Accounting Solutions for Cryptocurrency Tax

Cryptocurrency has created a whole new degree of complexity when it comes to taxation.

The good news is that we’ve been dealing with cryptocurrency for over a decade and no matter how simple or complex your situation, we’ll be able to offer a solution.

We understand the complexities involved and are here to make the process as smooth and beneficial for you as possible.

How do we achieve this?

It starts with gathering all the necessary source information from you. From there, we meticulously prepare your crypto tax report, any required financial statements, other essential documentation, and of course, your tax return.

Our approach is rooted in a combination of unique systems and deep knowledge, helping us provide outcomes that we believe are unrivalled in terms of accuracy on calculating gains, losses, income and deductions.

Our goal is to minimise your tax liabilities as much as the law allows.

We know crypto can be complex and overwhelming, and you might have fallen behind on your tax lodgements. If you have prior tax year returns to get done, or amended, we can also assist.

Whether you’re a cryptocurrency investor, trader, miner, forger, staker, business or self-managed superannuation fund – in Australia or overseas – we can help with your Australian tax obligations.

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.

When it comes to decentralised finance, which is our next topic we’re talking about DeFi.

It’s a brand new evolving space for cryptocurrency. Quite exciting. I know I know a lot of people getting involved. But I do also like to kick off the topic and mention that it can be an absolute accounting nightmare.

So it’s very important that we look into this and wrap our head around what’s going on here and appreciate the complexity of the accounting that needs to be done here. And hopefully for yourself, arrange your affairs so that those complexities are minimised as much as possible.

So I suppose I’d like to really kick off immediately by saying that there can be unexpected disposal events when it comes to DeFi.

So DeFi, so in the traditional sense of just doing trades on a decentralised exchange, which typically mostly done at this stage on the Ethereum blockchain. You’re doing them and you’re switching crypto on the exchange. Okay, directly. Direct (direct) exchange of say Uniswap token for wrapped Ether token. And it’s all done on a decentralised exchange.

As we’ve already gone through earlier on in the course that is the crypto transaction. Yeah, so we’re all settled on that. We’re all happy. We know about that. From an accounting point of view. Perhaps a little bit harder to get that, that data, compared to if it was done on a centralised exchange because the centralised exchange, bang, got the transaction history there available. But it is available from a decentralised point of view at least here it will say, Uniswap transaction, it mostly should be available connected to that Ethereum address, as we’ve already gone through in the record keeping part of the course, and you should be able to paste your Ethereum address into one of those softwares and it should pull through those transactions. So, at that point, we’re reasonably comfortable that we can get the data. A little bit harder, but we can get the data.

Some unexpected disposal events can be mostly around when you might be trying to earn, let’s say, some interest or possibly have some borrowings on crypto.

So what happens in decentralised land, as I like to call it, is that people can, for lack of a better term, lock up their crypto or stake their crypto, some of the times called various different names for all this stuff. But I can put say some Ether onto one of these DeFi platforms and I can begin to earn some interest. Okay. Whether it be more Ether or it might be in a different coin, let’s say, let’s just say it’s called Aave Coin, for example.

It’s all meant to be decentralised as in, I don’t have necessarily counterparty risks. It’s not. There’s not a middle person in between here. There’s me, I’m lending my Ether out and there’s a peer to peer transaction. Someone else on the other side taking my Ether and then paying me in some interest, some other crypto in here. But the act of me putting my Ether into this platform is most likely a disposal event.

You might be going but I’ve just put my Ether there. It’s locked up in a smart contract and I’m going to get that Ether back. Now the thing here, the key reason why there’s most likely a disposal event, is if you’re earning interest from this crypto that you’ve locked up you’ve got to think why are people paying you interest, and (what) what’s their incentive?

The most likely, uh, circumstances here is that other party has now taken off that Ether or possibly they’ve got some other crypto, but let’s just say for this first scenario, they take it off with that Ether and then they’ve gone ahead and perhaps they’re now trading with it. They’re using it for whatever purpose they need to, we don’t necessarily need to care. We just know that they’ve taken off with the Ether, now they’re paying you some interest.

Now the fact that you no longer have control of that Ether and someone else has taken off with it, and because they’ve taken off with it, when they put some Ether back in there and when you take it out, it’s highly likely you’re going to get a different Ether back; different token.

So, we go all the way back to the basics part of this course, when we were talking about disposal events, we were talking about the fact that it all comes down to do you still own that same asset.

So, in this example here, the most likely scenario was that most likely disposal event, even though it’s unexpected because you think your Ether is locked up, is that you no longer are getting the same Ether token back, because it’s a different token. And in that period when you had it in the smart contract locked up and away; it’s no longer under your control or ownership, and this has most likely been a disposal event. So that can come up and be quite unexpected and can have such quite severe tax outcomes.

Touch on those in a second.

Sort of another way where there can be a disposal event, because it’s not necessarily that a person’s taken away with Ether. What can happen is that you might put your Ether into one of these decentralised marketplaces to earn interest. And when you put it in, rather than necessarily be just locked up by itself, it gets locked up in a pool, sometimes called “liquidity pools” in these decentralised platforms.

And, so it’s pulled together with everyone else and you get back a token sometimes called, very similar, so it might be instead of ETH token, say we’ve got, ah, Drew’s decentralised world and I call my tokens DETH. Okay. You get back a DETH token. This token, now, sometimes some people call it, it’s a placeholder token, and that, or it (it) represents the ETH I put in there, which it does, but it is actually a different asset because it’s actually representing your share of a pool of Ether.

Okay. So when you go and exchange that, that token back to get your Ether, you aren’t necessarily getting the exact same Ether back. You might be getting the same quantity back. It’s, well hope and, hopefully some interest along the way, but a different token. So what’s happened here is once again, when you put Ether into the pool, because now it’s wrapped up with everyone else’s and you’re getting some other asset back, just slightly different asset, you’ve now had a disposal event.

So hence the unexpected disposal.

