Crypto & Blockchain Tax Planning by Australia’s Premium Cryptocurrency Accountants

Proactive tax planning.

What is it?

This is the process of getting your tax affairs in order, planning ahead to legally and commercially, as much as possible, minimise your tax.

And from the Munro’s point of view, we’re all about working for you to minimise that tax. Get you set up correctly. Lodging things correctly in the future.

Taking your considerations into account, and wherever possible, the argument can be made making sure that we put it in your side of things and not working for the ATO.

Certainly not working for them and taxing you anymore than necessary.

Know we want to minimise that and get your affairs in order.

So that’s proactive tax planning.

When it comes to proactive tax planning, we first start off with your longer term tax planning, longer term thinking, structures, ownership.

How do you own your cryptocurrency and your various other investments and the like?

Because it’s really important. You can’t just all of a sudden change the structure of your investments at the very end and hope to immediately minimise your tax.

If you’ve owned an asset, say, solely by yourself throughout and you’re sitting on a gain and you’re about to sell it, you can’t just all of a sudden throw in a trust in there to help minimise your tax.

It’s not going to work like that.

The trust might help (the) in the future, and gains coming in the future, but essentially the gains need to be reported based on the ownership throughout. So it’s really important to get this right as early as possible in the beginning, ideally before you even do anything.

And there are mechanisms, of course, to restructure throughout.

Ideally, you’re doing everything up front because to restructure later, it adds the extra complexity and no doubt costs to do that later (and can), and possibly bring forward some tax that you otherwise could have avoided if getting things right in the beginning.

When it comes to cryptocurrency, common ways to own it:

so you open up the exchange in your own name. You buy it, you hold it and you eventually sell it (you eventually sell), it counts in your own name. Essentially, the gains and losses need to be reported in your tax return.

You might own it jointly, so the most common scenario there would be husband and wife and/or spouses. They (joint) own it jointly, so 50/50 each, and that would mean that if you’ve got gains to report, we report 50% in Spouse 1 and 50% in Spouse 2. That can be beneficial from a tax point of view because you might have your gains might otherwise then be taxed at lower tax rates.

By having them split 50/50, it reduces our chance of going to the top tax bracket. So reducing the potential being taxed at the top tax bracket.

And also take advantage of, Spouse 1 and Spouse 2, they might have slightly different taxable rates. So we also get to take advantage of the lower tax rates for the spouse that has a lower tax rate there.

And 50/50 jointly owned, it doesn’t really add too much extra complexity. You don’t add in any extra tax returns due, no extra financials because just basically (like) 50% is put into tax return over here and 50% put into tax return over here. So relatively a simpler scenario to look at.

After that, looking at more complex structures, we’re looking at family trusts, otherwise called discretionary trusts.

We love these trusts as accountants. They give us a lot of tax planning flexibility.

So, what happens here is, so, we end up with a trust. The trust (is) sits at the top and doesn’t pay any tax.

So it doesn’t mean we avoid tax.

What it has to do is it has to distribute its profits down to its beneficiaries.

Owning the assets is very similar to how you would, every day, except we view it differently.

So you have to set up a trust, which is just like a whole bunch of paper documents and sign them all. And now, the assets aren’t technically yours anymore, because they’re now the trust. But, you actually hold them, control them, as much as you would ordinarily.

So, you open an account and you have that account make sure that it’s documented and registered as owned by the trust. And then the assets and the activity in that account, gains and losses, are made by the trust. So, then you report those gains and losses in your trust tax return.

So, as I said, the trust doesn’t pay tax on it. It has to distribute its profits for the year down to beneficiaries because otherwise you’re going to be paying taxes at the top tax rate. The whole purpose of having the trust is to avoid that top tax rate.

So we distribute down to beneficiaries. So what this means is we don’t actually have to technically actually distribute out the profits. Don’t actually have to send the money to bank accounts at this stage, not necessarily. But you do have to document on a piece of paper of Beneficiary A gets 20% of the gains, Beneficiary B gets 40% of the gains and Beneficiary C gets 50% of the gains. You must do that within the tax year for the gains. So it normally happens that last week in June to work out that.

So, importantly here, once we’ve done that declaration that these beneficiaries own these amount of profits they are technically legally their’s now. So, those beneficiaries can come along and go, “Hey, you owe it me. You owe me 50% of those profits, give it to me”. You would be obligated to give it to them, because they’ve, legally, made them entitled to it.

So, that’s why they’re called, some of the reason why they’re called, family trust; because, distributed to family members, and really close family members who aren’t just going to take off with what would otherwise be, hopefully, your wealth that you’ve generated. So, you just keep it within the family.

So, the benefit here is that you can have different family members on different tax rates. From before when I was mentioning that, and spouses and, when one spouse’s taxable income is up here and one spouse’s taxable income is down here. When it’s 50/50, they just go up, some 50% each. With a family trust, what we can do is we can distribute to spouse number two until they get even; and then we can go 50/50 each.

So, we’ve got a little bit more flexibility. We love that from the tax planning point of view, because we get to utilise lower tax rates.

There is another benefit here, using family trust as a beneficiary. We can also add in a company as a beneficiary.

It’s a more complex structure, by adding in a company. And the great thing here is we don’t actually have to add in a company at the beginning. We can add that company in, as long as it’s in the tax year when the gains made.

(And) Why might we want to distribute to a company?

Ordinarily, we wouldn’t want to distribute to a company if we were going to get the 50% CGT discount because distributing such long term gains to a company would otherwise lose the 50% discount. Companies don’t get the 50% discount.

So, what we would want to do is give the company gains which come from shorter term trading.

