Author: talkagency

In December 2021 I wrote a two-part article on Cryptocurrency.  There were two very different quotes from two brilliant minds and one of their comments may end up coming true if the recent Crypto Crash is any indication….

“In terms of Cryptocurrencies generally, I can say almost with certainty that they will come to a bad ending.” — Warren Buffett CNBC, January 2018

University of New South Wales data tells the story clearly. The sell-off in Bitcoin in Mid-June 22 saw the currency’s value fall to $17,592.78 USD. Bitcoin’s high in November 2021 reached Circa $65,000 USD, that’s a 73% fall. This was the first time since December 2020 that it had fallen below $20,000 USD. As per Bloomberg another Crypto, Ethereum, dipped a whopping 70% from its all-time high in November last year, prompting the world’s largest Cryptocurrency exchange, Coinbase, to sack a staggering 18% of its staff.

Proponents of Crypto currencies regarded the currency as relatively safe from volatility as it was based on the belief that it was a new form of currency that would continue to be supported by the members (people that own and mine) and the market, instead of being supported by a Bank or Government. What this crash confirms is that the currency cannot escape the volatility that affects all asset classes and is in fact more volatile and riskier than shares.

However as far as facts go I find the most interesting fact that the Crypto collapse is flooding the market with Rolex watches.

According to the report, the recent uncertainty surrounding Cryptocurrency has seen more owners unload their high-end timepieces.

What Does This Crypto Crash Mean for You and What Opportunity Can You Make of It Now?

Right now you could sell your Crypto assets, recognise your Capital Loss and use the funds from the sale to buy a cheap Rolex watch.

Jokes aside, there is some logic to part of what I have suggested. Timing is a critical part of effectively reducing taxes.

If you hold Crypto assets that have a “paper loss” and Other Capital assets that have a “paper gain” and wish to realise the gain on these other assets then it is wise to realise your loss on the Crypto assets and use this loss to offset your gain.

Let’s look at an example:

Raj owns an investment property that she sells in June 22 which will create a Capital Gain for her of $100,000. She earns over $200,000 and holds private health insurance, so her Marginal Tax rate including Medicare is 47%. The Tax will be $47,000 if she does nothing else.

Along comes Raj’s Bishop Collins manager who informs Raj during her tax planning session in June that she purchased some Bitcoin for $80,000 AUD in 2021 and it is now worth $40,000 AUD. If she sells the Bitcoin before year-end and realises her Capital loss of $40,000, she can offset this loss against the gain on the property sale and save $18,800 in Tax.

If Raj still wishes to hold on to her Crypto, she could repurchase the Crypto asset on the same day. Effectively she is realising the Capital Loss and applying it cleverly to her Capital Gain. If she holds on to her Crypto asset and it goes up then she will only be liable to CGT when she disposes of the asset.

How to Avoid Tax on Cryptocurrency

Can you avoid tax on Cryptocurrency? When you buy Cryptocurrency in Australia, you are not taxed at the time of purchasing the asset, provided it is purchased with a fiat currency (Australian dollars, US dollars, British pounds, etc).

Tax is applicable only at the time of disposing of your Crypto and only if you have made a Capital Gain.

Crypto is also GST-free.

Other than when purchasing Crypto, broadly speaking, you won’t pay tax on Crypto in Australia:

• While holding Crypto.
• Acquiring it as a gift.
• Hobby-level Crypto mining
• Transferring your Crypto between your own wallets (however this can incur a transfer fee)
• Purchasing personal use assets using Crypto under $10,000 (see more on what counts as a personal use asset below)
• Donating Crypto to registered charities with Deductible Gift Recipient (DGR) status.

How to Minimise Tax on Cryptocurrency

You can guarantee that if you profit from Cryptocurrency, there will be some Tax to consider. As discussed previously, transacting in Cryptocurrency is not a secret transaction that is undetectable.

The Australian Taxation Office (ATO) Cryptocurrency data-matching program has been around since April 2019. Under the program, the ATO has collected data on Cryptocurrency transactions for the 2014-15 to 2019-20 financial years. This protocol will continue into the 2022-23 financial year.

Cryptocurrencies can be bought or sold on a digital currency exchange platform using traditional currency. In addition, some popular digital currencies or “stable coins”, like Bitcoin, can be purchased or sold for cash through special ATMs.

Tax Treatment of Cryptocurrencies

If you are involved in purchasing or trading Cryptocurrency, you need to be aware of the tax consequences. These vary depending on the nature of your circumstances.

Everybody involved in buying, selling or trading Cryptocurrency needs to keep records of their Cryptocurrency transactions.

If you’ve transacted with a foreign Cryptocurrency exchange, you may also have tax responsibilities in another country. This is an important thing to consider when you’re on the hunt for a reliable Crypto exchange. A few great ones are available in Australia, so you should research those over foreign exchanges.