So, the unexpected disposal has a reasonably big tax consequence for yourself. Because your otherwise, you’re thinking, Hey, I haven’t had any disposal yet. It’s an unrealised, I might be sitting on an unrealised profit at this time. And by this time that you’re doing this, you might’ve bought Ether way back when it was really cheap. Now it’s, it’s gone through a boom. It’s really high in value. And all of a sudden you’ve got a disposal event that you didn’t otherwise know of. So you’ve turned an unrealised profit into a realised profit. Huge consequences.

Now you’ve got gains report. Hopefully you can still get the CGT discount if you held it for more than 12 months. But it’s happened at that time.

And not only does it happen at that time, but when you go and you take your Ether back out, boom, another event’s happened.

Because in the meantime, you’ve held a different asset. You’ve either held that replacement asset, that placeholder asset, that DETH that I used in the example earlier, you put that in, and then you take out your ETH. Now you’ve had a disposal of your DETH, your ETH. Could have had a gain or a loss there, depending on the fluctuation of the value of ETH during that time. So what I’m saying is, within that pool, if ETH had appreciated any value from going in to coming out by the time you take it out the tax world is going hey, the value of it at the time coming out, that’s your proceeds. The cost was when you put it in there, the value then. So the uplift in value is all of a sudden, that’s a further gain that you’ve got to report. If that’s all happened, going into the pool, coming out within a 12 month period, no CGT discount on that next part.

So huge implications there. A lot to wrap our heads around. A lot of accounting work to do, hence the complexity of this world. Please do appreciate that.

I can’t make a blanket rule on this, in terms of the decentralised world.

There’s all different platforms, all different ways of doing this thing. That’s the part of the, sort of excitement, of this world. All the innovation is going on and every platform does things slightly different way. So there’s no blanket rule on this.

So what you have to do is, as advisors, clients come to us, they ask us what about the Aave platform, what about Synthetix over here, all these different platforms that are out there we have to look at each individual one, and work out, okay, event A, B, C, and D are happening over here, or event A and B are happening over here . Basically, it’s, if you’re getting in this world, if you’re not doing huge sums of money, and the sort of the burden from accounting point of view can play a huge heavy role on you.

I think you need to take that into consideration. And if you are playing, playing around, maybe not playing around, investing, with large sums of money it all of a sudden becomes a huge tax sort of obligation, liability there possibly because you might be triggering gains, making profits you otherwise weren’t aware of.

So please take that into consideration.

So as part of this world, we put our crypto in there, we’re trying to earn interest, and earns extra crypto, which are sometimes called interest, sometimes called staking, and in this case, slightly different proof of stake, which we’ll touch on in another topic of this online course. But the decentralised world, for the sake of argument we call that, that’s most of the time pretty similar to your earning interest in a bank.

Look, if you’ve put something, if you’ve gone ahead and done something, so you put some crypto over there and now you’re earning some interest back. Yeah. The value of the coins as they come in are income.

So you have to do your accounting. Yeah. Okay. On day one you earned $1 worth of crypto at that time. On day two, the crypto I got was $1. On day three, hey, now the cryptos a $1.10. On day four, whew, prices spiked, I’ve got $2 worth of crypto on that day. Each one of those events, that’s income to report, to go into the tax return, the relevant tax return for that period. And that cost, the cost for those crypto, it’s whatever the value was at the time they were received.

Now I do know that there are some platforms out there, they don’t actually pay interest in this way. Rather than actually giving you more crypto as you go along or more interest, what they do is, behind the scenes, the coin that you received when you put it into, say, one of these pools, it’s actually meant to appreciate in value. Okay, so you don’t actually receive more of these coins. The coin itself is meant to, because of all the mechanisms behind the scenes, appreciate in value over time. So what this means is because you’re now not receiving more coins, you’ve just got the same coin there and it’s appreciating value, you don’t actually have interest to report.

Because you’re not receiving anything extra, you just have your ordinary outcomes. So if you’re a speculated/investor and that coin appreciates by the time you dispose of it, now you just have a gain or a loss.

If you’re in business world, profit making world, so the revenue account that we spoke about earlier in the course, in that world, you’ve got a profit or loss to report. It’s treated as your trading stock in most cases.

So that’s a, once again, the little differences in the platforms can have a little different outcomes. You really need to look into what’s happening. That’s where it’s a little bit difficult. Once again, because of all the little mechanics behind the scenes and how each platform works as to what the exact outcome is.

Okay, so there’s also mechanisms within decentralised world to borrow against your crypto.

Okay, so I can get my say I’ve got, I was lucky enough, bought some ETH back in the day. My ETH is now worth, let’s say it’s worth $500,000, Drew’s very happy with $500,000 of ETH. But being a tax savvy here, I’m like, phew, if I go sell some of this ETH then I’m going to have to pay tax on the gain. And I’m a bit of a speculator at the moment, I’m thinking, hey, it’s still got a while to go. I also want to keep some in my mouth and have exposure to the appreciation of the value, hopefully. And rather than selling it, but I still want the money because I want to go and buy a house, for example.

But, what we can do now, there are platforms out there that enable me to borrow against my ETH. So it depends on, this is once again, same as all the other platforms that I was speaking about, they will do it slightly differently. So it may or may not eventuate in a disposal.

I suppose here I need to be very careful because part of the reason why I’m doing the borrowing is because I don’t want to have a disposal event.

So I can put my ETH on some of these platforms. And it’s there as collateral. So collateral means it’s just locked up. It’s like when I buy a house and I get a loan from the bank, and the bank takes a mortgage over my house.

So if something goes wrong, boom, they got access to the house. That’s what we’re talking about here with crypto. Put it over here. It’s held there as collateral, but it’s still mine. I still own it, still hold it. Just for the moment, it’s just locked up and certain things happen. Like I don’t pay off the loan, the smart contract is going to go, all right we’re going to sell some of this ETH to pay off Drew’s loan, so that the the lender is covered. That’s the general mechanics of what’s meant to be happening.

But, so, as long as it’s held there and hasn’t been used to repay the loan I’ve been paying off, uh, according to the obligations; the repayment obligations; it’s still held there, still mine, there hasn’t been a disposal event. I take the money and I go buy the house, that’s all good.

But some of these platforms don’t necessarily work like that.

