1.1 Overview of the Australian GST system
GST is a broad-based consumption tax, and is imposed on taxable supplies and taxable importations.
It is generally the entity making the taxable supply or taxable importation that will be liable for GST. Under section 9–5 of the GST Act, an entity will be regarded as making a taxable supply where:
(a) it makes a supply for consideration (being either monetary and/or non-monetary consideration);
(b) the supply is made in the course or furtherance of an enterprise that it carries on;
(c) the supply is connected with Australia; and
(d) it is registered, or required to be registered for GST purposes.
But, the supply will not be a taxable supply to the extent that it is GST-free or input taxed.
In some circumstances the GST included in the price paid for an acquisition of a taxable supply may also be recoverable by an entity as input tax credit.
The GST implications associated with mining and using Bitcoin are discussed further below. GST rules applicable to specific entity types are not discussed. For the purposes of this discussion, and unless specified otherwise, it is also assumed that the relevant entities are in Australia.
1.2 Mining Bitcoin
As previously said, Bitcoins are created and entered into circulation through a process called “mining” that certain users of the Bitcoin network perform (i.e. miners). The process of mining involves miners using the Bitcoin software to solve complex equations. In short, the equations in the mining process serve to verify the validity of Bitcoin transactions. In addition, currently 12.5 new bitcoins are created and awarded to the successful miner who solves the relevant equations.
(a) Carrying on an enterprise
In determining the GST implications associated with mining, it is necessary to firstly consider whether the activities related to mining Bitcoin constitute the carrying on of an enterprise by the miner.
In this context, the term “enterprise” is relevantly defined in section 9–20 of the GST Act as:
an activity, or a series of activities done:
(a) in the form of a *business; or
(b) in the form of an adventure or concern in the nature of trade; […]
It is clear from this definition that “enterprise” includes a business, and the use of the phrase “in the form of” indicates a wider meaning than the word “business” on its own. The term “business” is defined in section 195–1 of the GST Act as including:
- any profession, trade, employment, vocation or calling, but does not include occupation as an employee.
While this definition simply states what activities may be included in a business, it does not provide any guidance for determining what the nature, extent, and manner of undertaking those activities amount to for the carrying on of a business. It is therefore necessary to turn to case law.
The indicators that have been held by the courts as relevant are set out in paragraph 13 of TR 97/11 and reproduced below:
- whether the activity has a significant commercial purpose or character;
- whether the taxpayer has more than one intention to engage in business;
- whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
- whether there is a repetition and regularity of the activity;
- whether the activity is of the same kind, and carried on in a similar manner to that of the ordinary trade in that line of business;
- whether the activity is planned, organised, and carried on in a business-like manner such that it is directed at making a profit;
- the size, scale, and permanency of the activity; and
- whether the activity is better described as a hobby, a form of recreation, or a sporting activity.
While each case turns on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. No one indicator is decisive. That is, the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the “large or general impression gained” from looking at all of the indicators, and whether these factors provide the operations with a “commercial flavour”. But, the weighting to be given to each indicator may vary from case to case.
It is conceivable that the activities related to mining Bitcoins may be undertaken in the form of a business. For example, the miner may have invested a significant amount of money in computer hardware and advanced scientific computing software to enhance their mining capabilities — this is more likely than not to be the case, given that solving the equations require intensive computing power. Furthermore, the mining activities may be of considerable size and scale, and conducted routinely and systematically, and with a high degree of sophistication. Further, it is likely that the intention of the miner may be to sell the bitcoins generated from the mining process at a profit. In such a case it is likely that the activities undertaken by the miner constitute the carrying on of an enterprise for GST purposes.
Where a miner is carrying on an enterprise, the next issue to consider is whether it is required to be registered for GST purposes. Generally, an entity will be required to be registered for GST purposes, if its annual turnover for the previous 12-month period or projected annual turnover for the next 12-month period in relation to supplies that are connected with Australia exceeds AUD $75,000.
Even if a miner is not required to be registered for GST purposes, it may elect to register for GST purposes (e.g. so that the miner can claim any available input tax credits for creditable acquisitions that it makes).
(b) Making a supply for GST purposes
To fall within the ambit of the GST system, there must be a supply (or importation). The importance of supply was highlighted by the Full Federal Court in Sterling Guardian Pty Ltd v Commissioner of Taxation, i.e.:
In economic terms it may be correct to call the GST a consumption tax, because the effective burden falls on the ultimate consumer. But as a matter of legal analysis what is taxed, that is to say what generates the tax liability (and the obligations of recording and reporting), is not consumption by a particular form of transaction, namely supply; see generally HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at -.
The term “supply” is broadly defined in section 9–10(1) of the GST Act as “any form of supply whatsoever”. While section 9–10(2) goes on to list the things that are included as supplies (such as the supply of goods and services), it is not intended to be an exhaustive list, or limit the scope of the definition of “supply” in section 9–10(1).
Given the broad definition of “supply”, it may be argued that the miners are making a supply of services by undertaking complex equations on their computers in an attempt to validate transactions. Furthermore, where a miner solves an equation, and thus validates the relevant transaction, the 12.5 new bitcoins awarded to the miner may arguably be treated for GST purposes as consideration for the supply of those services.
But, the Commissioner of Taxation (Commissioner) provides as one of his propositions in GSTR 2006/9 that, for every supply, there must generally be a recipient and an acquisition (Proposition 2 in GSTR 2006/9). Relevantly at paragraphs 53 to 55 of GSTR 2006/9, the Commissioner states that:
The meaning of ‘acquisition’ in section 11–10 is the corollary of the meaning of supply in section 9–10 […].
To make an acquisition you have to be the ‘recipient’ of the supply of the thing you are acquiring […]
The supplier and the recipient have to be different entities because an entity cannot make a supply to itself. Also, the recipient has to be identified, as you cannot make a supply to the world at large […].
As with the definition of “supply”, the term “acquisition” is broadly defined in section 11–10(1) of the GST Act as “any form of acquisition whatsoever”. Section 11–10(2) refers to the thing acquired, such as goods, services, or a right, and the means by which the thing is acquired, such as its receipt or acceptance.
To make an acquisition, you have to be the recipient of the supply of the thing you are acquiring. In terms of a supply, the “recipient” is defined in section 195–1 of the GST Act as “the entity to which the supply was made.” This definition suggests that there must be a supplier and a recipient, and that something is to pass from the supplier to the recipient. While there are exceptions to this proposition, as set out in paragraphs 60 and 61 of GSTR 2006/9, they are not relevant to this analysis.
In terms of mining, it appears that there is an en