When a Transaction is a Capital Gain

If you invest in Cryptocurrency simply hoping that it increases in value, any gain you make from the disposal is treated as a capital gain.

Capital Gains Tax (CGT) occurs when you dispose of your Cryptocurrency. The disposal can happen when:

• You sell or gift Cryptocurrency
• You trade or exchange Cryptocurrency (including the disposal of one Cryptocurrency for another Cryptocurrency)
• You convert Cryptocurrency to traditional currency, such as Australian dollars, or
• You obtain goods or services using Cryptocurrency.

Some or all the gain may be taxed if you make a capital gain on the disposal of Cryptocurrency.

Some capital gains or losses may be disregarded if they come from the disposal of a Cryptocurrency that is a personal use asset.

Crypto is a personal use asset if you hold it or use it mainly to purchase items for personal use or consumption.

If Cryptocurrency is acquired and used within a short period to purchase items for personal use or consumption, the Crypto is more likely to be a personal use asset.

The appropriate time for working out if an asset is a personal use asset is at the time of its disposal.

Except in rare situations, the Crypto will not be a personal use asset.

When a Transaction is an Ordinary Income

There are situations where a Cryptocurrency transaction or series of transactions can give rise to ordinary income if:

• You went into the transaction intending to make a profit, and
• The transaction is part of a business operation or commercial in character.

Relevant considerations for working out whether a transaction has such a character include:

• The nature of the entity undertaking the transaction
• The nature and scale of any other activities conducted by the entity
• The amount of money involved in the trade and the scale of the profit sought or obtained
• The nature, scale and complexity of the transaction
• The amount of time which the transaction occurs
• Whether the Cryptocurrency has had any other use, other than as an object of trade, for example, is it used to exchange or buy services only available on the blockchain?
• Whether there is the necessary profit-making intention and business or commercial character of the transaction will depend on each case’s particular facts and circumstances.

If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain. This includes if you carry on a business of Cryptocurrency Miner or Trader making multiple disposals frequently.

What Triggers an ATO Audit?

Hearing the words “ATO Audit” often evokes one of two reactions; either the burying-of-heads-in-the-sand or a call to action.

As an accountant, I can say with some authority that taxpayers who are proactive about their tax returns are in a much better position to handle an ATO Audit, and are most likely to avoid an ATO audit altogether. The reason for this is to do with what has been included or excluded in your tax return; for example, attempting to reduce taxes by not correctly including income or incorrectly overclaiming deductions can trigger an ATO Audit. Remember, as the taxpayer you are responsible for what is lodged in your return – not your accountant or tax agent, you.

When you are preparing your tax documents for your accountant or lodging anything with the ATO, make sure you are paying attention! Of course, everyone makes mistakes from time to time; however a mistake on your tax can be costly – especially now, as the ATO moves out of their COVID “sympathetic and understanding” approach to their compliance program.

The list of ATO audit triggers is endless, and indeed we have looked at this topic previously, however, I would like to look in detail at just one of the major ATO audit triggers: data-matching and ATO prefilling. Here’s some top tips for you to take note on what triggers an ATO audit!

ATO Data Matching

The ATO is ramping up its data matching activities, big time. They’re tapping into more and more sources every year.

Single Touch Payroll

The ATO brought in Single Touch Payroll (STP) a few years back and are just beginning to tap into potential ATO audit trigger points. This data provides your payroll information to the ATO progressively for every pay throughout the year.

1. Superannuation compliance has already begun with the ATO cross checking super payments with STP data. So it is very important to pay your super on time. I have already had clients receive automated letters here suggesting they may have incorrectly paid super and to lodge a superannuation guarantee charge (SGC) statement imposing crippling penalties on businesses for mistakes or only slightly late payments.
2. Centrelink: cross-checking your income estimates and amounts reported to Centrelink can be done on a live basis now.
3. Business activity statements (BAS): PAYG withholding incorrectly reported on BAS can be reviewed, and easily cross-checked by the ATO.

Lifestyle Assets

The ATO is continuing to expand previous data-matching activities such as the 2020 “Lifestyle assets data-matching program”. This program has been gathering information from insurance providers and state governments in relation to boats, cars, art, horses and aircraft, to name a few things. This program has a few triggers affecting almost every possible tax:

1. Income tax: If you are accumulating lifestyle assets and your income isn’t sufficient then the ATO will come knocking.
2. GST: If you are claiming GST on lifestyle assets without being a legitimate business then you could be a target.
3. FBT (Fringe Benefits Tax): If lifestyle assets are being claimed in businesses but are being used personally then this could trigger an FBT audit.
4. CGT (Capital Gains Tax): If lifestyle assets are disposed of then the ATO will check your return for CGT being reported. You can still be liable for CGT on personal use assets if the acquisition cost of an asset is more than $10,000.