And the trick here is though, that some of these platforms might even just say, they might even say the right things.

Like they might say, yeah, Drew, you can put your ETH over there and it’s held as “collateral”.

They might say that, but then when you dive deeper into these platforms, the terms and conditions, which are sometimes they’re really hard to find.

But once you dive into there and you read the terms and conditions and you work out what’s going on, you’d be surprised to see that sometimes they actually say, nah Drew, although we might say it’s held as collateral, you’ve actually had an outright disposal of (of) your ETH, crypto, any crypto whatever’s, was involved in this, and we just owe you this crypto back later on.

So if that is the case, then I have had a disposal again, and I have got those tax obligations on my ETH and the disposal and the paper gain here.

So huge different outcome there.

Very tricky of some of these platforms to call it collateral when it’s not actually collateral, when you dive in to look at terms conditions and see that it’s been an actual disposal.

So gotta be very mindful of that and I would suggest that if you are looking at doing any of this, that you do seek out tailored tax advice to make sure you know the implications of your activities. Yeah, especially since it can be unexpected.

So a lot of what I’ve just spoke about there applies very much in the CeFi world, centralised finance world which is, there’s platforms rather than being decentralised with meant to remove the middle, middle party. No, there is a middle person there. Middle entity. And, if I’m putting crypto in an interest account or I’m borrowing, very similar outcomes can be had there. A lot of times that these things aren’t disposable events.

So just be mindful of that.

And I suppose, the other thing I want to speak about here, which isn’t 100% always just DeFi, but it’s related to the space and the evolving innovations and stuff is NFTs.

Non fungible tokens that are out there.

Simply put, look, if you’re investing, if you’re speculating in this, if you’re hoping prices to go up in value, similar tax outcomes as we spoke about throughout this course. You bought something, that’s the acquisition, when you dispose of it, that has appreciating value, in Australian dollar terms, and you’ve got a gain there, and then you’ve got to look back, okay, how long did you hold that for and if it’s more than 12 months, it may be that you get the CGT discount after applying your losses.

So that’s important. I know that some of these NFTs are connected to things like games and then at times we get asked, because it’s a game, is it tax free? Which is going back to the personal use case, and the personal use exemptions spoken about earlier in this course. Ultimately, much like I mentioned in that segment, it’s around, is it actual genuine personal use?

So if you’re playing a game, don’t care whatsoever about the appreciation of the asset. You’re just playing the game and you just happen to get NFTs throughout playing that game, then most likely don’t have to worry about the tax because it’s just personal use of the game. But if you are, to some extent, playing that game and you know that by playing the game you get NFTs and they can go up in value and you plan to actually, you’re doing it for the reason of getting the NFTs and hoping they go up in value, then it’s going to be a taxable event

On Superannuation.

(And) So, when we’re talking about Self-Managed Super Funds (SMSF), as you see there towards the bottom of that side, there’s tax free super earnings in retirement phase.

So, what I mean here is that when in super you are earning income, profits, gains and that superannuation is paying out a retirement stream to you.

So you’ve (you’ve) got to your older age and you’re starting to draw down super, that super, the earnings on that can be tax free.

They won’t necessarily have to pay any tax. You might have to pay 10 or 15 percent tax, but it could be tax free. Depends on, obviously, the super laws at that time when you’re taking them out.

But in this current climate, if you’ve got less than $1.6 million, and that’s been put into support that retirement stream, you’re basically looking at whatever earnings are in there, completely tax free.

That means, you might be lucky enough, you might own some crypto in there and it might go from $100,000, it might go to $10 million, that growth, in the right conditions, completely tax free.

So incredibly great environment to have.

So the big downside of superannuation, structuring it that way, would be your access to super monies. If you’re not anywhere near retirement age, you can’t touch the, can’t touch and use those profits for your personal use until we get to retirement.

So that’s a disincentive to put the money in there, if you wanted to use the gains for something else before you hit retirement.

But if you’re looking to invest in cryptocurrency and you think they’re gonna help part of your longer term retirement planning, superannuation can be very attractive because of those lower tax rates.

I know we’re also talking about super. We’re also talking about contributions and their ability to reduce our personal taxable income, and therefore some tax rate.

So what you can do is you can contribute monies to superannuation to get a tax deduction for it.
Why would you do that? Because that can reduce your overall tax rate.

So contributing to super, a contribution that goes into super that is deductible to you, would be ordinarily taxed at 15% in the super.

If you’re a high income earner, say, earning over $200,000, I think the limit is at $250,000 I can’t quite recall at this time, somewhere within $200,000 or $250,000. If you’re earning over that amount that contribution actually might be effectively taxed at 30%, but still there is benefit.

The benefit would be that the amount that you contribute there, that’s within certain thresholds. So, there’s certain thresholds that you can do. So, you can’t just contribute as much as you want into super. So, you’d be (have to be) very mindful of the contribution caps. But the amount you contribute goes as a tax deduction, in your tax return. So if you’re going to pay 39 cents for each dollar profit, 49 cents in each dollar profit. Now each dollar that you put into super is saving you the difference between your tax rate and the super tax rate.

So if your tax rate was 47 cents on the dollar and going into super you only paying 15 cents, you’re basically saving 32 cents on the dollar each (each) dollar contributed to super.

If your tax rate was 30 percent going into super, you’d save 17 cents.

If your tax rate was 39 cents on the dollar and whatever reason your super was, contribution was being taxed at 30%, you’re still saving 9 cents on the dollar.

So you are saving, making those contributions.

But it’s really important, there are contribution caps going in, into super, and that some of those caps might have already been soaked up.

Used up by say employer, your employer make contributions on your behalf. So you might only have a small amount available.

But this, at this time, we now have availability of catch up contributions.

If in previous tax years, you didn’t fully utilise your cap, those unused amounts can flow over. I believe the rule is up to five years, starting about three years ago (2019FY). They can add on top and then all of a sudden, instead of that year’s cap you might have had $10,000 available, if you had $10,000 available that you didn’t use up for the last three years, the actual total cap you can use is now $40,000. So, you can make a slightly larger contribution.