I know with cryptocurrency sometimes, the fluctuations in the volatility, some years you might have a really big year, really profitable year, and it might just because might be from all short term gains. That happens, and you’ve owned those assets in the trust, you might then want to park those profits in the company.

Why would you do that? The company has a lower tax rate, generally does. That’s a 30% tax rate, the peak tax rate, you’re looking at there. Whereas if you took them yourself or amongst your family, you might be looking at 35% tax rate, 39% tax rate, maybe 47% tax rate. So if you want to reduce the amount of profits that are taxed at those high tax rates, you can park them in a company.

This is commonly called, actually, a “bucket” company.

So, we put the profits in that company, and because of the crypto world, and volatility over the next one, two, three years, you might not necessarily be making those quite substantial gains anymore. For whatever reason, the profits just aren’t there. What you would then do is you would start taking that profits out of the company that will come out through a dividend.

A fully frank dividend, which means the tax has already been paid on them, you get a credit for the taxes paid on them. They come out through the family trust, through a family trust, you get flexibility of minimising the tax and head them down to your family members and then they’ve got to pay tax on this dividend.

You go, I’ve got to pay tax on it, where’s the tax benefit?

Sort of two tax benefits here.

Delaying paying tax by.

Putting it in the company, instead of let’s say paying tax at 39 cents on the dollar or 47 cents on the dollar. We’ve only paid 30 cents on the dollar. So if you’re aware of like compounding returns and stuff, you go, “Oh, I haven’t had to pay so much tax”. So, in the meantime, maybe I’ve invested that money and I’m going to return on it. So, get a higher return, potentially, with compounding returns.

But, also you might actually minimise tax over this whole system.

Because by the time those dividends come out, to you, you might have a scenario where the tax rates for individuals is reduced, in that time.

So, rather than individuals having to pay 39 cents on the dollar, maybe the tax rate has reduced to 30 cents on the dollar. So this way you get a tax credit for the 30 cents on the dollar the company has already paid. You’ve got no further tax to pay. That’s it, done. So you’ve reduced tax. You’ve saved 39 cents on the dollar for each dollar of profit you’ve made, and you’d be happy days.

Or, you might have a slight amount of top up tax to pay. Maybe if you took it all that first year, you’re going to pay 47 cents on the dollar in tax. But maybe because you take it out in the future year, your tax rate is only at 39 cents on the dollar. You’d get a 30 cents credit for the tax the company’s already paid, you’re only paying the extra 9 cents instead of paying the extra 17 cents on the dollar.

So, this can work out, depending on the size of the gain, the larger the size of the gain, the larger the tax can be saved.

You can save a few thousand dollars, maybe a few tens of thousands of dollars through this mechanism.

It is a lot of extra complexity. You’re probably only starting to think about using these structures when you’re talking six figures. In terms of assets and income and profits there.

Otherwise, add extra complexity of doing the accounting and dealing with it might not necessarily, might mean that, the costs don’t necessarily pay the benefits. But it is an option there. But very importantly, you’d have to have that family trust set up early on.

There’s a different type of trust called a unit trust, which might be used in some unique circumstances not typically for investing. Or when it comes to cryptocurrency.

Maybe if there’s some sort of business activity going on, you might use a unit trust. Slightly different to a family trust in that you don’t (you don’t) have just the wide range of family beneficiaries. You have your beneficiaries are unit holders.

These are people who own units in the unit trust. A bit like shares in a company. There are people who own units in the unit trust and then they split the profits, split the gains based on their percentage ownership through the unit trust. So a bit of flexibility there with unit trust that wouldn’t necessarily be used. It’d be a pretty unique circumstance to be using a unit trust when it comes to cryptocurrency.

A company. Why would you use a company?

Look, you wouldn’t use a company if you’re making longer term investments because you don’t get the 50% CGT discount, as I mentioned earlier. You would maybe only look at using a company to directly earn and hold and do the crypto activity if you’re doing a high volume of activity.

You’re operating a large scale business, a trading business. Because you’re turning over, you’re doing day trading, you’re doing swing trading, you’re only holding assets for short periods of time, you were never otherwise going to get the 50 percent CGT discount.

So it might be beneficial to do that trading within a company, because by doing it in a company, you might actually have access to the lower of the two company tax rates in effect, at least at the time of recording this online course. So, rather than a 30% tax rate, the tax rate might be 26% or 25%, depending on the financial year and what the actual company tax rate is, is there.

So, you can reduce your profits, not reduce your profits, reduce your tax by using a company for a trading business.

I would say that’s a rarity to set up at least in the beginning. You might initially set up more actually as a family trust. See how you go, depending on the scale, once you get to see how you’ve got some confidence in the level of the profits on an ongoing basis, it might then restructure to a company. It will be something to explore.

And that company would most likely, ideally, be owned by a family trust that you would set up to give you flexibility when you do eventually take out the profits, through a franked dividend would be the plan.

So, your other structure here to consider would be a Self Managed Superannuation Fund ( SMSF).

So, in superannuation, you could own cryptocurrency within a superannuation, if you wanted to. It’d have to be a self managed superannuation fund. So, one that you manage and you control. (And the) There is a huge level of onus on self managed superannuation, which I’ll touch upon momentarily.

But, why would you want to do this?

Basically, simply put is, superannuation is the lowest tax environment we’ve got going around. It’s credibly beneficially taxed. You’re top tax rate, essentially, is 15% on your shorter term gains. And if you’ve got longer term gains on your superannuation, superannuation gets a 1/3rd CGT discount, it doesn’t get 50% CGT discount, but essentially that makes the tax rate 10%. So, 10% tax rate on longer term gains, that’s usually beneficial. And (and) possibly those gains can be reduced to nil.