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What are Australian tax issues for a business paying salaries with cryptocurrency?
The content in this article is provided for general information purposes and is not tax, legal, investment or other professional advice. Readers should seek appropriate professional advice prior to making any decision.
What happens if a business pays an employee’s salary using cryptocurrency? This is a question likely to come up more and more as the overall cryptocurrency ecosystem matures. Let’s look into the tax implications.
The first question a business needs to answer is: am I paying an employee or a contractor?
If your business is paying a contractor, then this is a business to business transaction. You need to consider whether you are obligated to withhold tax if an ABN is not quoted. The payment may also include GST, which you then need to consider whether or not you are entitled to claim this back.
If your business is paying an employee, then you need to consider PAYG withholding obligations, fringe benefits tax and superannuation guarantee. Ordinarily, when a business pays salary it withholds tax and pays this to the ATO. However, in the case of salaries paid with cryptocurrency, there may not be a withholding obligation. Instead, this may constitute a “fringe benefit” and attract fringe benefits tax; which is levied on the employer at the top marginal tax rate (currently 47%). Also, the employer’s superannuation guarantee obligation may be reduced as a consequence of paying salary with cryptocurrency. However, this does not necessarily mean superannuation contributions are reduced. The employment contract is key, and instead the employer may be making reportable employer superannuation contributions which are important to note as there are associated tax compliance reporting obligations.
Non-resident employers who have Australian employees must also be aware of Australian tax obligations. It is possible the overseas employer may be subject to tax liabilities, which the Australian Taxation Office will demand payment for. Employees of non-Australian employers may wish to consider this and seek our help to mitigate tax obligations for the overseas employer, because otherwise the non-resident employer may consider the Australian tax burden too onerous, potentially leading to non-engagement of Australian based employees.
Valuing cryptocurrency can also be an issue, particularly where the cryptocurrency is not readily tradable on exchanges (e.g. salary paid in the employer’s unlisted token before public trading commences). Australian tax reporting is in Australian dollars and accordingly, it is necessary to attribute an Australian dollar market value to the cryptocurrency received. Where the cryptocurrency is publicly traded, then the market value is that which is obtainable from reputable exchanges. The market value of non-publicly traded cryptocurrency needs to be ascertained by some other reasonable method, the most likely being by asking the question: if the employee’s salary was paid entirely in dollars, what would it be?
In recording salaries, employers also need to keep in mind what the salary is related to. For instance, where an employee is conducting activities to build a blockchain based platform, this is likely to be the development of a capital asset and expenditure is unlikely to be immediately tax deductible.
Ultimately an employer should seek tailored tax advice from a cryptocurrency specialist accountant to manage their tax compliance obligations and implement tax effective strategies. Call us today if you want to start a conversation.