You might want to, you might want to consider using that to get that tax savings.

There is also another strategy to give a little bump up, to that you can contribute as well. It’s called a “Reserving Strategy”.

It’s very unique, a very complex one, you want to get (definitely get) advice and assistance with this. But essentially it allows you to use next year’s contribution. That amount you’re not going to use next year to bring it into this year.

You would need a Self-Managed Super Fund (SMSF) to do this and you’ve got to be very careful around how much you’re going to use in this reserving strategy, because if you’re making a contribution now and then next year you made more than you otherwise were planning to, and you might breach the cap next year, which could have some serious implications.

So, when it comes to all this, wrapping it all up, and we’re talking about Self-Managed Super Funds (SMSF).

Look, highly regulated. A lot of onus is on you to abide by the super laws and tax laws, there.

These funds are audited. So essentially your accounting costs go up quite substantially. You’ve got audit costs involved.

So ordinarily, the rule of thumb is, or at the very least $200,000 in super to make them cost effective. This day and age, you even hear of A.S.I.C. talking about higher amount.

Yes, you can set them up if you have a lower (lower) amount in super. But, you’ve got to look at that cost and benefit analysis.

And, I really do suggest that you seek out professional help with setting these up, or at least considering setting these up, and if you’d like to explore that Munro’s can consistent with that process.

So, Revenue and Capital.

These are terms that as accountants we’re very familiar with but they might be a little bit foreign to you.

So, what that means is that within the tax world, we obviously (we generally), have sort of two categories of income and gains (or profits and gains) and that’s revenue world over here, capital world over here.

So try to make it as simple as possible.

Revenue world is when you’re going out, say it’s like an employee, earning (earning) some income or you’re earning dividends from investments or you’re conducting a business and you’re turning over assets providing services and you’re bringing income in.

Capital world is when you’ve gone out and bought something generally the longer term position of holding that asset and looking for it to appreciate and value.

Okay, and also if you’re going out in an unsophisticated way – buying something and really speculating (another term might be gambling) on the appreciation of the asset – and just having a punt think it’s (think it’s) going to go up, but you’re not doing anything in a very technical, sophisticated manner that’d the capital world.

So, when it’s in capital world – investing or speculating – which is what the (most) majority of people in crypto are doing is those gains and losses are subject to the capital gains tax regime.

Okay, so there’s no separate capital gains tax. So, all these gains and losses and stuff, they’re (they’re) all taxed at whatever your marginal tax rate is, but they’re subject to the capital gains tax world.

So, within that world is CGT discount, which I mentioned earlier in this course, which is the 50 percent discount that you might otherwise be available to, as opposed to if you’re in the revenue sort of world that CGT discount isn’t available.

Another sort of a really important thing from this world, and capital world, is that whenever you have losses, so, whenever you have losses from investing and speculating that are capital losses, those losses are not available to reduce your taxable income from other income.

If you make a $1,000 loss and you’ve got, say, $100 000 of taxable income, so your salary is $100,000, for the sake of simplicity, you cannot use that capital loss of $1,000 in this example to only pay tax on $99,000.

Unfortunately, that loss, capital loss, can only be used against other capital gains. If you don’t have other capital gains, what you get to do is get to carry forward that capital loss until future tax year. It might be next year or might be the year after that or 10 years. You just keep getting to take it forward until eventually got a capital gain to claim against.

The other really big thing, in capital gains world, is if you’re a speculator or investor, if you’ve got paper gains / paper losses – another term for them is realised or unrealised. Sorry, unrealised, I should say. So realised means that you’ve actually had disposal if it’s just on paper, or let’s say a few weeks ago, I bought Bitcoin for $10,000 and today it’s only worth $8,000, but I still own that Bitcoin then I’m only sitting on an unrealised $2,000 loss (or $2,000 paper loss); and now we switch over into a new tax year, that paper loss, (I don’t) I can’t use that paper loss to reduce the realised gains I might have made in that earlier year. It’s simply not available.

But, the way to look at it is, if you’ve got a paper gain (unrealised gain) you’re also not paying tax on that.

Okay, the difference when we’re talking about a business. (So the business might be accepting Bitcoin in your business.). So if you’re accepting Bitcoin in your business the disposal of that Bitcoin, that’s just (it’s a) sale proceeds.

Okay, the cost of that Bitcoin would have been related to whatever you gave up.

When you bought the Bitcoin. So if I provided an accounting service worth $1,000 and I got paid $1,000 in Bitcoin, then the cost of my Bitcoin is $1,000. And then when I sell it, let’s say the Bitcoin is now $1,500. I have $1,500 in my sales, I have $1,000 on my expenses related to that Bitcoin. $1,000 on my sales for the accounting service as well.

Okay, so it’s treated as trading stock.

But, I suppose a lot of people in crypto, what they’re doing is they’re doing a cryptocurrency business. So it might be day trading, swing trading, using bots to trade, various different mechanisms. So if you’re doing these things, and it actually is, it’s a pretty high bar, to be classified as carrying on a business. You have to do a lot of repetition, you have to have real sort of business plan, means of how you’re getting to how you’re going to make these profits. You don’t necessarily have to make profits. You have to have, a really clear plan on how you’re going about this.

Basically, the courts have set out a number of different criteria when you’re carrying on a business. And it can be a little bit difficult to get into. I’d say most people, when they’re getting into crypto, are just investing or speculating. They’re not necessarily carrying on a business.

But, if you are carrying on a business, you’re over in revenue world, means the CGT discount is not available for your assets, which probably isn’t too much of a big deal because it’s highly unlikely that you’re going to be holding your assets for longer than 12 months.

I suppose the point can be made that you actually can sit in both worlds, you can have a business and still have an investing portfolio sitting over here. We would say to make this a little bit clearer, and say you, you look at your structuring options. Have a look at further into this course around those things.

But, I suppose when it comes to the business, then you’ve got your sales, you’ve got your expenses, you run through those things, much like every other business, and you put them in the business schedule tax return.

Now, there can be this sort of third criteria, third category, I should say, which is profit-making intent.

