This months top tax & accounting Q&As live from the Knowledge Shop Help Desk:
- Are Bitcoin transactions taxable?
- Distributions from a trust to a related company
- Share transfers and the new small business rollover rules
- Fees paid to a foreign director
- GST credits and luxury cars
1. Are Bitcoin transactions taxable?
I have a client who invested $4,000 in Bitcoin. The value is now $2.5m. The client is looking at selling 30% of these Bitcoins and making a profit of $750,000 - are these capital (CGT), assessible income, or tax-free?
My client has a colleague who has received advice stating they are tax-free stating that they are personal use assets purchased for less than $10k. I believe they would be subject to CGT per TD 2014/26.
1. The starting point with this is really to determine whether transactions involving cryptocurrency are on capital or revenue account.
The tax outcome will generally depend on whether:
- The cryptocurrency is held as trading stock (refer to TD 2014/27);
- The cryptocurrency is held as part of a profit-making undertaking;
- The cryptocurrency is held on capital account and is classified as a personal use asset (as defined in the CGT rules); or
- The cryptocurrency is held on capital account but is not a personal use asset.
While TD 2014/26 confirms the ATO’s view that Bitcoin is a CGT asset, this does not mean that it cannot also be taxed on revenue account on the basis that it is trading stock or has been acquired as part of a profit making undertaking.
For example, if the client acquired the cryptocurrency with the intention of making a profit on future sale rather than using it to undertake personal transactions then any profit on sale is likely to be taxed on revenue account, even if the client is not holding the cryptocurrency as trading stock.
If the client wants to argue that the Bitcoin is held on capital account on the basis that it was acquired with the intention of using it to make purchases for private consumption etc., then the client should be encouraged to gather and retain as much evidence as possible to support this. If the client has held the Bitcoin for a number of years and never used it to make purchases for private consumption etc., then it may be difficult to support this argument.
2. If the cryptocurrency is taxed under the CGT rules and was acquired with the intention of using it to make purchases for private consumption only then it may be possible to argue that it is a personal use asset, which could mean that certain gains are basically ignored if the Bitcoin was purchased for $10,000 or less. Probably the best source of guidance on this is TD 2014/26.
Also refer to the ATO guide on the Tax Treatment of crypto-currencies in Australia.
Did you know that emerging tax issues - such as cryptocurrencies - will be covered at Knowledge Shop's member only PD?
2. Distributions from a trust to a related company
Trust A and B are controlled by same person. Company A is 50% owned by the trust control person while the balance is owned by an unrelated person. Trust B and company A have some losses from their own operation.
Trust A elects to be a family trust and makes distribution to Trust B who elects to be an interposed entity. Trust B after deducting its own loss, still has net income.
1. Can Trust B distribute surplus income to the company?
2. If the answer to question one is no, as Trust B can only distribute to family group, can company A be elected to be interposed entity for family trust purposes
1. If the trust deed of Trust B allows distributions to be made to the company then this should generally be possible. That is, you need to first check whether the company is an eligible beneficiary of Trust B under the terms of its trust deed.
2. If Trust B is permitted to distribute to the company this is likely to cause some adverse tax implications. If Trust B has made a family trust election or interposed entity election, then any distributions made outside the relevant family group should trigger family trust distribution tax (FTDT) at penalty rates. That is, if the company is outside the family group then distributions from Trust B to the company would generally trigger FTDT.
If some of the shares in the company are owned by an unrelated shareholder then the company would not automatically be part of the family group. The main option for overcoming this problem is by having the company make an interposed entity election. However, this is only possible if it can pass the family control test. In broad terms, section 272-87 Sch 2F ITAA 1936 indicates that this can only be satisfied if certain family members hold fixed entitlements to more than 50% of the company’s income and capital. If the unrelated shareholder holds 50% of the shares, then it seems very unlikely that the family control test can be met.
3. My other concern here is around Trust B’s ability to deduct its losses against the distribution from Trust A. Unless Trust B has made a family trust election then it is likely to fail the income injection test when it receives income from another discretionary trust. The way we would normally manage this situation is to ensure that Trust A and Trust B both made FTEs with the same test individual (if this is possible).
