Crypto clarity? New tax bill proposes tax exemptions for cryptoassets, GST on NFTs and more

A GST exemption for “cryptoassets" has emerged among a number of proposed remedial tax changes contained in a tax bill published last week.

But the potential exemption will not cover an asset type currently generating heat in the market, leaving NFTs (non-fungible tokens) within the GST net.

The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill, published on 8 September, defines cryptoassets as a digital representation of value that exists on a decentralised database such as a blockchain. This is a much broader definition than the equivalent Australian GST definition of “digital currency", which focuses on the payment aspect of a cryptoasset.

The Bill proposes treating cryptoassets in the same way as money, so that a transfer of a cryptoasset is not a supply for GST purposes. Without this change, GST would arguably apply to every cryptoasset transaction, which would lead to compliance issues and potential double-taxation where a cryptoasset is acquired and then used to purchase goods or services. The exemption will be retrospective to 2009.

However, a key aspect of the cryptoasset definition is that the asset must be “fungible". Each item must have the same characteristics and so be interchangeable (as bitcoin is, for example). This would mean NFTs would remain subject to GST, as they are a form of token that represent images or gaming assets and have characteristics similar to collectibles or artwork.

Sales of NFTs to non-residents would still be free of GST. This raises questions as to how one would determine that a buyer of an NFT is non-resident – potentially very difficult when many blockchain transactions take place without the parties being able to identify each other.

Further complications may arise for offshore sellers or platforms where NFTs are sold to New Zealand residents. There is the potential for GST to arise via either the so called “Amazon" or “Netflix" tax rules (depending on whether an NFT is treated as a good or service). Again, this raises possible compliance issues.

Changes are also proposed to exempt cryptoassets from the “financial arrangement" rules which are broadly designed to tax gains accrued from certain transactions (usually involving debt securities). However, the financial arrangement rules will still apply to certain types of arrangements where cryptoassets are lent to a platform which provides some form of “interest" in return, provided the amount of the return is known in advance. It appears the intention is for variable yield products (which are more common) to remain outside the financial arrangement rules, but the ordinary tax rules would still apply to tax yield and potentially the disposal of the underlying investment.

The tax treatment of cryptoassets has been very uncertain and stakeholders are likely to welcome further clarity. However, substantial uncertainty remains over particular assets. Notably, there isn't clarity around the income tax treatment of cryptoassets that have properties similar to shares (and allow rights such as voting and a share of revenue), particularly where those assets are acquired for the purpose of disposal as opposed to yield or utility. This is particularly important given the rise in prominence of cryptoassets with “staking" features (such as the proposed upgrade to the Ethereum blockchain) that reward passive holding with additional tokens.

The Bill also proposes a number of more broadly-focussed remedial tax changes. These include:

AIL and security trusts. The approved issuer levy (AIL) rules will be amended to clarify that AIL can be paid on interest where the borrower/issuer and lender/noteholder become associated persons by virtue of the latter being a beneficiary of a security trust. This change will fix a legislative oversight that arose when the concept of “related-party debt" was enacted, and applies with retrospective effect.
Securitisation flow-through regime. Allowing elections into this regime (which treats certain securitisation special purpose vehicles (SPVs) as transparent for tax purposes) to be made at an earlier point in time, so as to provide greater certainty that transparent status applies from the date the SPV commences activity. The current positon is that this election can only be made when the SPV's originators file their income tax returns for the income year in which they transferred assets to the SPV, which may be a year or more after the SPV commenced activity, leading to uncertainty about its tax status in the intervening period.

BEPS rules. Changes to close perceived gaps in the “restricted transfer pricing rules" for certain cross-border related party debts, and remedying various issues identified with the operation of the “imported mismatch rule" in the hybrid rules (which can deny deductions in New Zealand for payments that fund offshore hybrid mismatches).
Share-for-share exchanges and tax free capital. Allowing a step up in a company's “available capital distribution amount" (an amount which can be distributed tax-free to shareholders on certain liquidations) where the company disposes of shares acquired in a share-for-share exchange to a non-associated party. This amendment would partially overcome the current tax treatment of share-for-share exchanges which inhibits the amount of capital that can be returned to shareholders tax free, for a company which acquired shares under a share-for-share exchange.
Changes to GST invoicing requirements. A substantial relaxation of the technical requirements for the formatting of, and information included in, GST tax invoices. Previously, tax invoices had to comply with the strict requirements of the GST legislation. Deficiencies could render a tax invoice invalid, which put at risk any GST credits claims. This change should be welcomed as the existing requirements create issues with various IT systems and can add compliance burdens.

If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.