This is where you’re a little bit more sophisticated than an investor, but you’re not so repetitive that you’re in business. It might be that you find a short term window that might last only a month.

Let’s, say for example, (and) there’s price arbitrage available. So, what that means is just that on Exchange A and Exchange B, the price of Bitcoin, they’re different. It really shouldn’t be for whatever reason, but you’re able to sell over here and buy over here and take and make a profit and you just keep repeating this process and you’re able to do that for one month, one week, two months or whatever, just a short period. Because you’re doing this clearly for only to gain a profit, tax law goes, that’s a profit making undertaking.

So, you’ve got to put that in the tax return as such.

And the other aspect is also if you’re using sophisticated instruments, we like to call them financial instruments (margin trading) anything pretty much to do with leverage: futures, derivatives. These sort of things, instantly, you’re not actually owning the cryptocurrency in a lot of these instruments, you’re getting exposure to these assets, and those exposure profits and losses that you make there, they’re not within the capital gains world generally, they’re within profit making world. Or, if they’re like, if you’re doing this on a very regular basis, decent scale, that would be business world.

Business and profit making world, pretty much very similar outcomes there. I suppose the key sort of difference would be that when we’re talking about business, there’s these rules called the non commercial business loss rules. There, which might prevent you from using a business loss to offset your other income.

So you’d have to look into those, that would be outside the scope of this course.

So what I would suggest to you is that you do seek some tailored advice if you’re possibly sitting in those worlds.

But oftentimes, just, as a general remark, you probably, not necessarily going to be caught by those non commercial loss rules because one of the (one) ways to get over that is assessable income over $20,000. When it comes to crypto, the rapid nature of doing those trades, you’d soon exceed that limit.

The other part would be you’d wanna not exceed the $250,000 income limit for those rules (to look into).

Otherwise, the thing about business profits and revenue profits is that actually, I should say losses, you’ve got losses in those aspects, ordinarily, those losses can offset other income.

If I’ve got a $10,000 loss from margin trading and I’ve got $100,000 of employment income, for example, I’m actually only going to be paying tax on $90,000 because I can use that $10,000 loss from losses of margin trading to offset my employment income.

When it comes to compliance action, what’s really important to realise is that Australia’s tax system is a self assessment system, which means the onus is on you as the taxpayer to get things right.

To lodge them accordingly, and pretty much, then just leave it up to the ATO to do the regulations, to do the checks and give you the tick off and really not have to go and chase you up for your correct tax liability.

So, really the onus is on you to understand all these various aspects of cryptocurrency as we’ve run through and calculate your gains and losses and report them in your tax return as necessary.

But, that might be a bit above and beyond your certain expertise. Which is then why your obligation is to seek out professional help from people, such as ourselves as accountants, to help you out.

So, if you can do it yourself, that’s all well and good. The tax system certainly allows you to do everything. And if you’re not able to, or you’re not sure exactly what to do right, you’re meant to go out and seek professional help.

Because otherwise if you don’t, pretty much just be considered to be a little bit negligent, one way to put it. If you’re not reporting correctly when you otherwise could have gone out and got professional advice. And if you’re just outright evading tax, avoiding tax, not reporting, there’s very serious implications there, which I’ll touch on very soon.

What happens here?

You’re meant to get your tax return done and report it and get everything correctly. And then from that moment, the ATO processes those tax returns, and in almost all cases they accept those tax returns immediately, unless they do a pre-issue audit.

Why would they do a pre-issue audit? That would normally be because they quickly identify through their systems that you haven’t reported something.

How can they do that? It’s sort of part of their data matching processes that they have in place. So this either kicks in when you lodge your tax return, or sometime over your period of review, which I’ll mention just in a moment.

So, when it comes to data matching, the ATO as the regulator, gets the information from all over the place. We’re aware of this happens, it’s been happening for years and years now. They’re getting information from all over the place income, expenses, mostly around income and gains and assets and stuff. And when it comes to cryptocurrency we know that the ATO get the transaction histories from the Australian exchanges.

So they match them up with your file. Over there at the ATO, not sure exactly how that system works. This is what’s happening, collecting all this data and then when you lodge your tax return they look at that data, run it through their risk assessment systems to work out, okay, do we think Drew has lodged his tax return correctly? If so most likely, tick, yep, no problem. We don’t ever hear anything extra from the ATO. They’ve already issued our notice of assessment and paid our tax or got our tax refund.

But, if through that process something comes up whether through that direct data matching scheme or something else pops up then they might start to inquire.

The ATO has a “period of review” in order to look at your tax affairs and decide whether they need to adjust what you’ve already done.

So, this period of review is somewhere between two to four years or unlimited.

So, two to four years, it depends on your circumstances for that financial year.

So one year, you might have a two year period of review, which means that after you get your notice of assessment from the ATO, which is about a week or two after you lodge your tax return from that time, two years out, the ATO can come back and look at your tax return and adjust it. And so can you. Or, if you’ve got a four year period of review, it’s four years.

So, one year, if you’ve got simple tax affairs such as just a salary earner, yeah, if you’ve just dabbled in some cryptocurrency and made some gains and losses, that’s fine. As long as you’ve reported those, or a small business entity, generally you have a two year period review.

Although, something which can easily kick you over to the four year review, so it’s more complex taxpayers have a four year period of review, but something that can easily kick you over into that would be if you’re a beneficiary of a trust which is not a small business in itself.

So, one of the easiest ways to do that is essentially if you own a trust that’s on the stock exchange. So, ETFs (Exchange Traded Funds), are typically trusts. If you own those, it can quickly within the four year period of review. Which extends the amount of time the ATO has to look at your tax return.

So, say at some point, through this process, if you’re aware of lodging tax return having got something wrong within that time frame, the onus on you as a self assessment system is to go and amend your tax return.

So, at some stage, if you’re just coming along today, you’re here at watching this course and you’re learning about how crypto transactions are taxable events and otherwise weren’t aware of that; and you’ve been doing that from back a year, two, three years ago; the obligation is on you now to go and amend your tax terms and report correctly to fix it up.