Cryptocurrency

The ATO has recently brought to focus an extension on their Cryptocurrency data-matching program. The ATO collects information from major exchanges and any crypto-designated service provider. The primary triggers are as follows:

1. CGT: Since crypto is mostly treated as a capital asset the ATO will be looking for CGT being reported on your return if you have sold crypto in an income year.
2. Income tax: In some circumstances, you can receive income from carrying out a “business” of trading crypto currency. The quantity and the process of trading can mean the ATO can require you to report this as ordinary income.
3. FBT: If businesses use crypto and are passing it on to an employee or associate, you could be staring down the barrel of a 47% fringe benefit tax by using business money to purchase crypto in your individual name.

Property Income

This is a new data-matching program that the ATO has announced which involves collecting data from real estate property management software. Rental properties are being brought to the fore as the ATO has recently announced a high error rate from rental property audits conducted in recent years. 1.6million taxpayers will be affected by this program. People often choose Rental Properties as investments to reduce income tax. This may be the case when negatively geared, however, not reporting rental income and expenses correctly can cost you.

This new program will add to the rental bond data-matching program already being conducted. The ATO will be looking at:

1. Income tax: Ensuring that all rental income and deductions have been included in the return.
2. CGT: Ensuring that any disposals have been recorded on a taxpayers individual return.
3. Lodgment: Ensuring that taxpayers are lodging returns when there is rental income.

Novated Leases

Another new data matching program through which the ATO is gaining information from major leasing providers. Possible triggers for this program are:

1. Income tax: If you are claiming Car Expenses in your tax return to reduce taxes and have a novated lease, these expenses are not claimable in your return because they should already be claimed by your employer.
2. GST: Businesses claiming GST credit for the purchase of a car when it is a novated lease is incorrect, only the GST on the repayment is claimable.
3. FBT: Businesses could find themselves in an FBT audit if they have not been reporting FBT but have entered into a novated lease agreement with their employees.

Benchmarking

The ATO is continuing to cross check business income against other taxpayers in their industry. This reviews your major claims such as cost of sales, motor vehicles, and labour can trigger an ATO Audit which generally looks at the inclusion of cash in your income. The ATO has been known to issue default assessments if you have not kept adequate records. They basically assume you have earned a certain amount of income based on industry benchmarks and what information they have from other parties. Not including your cash income is not the way to reduce small business taxes legally. Watch out for the common expression “is it cheaper if I pay cash?”

Late Lodgement

The ATO is always cross checking late lodgements with higher-risk taxpayers, and they are always looking for businesses and individuals that aren’t lodging tax returns on time. If you think you can get away with not lodging a tax return, think again; not only are the late lodgement penalties severe, you may also find yourself under the microscope since late lodging is like waving a red flag to a bull.

ATO Prefilling is Not Perfect

You need to avoid being complacent and blindly relying on ATO prefill data. Yes, it is reasonably accurate in many circumstances, however, it is there often as a reminder that attention needs to be given to report this income correctly. If the ATO doesn’t have something in their prefill then don’t stick your head in the sand and assume that you don’t need to declare it. For example, if your prefill doesn’t include some share investment income and you know you have share investments, then do your homework and cross-check that each tax statement has been included in the correct location on your return.

If the ATO gets it wrong then you need to be proactive and make sure that the data source is corrected. Just ignoring what the ATO has reported on their pre-filling can mean bigger penalties if the ATO audits you later and you chose to ignore income that the ATO had already included. You can find some more information straight from the horse’s mouth here.

Some of us have not experienced the burden of an ATO tax audit – those who have are generally more careful about taking the time to understand what they need to report in their tax returns. Most accountants have audit insurance offerings which can help cover professional fees through the uncomfortable process, however, this insurance doesn’t pay for penalties or increases in tax should a mistake be found. It also doesn’t reduce the likelihood of an audit. If you do find yourself in the unfortunate situation of an ATO audit, having a professional assisting you is highly advisable and does increase your chance of a more favorable outcome with the ATO as your accountant can professionally direct your responses and assist in defending your reported position. It is worth noting however that the most effective insurance you can have is to be proactive and not complacent about your income tax return.

Speak to Bishop Collins about Tax and Auditing

It’s simple; with Bishop Collins Accountants on the NSW Central Coast, there are no surprises. We listen. We educate. We deliver. We provide solutions to protect your assets, and assist you with minimising your tax and moving toward your goals.

To learn how Bishop Collins can help you with taxes and auditing, visit bishopcollins.com.au or call (02) 4353 2333.