Lately, it has been getting harder and harder to pinpoint the position of the Australian Tax Office (ATO) with respect to Bitcoin. Earlier this week the ATO announced that Bitcoin would not be considered money for tax purposes in a highly criticized decision that would in effect place a double tax burden on many Bitcoin businesses and merchants that accept Bitcoin.

Interestingly enough the Tax Office also ruled that wages paid in Bitcoin would be taxed at the same rate as traditional currency, as if the wages were “money” in what appears to be a double standard.

The new announcement yesterday changed the playing field yet again. Tax commissioner Chris Jordan said that while Bitcoin cannot currently be considered money this might change in the future with wider acceptance and use.

Australia has however been on the cutting edge of Bitcoin development for some time and is one of the global leaders in Bitcoin startups, exchanges and even Bitcoin Teller Machines (BTCs) and of the approximately 13 million Bitcoins in circulation, valued at nearly US$7 billion, about 7% of which is in Australia.

This is a large chunk of the global Bitcoin community and the recently announced new rules have the potential to drive Bitcoin investment out of the country to greener pastures.

A Contradiction

Jordan told a Parliamentary inquiry that under the current Tax Act Bitcoin could not be considered money. He said:

“Proponents want it to be treated like money. There’s a definition in the Tax Act of money. It’s got to be the legal tender of a country. We can’t say its money. If this grows more and more maybe the definition needs to change.”

It would seem that the definition can only be changed by government decree. And while his statement seems to indicate that when Bitcoin reaches a significant percentage of the total economy it will be possible to declare it officially as money, he failed to mention just what this threshold should approximately be for cryptocurrencies.

Calculating the Tax Gap

One of the things that the Tax Office has not yet completed is calculating the tax gap. The tax gap is the amount of tax liability that tax payers face when their taxes are not paid in a timely manner. Large economies like Australia collect trillions in taxes each year so this task is a monumental statistical effort that can only be carried out every few years.

The tax gap is also used to calculate the compliance rate of citizens. This week Second commissioner Neil Olesen said about this issue that his office would be conducting 5000 random audits of both individuals and businesses over the next four years to complete their calculations.

The audits are not only targeted at Bitcoin however, as the office also plans to seek out people who live in the cash economy and do not report either all or part of these earnings. The ATO’s target does not seem to be Bitcoin or even money laundering nearly as much as tax evaders. Jordan said that people who operate in these schemes not only avoid paying taxes but often cheat workers out of a fair salary.

The ATO has also been the recent target of massive budget cuts leveled by the Abbott government. There have already been 3,000 cuts with another 1,700 slated to take place over the next few years. While Jordan says that the Tax Office has become much leaner, these are deep cuts that will more than likely have an effect on the agency’s ability to perform.

Expert commentary

Fran Strajnar: "I've just come back from a 4 day trip to Melbourne where I met with many Bitcoin start-ups and I can tell you sentiment is bitter towards the double GST component with many pre-empting relocating their registered offices to Hong Kong and elsewhere. Under such an off-shore-operated model, trade volumes would stagger. This would curb innovation/adoption and ultimately drastically reduce the taxes legitimate Bitcoin business can bring into Australia."

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