Otherwise, what happens is the ATO, becoming aware of these things, will go ahead and, as a first step, they’ll typically just send out a letter to you, or it might be by email these days or through your MyGov account to say, “Hey, we’ve noticed this”.

So, if we’re talking about crypto, it goes, “Hey, we know you were trading on crypto exchanges in this period. And we can see on your tax return that we’re not too sure if you’ve actually reported gains and losses. So we’re going to give you, typically 28 days, to look at your affairs and and adjust it, lodge an amended tax return. If you got everything right, don’t worry about it, it’s all fine. Otherwise, we might do something”.

So, that’s normally the typical first step. And then at some stage after that, if you haven’t done anything and you have not lodged correctly, what the ATO will do is, they might give you, they may give you another warning, or they might directly reach out to you or they might just immediately do a tax office initiated amended assessment.

What that means is, they’ll basically, the information they’ve got, they’ll go, “Okay, what do we think your undisclosed gains are? Profits are?”, And throw that in your tax return, and say “Hey, you owe us tax on this”.

You don’t want to be in that scenario where they’ve done that because all of a sudden it becomes much harder to overturn that outcome.

Okay, so most of the time, essentially you want to get things right at the beginning. If you don’t, and get things wrong, that’s no biggie, don’t amend that, that’s fine; it’s if you’ve done something deliberate and evaded tax, that you’re really getting yourself into trouble here because that’s when the ATO has an unlimited period of review.

Tax evasion, tax fraud, unlimited period.

Big one here is basically, if (if) you had something to report and you haven’t, that’s most likely going to be tax evasion.

Yeah, you haven’t reported or if you reported something and (it’s like) way not wrong. Way not, I should say, it’s completely wrong, and you’re reporting it because you don’t want to pay tax; say, you may hit a million dollars and you’ve only reported a grand, and you know about this, that’s tax fraud.

So the ATO has a unlimited period to look at this. So, might be two years, might be four years, might be five years, might be 20 years. The ATO at some stage they’ll become aware of this and they’ll amend your tax return. And then you’re gonna be up for some serious penalties which I’ll mention soon.

So, essentially, you don’t wanna be in that scenario. You wanna be lodging correctly and getting everything right. And as professionals, that’s why we sit here to make sure you, you legally minimise everything .

(So say) So, if you go through that, if you end up getting reviewed or audited, take that very seriously. If the ATO happens to review or audit you and (and) they do something and you don’t believe it’s right, you do have through the ATO, through the tax law mechanisms, to object to that and then take them to a tribunal and through the court system if you have to. It’s all available there, but ultimately we want to avoid that outcome, of course.

So, let’s say you haven’t reported, you haven’t got around to doing it; whatever mechanism you’re just under yeah, you’re taking a while to report; the ATO eventually is going to come knocking at the door. Not actually physically at the door, but they’re going to be sending letters and say, “Hey, need to lodge”. “You need to do this”. “Final warning”, and you haven’t done anything, boom, they’re going to slap you with a default assessment.

So, that’s when you haven’t actually lodged. So, you haven’t triggered a notice assessment. You also haven’t triggered the period of review because you haven’t lodged. So the ATO (so) at any moment, essentially, as long as they’re giving you those warnings.

What they’ll do here is they’ll use their data matching facilities and everything. And they’ll work out, “Okay, what do we think? What do we think Drew’s income was? He hasn’t reported. What do we think it is? Oh, yeah, we see from exchanges he sold a million dollars worth of crypto. We’ll just put a million dollars of taxable income in Drew’s tax return”. And, then they’re going to issue that notice of assessment.

Being default assessment, I haven’t done my obligations as a taxpayer in this example, they’re going to slap me with a penalty. These penalties can range from 25% of the shortfall in tax, to 50% to 75% and maybe 95%. A huge amount on the penalties. So I can almost essentially double my tax by not (not) paying it correctly.

And then on top of that interest charges. And interest charges from the ATO, huge amount.

They’re not at the interest rate you’d get if you’re putting money in the bank, they’re much higher. You’re going to be owing the ATO a lot in penalties and interest charges and in very rare instances threat of imprisonment, but that’s (like) really serious implications, which I’m sure anyone here watching, watching the online course, shouldn’t have to worry about that because you’re going to be lodging correctly.

So, you don’t want to (you don’t want to) get in this situation.

Default assessments. The ATO is aware of these (these) unreported income, when they slap in there, they’re not going to give you like any benefits of tax concession.

In the example, I had a million dollars of sales, but I could have got the CGT discount. They’re not going to give it to me. They’re not going to give me that 50% discount. They’re going to bang it on there.

Failing that, they might just see that, “Hey, Drew’s gone out there. He’s (he’s) bought a yacht or he’s bought a house and he doesn’t have a mortgage on it or whatnot”. And they don’t have direct crypto and transactions. Because maybe I sold that million dollars on (on) an overseas exchange and they don’t have that direct information at this stage. Maybe in the future they will because they do data matching across (across) countries at times. But say they do this, say “Drew, he’s got a million dollars of assets and he’s got (he’s got) no loans, no liabilities, but he’s only been earning only a small amount through the years. Where’d he get this million dollars from? Doesn’t seem like he’s inherited any money or whatnot. That must be undisclosed income”.

So, what they do here is called an “asset betterment” test.

Basically, they go, “Oh, Drew’s got this million dollars of assets, hasn’t disclosed this, he must have got this income. Let’s slap that in his tax return. And he’s gotta pay tax on it. Plus he’s gotta pay basically double the amount because of penalties and interest”.

So, hugely worrying outcome there. So, you don’t wanna be in this land where the ATO’s done this because if the ATO do these type of assessments, man, it is hard to overturn them.

It’s not only, do I now have to prove that they’re wrong, so I might be able to prove they’re wrong, I might be able to go, “Hey, I didn’t have a million dollars of income, there were some costs related to those; it’s actually only $800,000 and I should get the CGT discount”. The courts might themselves go, “Ah, yep, we agree with you, but, you actually haven’t shown us 100% what is correct”.

So, if I’m not able to, dot my I’s, cross my T’s, and show, prove, what is 100% the actual outcome and what should have been put in there, the default assessment will stand.

