On 21 June 2023, Treasury Laws Amendment (2022 Measures No 4) Bill 2022 completed its passage through Parliament. The Bill received Royal Assent on 23 June 2023 as Act No 29 of 2023.
The Act contains two measures relating to the digital economy which are distinct and unrelated, but contained in the same Act. In this article, Special Counsel Saxon Rose from HopgoodGanim’s Taxation team, as well as its full-service Digital Assets practice, explains.
Schedule 1 to the Act implements the Digital Games Tax Offset, which was announced in the 2021-22 Federal Budget. The Digital Games Tax Offset is a 30 per cent refundable tax offset, that will be available to “eligible digital games developers” that incur a minimum spend of $500,000 on “qualifying Australian development expenditure”, from 1 July 2022.
Australian game developers have expressed their excitement about the legislative milestone, and the prospective benefits for the industry.
The offset aims to capitalise on the substantial economic and cultural contributions of Australia’s digital games sector by taking Australia’s talent to the next level, enhancing domestic development opportunities, attracting overseas investment and supporting ongoing digital skills progression.
This skills development is also expected to have flow-on benefits to other sectors of the economy.
Schedule 2 to the Act gives effect to the Federal Treasurer’s announcement in June 2022 that the law would be amended to clarify that digital currencies (such as Bitcoin) continue to be excluded from the income tax treatment of foreign currency.
Digital Games Tax Offset
Company Eligibility
The offset only applies to a company that:
- carries on its business activities in Australia and has an ABN;
- is primarily responsible for the digital game development activities undertaken; and
- to which the Arts Minister has issued one or more certificates as a result.
Such a company is entitled to the offset for an income year, provided the company claims the offset in its income tax return.
Game eligibility
Only eligible expenditure incurred in developing an eligible digital game or games can be claimed towards the offset.
An eligible digital game is primarily developed to be made available to the general public for educational or entertainment purposes and must be:
- made available for use over the internet; or
- primarily played through the internet; or
- only operate when a player is connected to the internet.
Where a game has an offline mode (e.g. single player) it may still be an eligible game if it meets the other eligibility criteria.
A digital game is not eligible if it is:
- a gambling service (within the meaning of the Interactive Gambling Act 2001) or substantially comprises gambling or gambling-like practices; or
- a game containing elements that are likely to lead to the game being refused classification under the Classification (Publications, Films and Computer Games) Act 1995; or
- a game that is primarily developed for industrial, corporate, or institutional purposes; or
- a game that is primarily developed to advertise or promote a product or entity or service.
Offset Certificates
When a company completes a new game, conducts development activity to port an existing game, or engages in ongoing development on an existing game, it may apply to the Arts Minister for a certificate stating the total qualifying Australian development expenditure in relation to the activity.
For a certificate to be issued, the total of the company’s qualifying Australian development expenditure incurred in completing the game (possibly over multiple income years) needs to be at least $500,000.
Qualifying Australian development expenditure
The amount of a company’s offset is determined by the amount of the qualifying Australian development expenditure that appears on the certificate or certificates issued by the Arts Minister.
Qualifying Australian development expenditure is a subset of a company’s overall development expenditure on an eligible game and includes employee remuneration for those directly working on game development – particularly programmers, project managers, and various creatives – as well as activities including research and development, prototyping, and creating underlying game technology, such as game engines and anti-cheating controls.
Some eligible expenditure is specifically excluded from qualifying for the offset to prevent expenditure from being double-counted with other Government programs or tax offsets, for example where the expenditure is claimed for the purpose of the Research and Development tax offset.
Further, there are integrity measures that contain three specific exclusions to ensure the offset remains well-targeted and is fiscally sustainable. The exclusions are for expenditure incurred on developing an eligible game in relation to another entity:
- in further subcontracting; or
- in relation to an entity that is an associate of the company; or
- in connection with a transaction in which the company and another party to the transaction did not deal with each other at arm’s length.
However, there are some exceptions to these integrity exclusions, for example for non-influential associates of the company.
Amount of the tax offset
The offset is 30% of a company’s total qualifying Australian development expenditure incurred on developing new or existing digital games, including porting a digital game in Australia.
The offset is a refundable tax offset. The offset is applied against the notional income tax liability of the company. A refund will apply where the total of the refundable tax offsets claimed exceeds the basic income tax liability of the company. Any amount of offset applied against tax liabilities or refunded to a company would not be assessable income for income tax purposes.
The amount of the offset is capped at $20 million per company or group of companies, per income year even if the company applied for multiple certificates in the income year. To reach the $20 million cap, a company would need to incur $66.7 million of qualifying Australian development expenditure in an income year.
On a reading of the accompanying Explanatory Memorandum, it may be interpreted, although used to calculate the amount of the offset, that qualifying Australian development expenditure may also be deducted in accordance with, and subject to Division 8, of the ITAA 1997. On this basis and generally, this means that eligible expenditure for the offset is additionally deductible for company income tax purposes.
Taxation treatment of digital currency
Following the decision by the Government of El Salvador in September 2021 to allow Bitcoin as legal tender, on 22 June 2022 the Treasurer announced the law would be amended to ensure that crypto assets would not be considered “foreign currency” for income tax purposes.
Schedule 2 to the Act gives effect to that announcement and clarifies that digital currencies (such as Bitcoin) continue to be excluded from the income tax treatment of foreign currency.
Up until the time of El Salvador recognising Bitcoin as legal tender, the Government (and ATO) position was as outlined in TD 2014/25 Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997?
That position was reinforced by McCabe DP in Seribu Pty Ltd and Commissioner of Taxation (Taxation) 2020 ATC 10-538; [2020] AATA 1840, although it did to some extent rely on there being no sovereign state that recognised the cryptocurrency as legal tender.
El Salvador’s decision has thus prompted this legislative response.
Practically, it means that gains and losses from “digital currencies” (which for the purpose of the amendments include cryptocurrencies like Bitcoin, but not government-issued digital currencies) will (continue) not to be brought to account under Division 775 of the ITAA 1997 which governs the income tax treatment of “foreign currency” gains and losses. The significance of this is that as Division 775 provides that gains and losses are automatically on revenue account, the ability of a taxpayer to shelter both capital and revenue gains / income on a disposal of a digital currency at a loss is removed.
Instead, the income tax treatment (and whether gains and losses are on revenue or capital account) will depend on the circumstances of the individual taxpayer and the way the digital currency is used or held.
It remains to be seen whether the Board of Taxation’s Review of the Tax Treatment of Digital Assets and Transactions in Australia will recommend a departure from the above approach, which often relies on a difficult assessment of individual facts and circumstances as applied against the law. The Board is due to report in September of this year.
Currently (as discussed previously), where digital currency is held as an investment, the ATO states that gains and losses from the disposal of such currency will generally need to be brought to account as capital gains and losses under the CGT regime.
The significance of the treatment as being on capital account, governed by the CGT rules, is that while the 50% CGT general discount may be available for individual and trust investors from the realisation of any gains (where the crypto investment has been held for more than 12 months), capital losses realised can only be used to offset capital gains and not offset against other types of gains or income. Further, companies are not entitled to the CGT general discount.
Saxon Rose is a Special Counsel in HopgoodGanim’s Taxation team, as well as a key member of its full-service Digital Assets practice. If you have any questions about anything mentioned above, or about taxation in the digital asset or cryptocurrency context generally, please reach out to Saxon.