Government’s regulation of crypto assets. The Board of Taxation this week began its public consultations comprising a “review of the tax treatment of digital assets & transactions”. The Board of Taxation states that the scope of the review is to:

…analyse the tax treatment of crypto assets from creation to the various forms of exchange or disposal with a view to determining whether Australian taxation laws need to be amended and/or updated.

Further, in a joint media statement, The Hon Stephen Jones MP, Assistant Treasurer, Minister for Financial Services and The Hon Dr Andrew Leigh MP, Assistant Minister for Competition, Charities and Treasury confirmed that the Government is to begin consultation on a framework for industry and regulators. This process is to begin with a token mapping exercise to identify how tokens should be regulated.

We discuss more about this proposed reform in our next article on crypto assets to be published shortly.

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Taxpayers and advisors should keep attention to this evolving space. Sladen Legal regularly provides updates on blockchain, technology and cryptocurrency. To subscribe to this mailing list click this link.

For more information on cryptocurrency and taxation or for general business law advice, please contact:

Laura Spencer
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E: lspencer@sladen.com.au

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au