Okay. There, the onus is so heavily on me, now the obligation on me, to prove 100% what was correct and if I can’t do that, the system will basically say, “Tough luck”.

And, (you now) that’s there because I didn’t get around to doing my tax return, doing it correctly. So, if I’d done everything right from the beginning, gave it my best crack; I might have got something slightly wrong, but as long as I’ve given it my best crack and taken the necessary steps to the larger gains, some more professional help you probably should get, because of that error of margin there, and the possible tax shortfall. As long as I’ve done everything as best I can, I’m okay. But if I haven’t, then I could be subject to huge penalties or interest charges. So as I mentioned, they can range from 25% of the short tax to 95% plus interest plus possible imprisonment. So you don’t want to end up in those scenarios.

So essentially, what’s the point of this? The point of this is, self assessment system, as we mentioned earlier, all your various different taxable outcomes and events which mentioned throughout the course, we’ve got to work, look at tax residency, full Australian tax resident, worldwide income, worldwide profits, gains and losses on worldwide assets to report and meet those. Those conditions, and really need to be doing that each and every year to work through this.

Some people I know come to us at times and it’s “Oh, I need to do this, need to lodge these tax returns, but I’ve made losses”. Still if you’ve made losses. Overall throughout your events, you still need to lodge those tax returns, there.

And, it would be really important for you to do that because eventually, I’m hoping at least for yourself, I’m sure you are, that you’re going to make some gains in the future. You’re going to want to use those losses to offset the gains in the future.

The onus is on you to get this right, and if you do need help with that you seek out professional help.

So there you have it. That’s the ATO’s tax compliant action that they can have. So all the best with that. And yeah, if you do need help, reach out to accountants like Munro’s to help you with this.

Estate planning and cryptocurrency.

Quite an important topic to at least consider, and keep in mind, especially as – I would be hoping for yourself – as your wealth generates and grows (and grows) larger (and larger).

We want to have – everyone should essentially have – a Will in place.

Otherwise, when you should pass away, your estates would be administered based on the tax law. Not that, sorry, not the tax law the State law.

So each State has her own on laws on this and your wealth and assets might not necessarily go to your loved ones as you intend to, if you don’t have a Will in place.

So you should consider getting a Will in place, in any case, to make sure that on your passing that your assets go to your loved ones, and and they go in a process that you find appropriate and relevant for you.

And throughout this process you want to try and make sure that the Will and those assets going to your loved ones are tax effective.

Because assets going to your loved ones that can trigger taxing events then or later and there’s certainly, the more wealthy you are, there’s more opportunities to involve a bit more complexity within (within) the deceased estate and going forward such as testamentary trust, which can provide a lot of tax benefits down the road for your beneficiaries.

So if you’re (if you’re) looking into this (yeah) certainly get a tax effective Will done. Munro’s can assist with that and be more than happy to help you out.

And other aspects of the estate planning is a recovery plan really for your crypto.

As we know, crypto, you don’t necessarily have it all on a central place – have it all on a central exchange. You might have it in wallets, all over the place, secured by different passwords, two factor authentication and the like.

What if you should pass away and then your loved ones know that you’ve got access – you had maybe a couple hundred thousand, maybe even a million (of you’re like) – of cryptocurrency and they can’t otherwise access this. (It would be) It’s not the outcome that we know that you don’t want for your loved ones.

So do you have a recovery plan in action?

When it comes to cryptocurrency, here, as professional advisors, we’d be more than happy to help (help) set such a recovery plan in place for you.

The complexity of that depends on your own circumstances and what security you want around these things.

Most of the time you don’t want, actually, any of your beneficiaries or your executor of your estate to have access to these assets. And certainly not, us, as advisors, we don’t want access to your assets. But, we can also play a role in how we can obtain access in the event that you passed away and make sure that the assets go to your loved ones as planned.

So you want to explore your options there (plans) and then put together a recovery plan. So keep that in mind when it comes to estate planning – tax effective Wills and a recovery plan for your cryptocurrency.

Tax Residency.

This is a big one to make sure that we cover.

Some people it might be really simple. If you’re born in Australia, you’ve lived in Australia your whole life, you’re full Australian tax resident.

But, for others, it might be a little bit to consider here. And also, I know it comes up semi regularly, people want to consider should I be leaving Australia possibly to reduce my tax burden when it comes to my gains in crypto and what would that look like? What would be the implications?

So, we have your Australian tax resident and your non tax resident.

So, there’s rules that set out who’s an Australian tax resident, who’s not. These depend on whether you’re an individual, you’re a person, or if you’re an entity like a company or a trust.

Let’s just focus, if you’re a company or trust, simple sort of answer here is, if you’re a company that’s incorporated in Australia, you’re an Australian tax resident. That’s just how it is.

If you’re a trust and you’re a controller that’s here in Australia, you’re an Australian resident trust.

But when it comes to an individual. There’s various tests when it comes to residency and we know at the time of recording this the Australian government has announced that they’re going to modernise some of these rules. So we won’t go into detail at this time because they might change. But main ones here to look at is, resident here in Australia. At least indefinitely, most of the time you’re an Australian tax resident. If you’re overseas and living there indefinitely, most of the time you’re a non tax resident.

You might just be holidaying here in Australia. For example, just because you’re holidaying here in Australia for a short period, wouldn’t bring your cryptocurrency investments within the tax regime. Certainly not necessarily, unless there’s some really exceptional circumstances.

So, non tax residents of Australia don’t pay tax on your worldwide assets. You’d only pay tax on Australian sourced income, and you’d pay tax at the non tax resident rate, which sort of, to make it simply, just means you lose the tax free threshold and you’re quickly up to the higher tax rates, non tax residents.

When it comes to Australian tax residents, there’s actually two categories for an Australian tax resident. There’s a full tax resident, or a temporary tax resident.

So, full tax residents you get taxed on your worldwide income, you get taxed on your worldwide gains and losses from assets. So, you might, you can very well have a cryptocurrency on an overseas exchange if you’re an Australian tax resident, a full tax resident those gains and losses that are made over there taxable here in Australia.