3. Do the new small business rollover rules apply to share transfers?
I have a client who wants to reorganise their business. It is an active business trading in a company structure with husband and wife each owning one share each. I was looking at the option of transferring the shares from their name into a family trust under the new small business restructure rules that came in 1 July 2016. My initial reading indicates that they may not meet the conditions of this as the trustee of the trust and them as individuals are not the active business itself. Therefore, the transfer of shares would not meet the conditions for Small Business Restructure rules. Could you please confirm that this is the case?
It appears that the small business restructure rollover relief cannot generally apply to the transfer of shares in a company. Even though shares in a company can potentially be classified as active assets under the small business CGT concessions in Division 152, the active asset condition in the new small business restructure rollover relief rules operates a bit differently. Refer to example 11 of LCG 2016/3.
In order for the active asset requirement to be met in the context of these rules, at least one of the following needs to be met:
- The taxpayer disposing of the asset needs to be a small business entity (SBE) in their own right and the asset is an active asset of that taxpayer; or
- The asset is used in a business carried on by a connected entity or affiliate that is a SBE.
This means that if the individuals who currently own the shares do not carry on a business in their own right then it would not really be possible to pass the active asset condition.
Even if the individuals who currently own the shares do carry on a business in their own right and they are SBEs it would still be necessary to show that the transfer was part of a genuine restructure of an ongoing business. In practice it would be difficult to show how transferring shares in the company to a new shareholder would benefit the business carried on by the company. It is more likely that this would provide a benefit further up the ownership chain, etc.
4. Tax on fees paid to a foreign director
I have an Irish client who is resident of Ireland for tax purposes, currently paying 50% tax individually. He is also a director and shareholder of an Australian Pty Ltd.
If his Australian company pays him a Director’s Fee, will he be taxed here and withholding will be at a non-resident's tax rate?
1. I assume that the client has been determined to be an Irish resident under Irish tax law as well as under the terms of the Double Tax Agreement (DTA). I also assume the company is an Australian resident company.
Under Australian tax law, non-residents are generally only taxed on income that has an Australian source. While income relating to personal services is often sourced in the place where the work is performed, this can be modified by DTAs.
Article 24 of the DTA between Australia and Ireland basically says that income which can be taxed in Australia under Article 17 is deemed to have an Australian source for the purpose of the DTA and Australian tax law.
Article 17 provides that directors' fees derived by a resident of Ireland in their capacity as a member of the board of directors of a company which is a resident of Australia may be taxed in Australia.
Broadly, this indicates that if the client is a resident of Ireland, director’s fees paid by an Australian resident company should be treated as Australian sourced income.
You may wish to refer to ATO ID 2005/130that discusses this issue (albeit in relation to a different DTA).
2. If the directors’ fees have an Australian source and are taxable in Australia, the company should ensure that it meets PAYG withholding obligations on the fees paid. Tax should be withheld in this case at non-resident tax rates.
If the director does not provide a TFN to the company then tax would be withheld from the payment at the highest marginal rate (this would be 45% for non- residents).
3. If the director is taxed in Australia and Ireland on the fees, then they may be able to claim some form of tax credit in Ireland to reduce the impact of double taxation.
5. GST credits and luxury cars
My client is a hire car/limousine service company. When claiming GST on cars purchased for use in this company, would the luxury car limit of $57,466 still apply, or could you use the full purchase amount of the car (e.g. $65,000)?
The key legislative reference is section 69-10 GST Act, which normally limits the GST credits that can be claimed in relation to the acquisition of a luxury car. However, there are some exceptions to the general rule which are summarised below:
- Vehicles that are not classified as ‘cars’ are not subject to the limit. ‘Car’ is defined as a motor vehicle designed to carry a load of less than 1 tonne and fewer than 9 passengers. If the vehicle is designed to carry 9 or more passengers, then it should not be classified as a ‘car’ and should not be subject to the luxury car limit when claiming GST credits.
- Where the entity is entitled to quote an ABN for the purposes of Luxury Car Tax. This is generally restricted to entities that acquire cars as trading stock.
- Where the vehicle is an emergency vehicle, is specifically fitted out for transporting disabled people in wheelchairs, a commercial vehicle that is not designed for the principal purpose of carrying passengers, a motor home or campervan.
Unfortunately, it is unlikely that the client will be able to claim full GST credits for the vehicle if it is designed to carry fewer than 9 passengers and less than 1 tonne. The luxury car limit would apply to limit the GST credits that can be claimed for this vehicle even if it will be used in a limousine or hire car service.
As an example, see private ruling 15195 dealing with a similar situation.