You can sell those crypto, you can leave it in a foreign bank account, it’s the same scenario, it doesn’t matter where it is. Taxable here in Australia, as a general rule.

As opposed to if you’re a temporary Australian tax resident. So the thing here is the difference between a non resident and a temporary Australian tax resident is that you get the tax free threshold. But, and then, the difference between a temporary resident and a full Australian tax resident is you’re only taxed on your Australian income, Australian source income.

So, a temporary tax resident. Now, that is someone who’s over here on a temporary visa, so it might be someone who’s come over here for say a working holiday and they’re only intending to stay for a short while. But they’re staying sufficiently long enough the circumstances allow them to be Australian tax resident, they get the tax free threshold, but their assets, their worldwide assets, the gains and losses they make from them, so the gains and losses they make from cryptocurrency aren’t taxable here in Australia; it’s only their Australian sourced income that’d be taxable.

So, the only way that sort of crypto is generally taxed to them would be if they’re conducting a business of cryptocurrency here in Australia. Otherwise, if they were just in that investor/speculator category, that capital gains which I spoke about earlier in this course that they wouldn’t otherwise have to pay tax in Australia.

Some people who really should be looking into this and seeing if they can qualify, for what can otherwise be tax free gains from cryptocurrency for temporary tax residents are those special category, New Zealand residents. It’d be worthwhile looking into that. There’s certain criteria when it comes to a temporary tax resident. It’s more than just a temporary visa. I would definitely be recommending that you go and reach out to us and let us help you . Determine whether or not you need to be paying tax in Australia and your cryptocurrency gains because possibly, you might not.

But otherwise, for the majority of people know, given this course, we’re a full Australian tax resident. As I said, even though you might not have cryptocurrency overseas, worldwide income, worldwide gains and losses, taxable here in Australia, our tax rates.

Things which might influence these outcomes can be Double Tax Treaties.

Australia has Double Tax Treaties with a number of countries out there. Not all of them, some of them. And those rules can override the ordinary rules of each country.

What sort of, the most common one here is looking at residency. There might be Australia. For example, I might say I’m an Australian tax resident here and in another country, I don’t know, let’s say the UK for whatever reason, maybe I was traveling there for a little while, whatnot, different circumstances, they might also say I’m an Australian, I’m a UK tax resident under their ordinary rules.

Now we’ve got two countries claiming tax residency for myself those double tax treaties generally have a tiebreaker. Where they determine, okay, Drew is a only tax resident in one of those countries, and then from that have different rules around, okay, what is each country allowed to tax me on? So those double tax treaties would otherwise override the ordinary rules (yeah).

Important thing to bring up, haven’t got it on that slide deck, there is for our somewhat unlucky U.S. tax citizens. As we understand things, U.S. tax citizens are essentially, no matter what their circumstances, always a U.S. tax resident, unless they renounce their citizenship. So that can have some serious consequences for the U.S. tax (U.S.) citizens.

Really important that you seek advice out there. In terms of, okay, what reporting obligations do you have to the IRS. What taxes are owing, and then, what other things might be impacting you. For example, that it’s not necessarily ideal for a U.S. c to, to set up a family trust here in Australia, because the onus put on from the IRS and the U.S. tax system.

So, if you need some professional help there. Reach out to us. We’re not specialists in the U.S. tax system, but we do know some people who could be able to help you out and we’d be more happy to help point you in the right direction.

So I suppose, yeah, one of the key elements we have on there at this point is the exit tax. The ceasing Australian tax residency.

I suppose there’s also the entry point as well. So let’s focus on this exit part and focus on the entry part.

So, let’s say, hey, Drew, you’re an Australian tax resident. From next year, I’m planning to move to Europe from permanent basis, be there for 10 years and whatnot. Essentially, I’m going to lose my Australian tax residency.

Hey, I might have, I’ve got some Bitcoin, and next year I’ll still own that Bitcoin when I leave. As an individual, I’ve got a choice to be made in that tax return, relevant to the time I leave is whether or not I have a deemed disposal event at the time I cease my Australian tax residency, or I don’t optionally choose not to have that deemed event.

So, the deemed event would say any assets I own at the time I cease my tax residency. I can have a deemed disposal, which then means I have deemed proceeds equal to the value of the asset at that time. And if those proceeds are then more than the cost related to that asset, I’ve then got a capital gain to, to declare and pay tax on the Australian, in the Australian tax return.

Okay, so that would be, I’d otherwise be paying tax on it. On a paper gain here because I actually haven’t had a real gain, a real disposal event. The Australian system here is built to operate to go once you’ve left the Australian tax shore, we’re only going to tax you the gain you’ve made whilst an Australian tax resident.

So it’s there. It’s not automatic. I do have the option to say no, I don’t want to have this deemed in the event. But the thing here is, and the Australian rules would then say, okay, when you do eventually sell this asset, whether it be in a month time or 10 years time after then, you have an obligation now to come back, report that gain in your Australian tax return. And one of the big thing, two of the big things here, is that I could be a non tax resident at that time. Paying tax now at the non resident tax rates, so it might be high tax. And also I can lose the CGT discounts. I might have otherwise got 50% tax free, but being a non resident don’t have access to that, so a huge amount of extra tax possibly to pay there.

So there’s something there, a little bit of planning can be involved here, you don’t necessarily have to make that choice immediately when you leave, and the choice is made when you’re lodging that tax return for that year, so it might be a little bit of time to look at it, but it’s definitely something to be kept in mind for, because the exit tax could be quite substantial. Especially if you’re sitting on quite a large paper gain.

As I mentioned before, what about if you’re coming into Australia becoming an Australian tax resident the entry point actually becomes the point when the Australian tax system goes, okay, we’re going to start taxing you on gains you make, but we don’t want to tax you on gains you made up until now.

So on the date of arrival, your deemed to have acquired those assets at that time, whatever the market value was at that time, which is really important because it’s only the gains after then you get taxed on. The acquisition date, the time you arrive, also starts that period for the 12 months. So if you dispose of them within 12 months, you don’t get that discount, but if it’s after 12 months, you could get that discount.

So there’s a couple key important elements when it comes to residency.