Are crypto-assets ‘tainted assets’ under the controlled foreign company (CFC) provisions?


The tax law is often playing catch-up with new technologies and commercial practices. Crypto or digital assets are an example of a new and evolving technology that was not contemplated by the tax laws at the time of drafting.

While there has been some effort by the Commissioner of Taxation to provide guidance on his views as to how the tax law applies to crypto-assets, the guidance is limited and has only been published in a non-binding form.

Fortunately, the government is seeking to address these issues, and the Senate Select committee on Australia as a Technology and Financial Centre (Senate Committee) has recently released its final report providing various recommendations in response to these tax, commercial and related issues presented by crypto-assets.

Although there are many unresolved tax issues that merit examination, this article only seeks to discuss one such issue: namely, from the perspective of a ‘crypto-asset trader’, whether income derived from trading crypto-assets is regarded as active or passive income for the purposes of the CFC rules.

What is a crypto-asset (also commonly referred to as a digital asset or token)?

It is difficult to define precisely what a crypto-asset is. Different experts and different jurisdictions adopt different terminology.

In its submission to the Senate Committee, the Australian Securities & Investments Commission (ASIC) used ‘crypto-asset’ as an umbrella term to describe digital assets, virtual assets or digital tokens, and provided the following definition:[1]

A crypto-asset is a digital representation of value or contractual rights that can be transferred, stored or traded electronically. Crypto-assets use cryptography, distributed ledger technology or other technology to provide features such as security and pseudo-anonymity. A crypto-asset may or may not have identifiable economic features that reflect fundamental or intrinsic value.[2]

ASIC continued that the assets are not homogenous and said:

The rights and features of each crypto-asset can raise different considerations for consumers, product issuers, and regulators. Crypto-assets are commonly regarded as speculative assets, with volatile prices and minimal to no regulatory oversight.

Although difficult if not impossible to define all types of crypto-assets by reference to a standard definition, the following summarises four main (but by no means exhaustive) types of crypto-assets/digital tokens.[3]

1.         digital currency – a storage and unit of account and a form of payment (eg Bitcoin);

2.         asset-backed – provides underlying exposure to real-world assets and usually confers actual ownership rights (also known as stablecoins) (eg Tether);

3.         security – legal form shares/securities, possibly rights to returns; and

4.         utility – right to current or perhaps only future goods or services (eg Golem).

As mentioned, these four categories are by no means exhaustive and it is possible for a single crypto-asset to possess hybrid characteristics such that they do not neatly fit into any one of the above four categories at the exclusion of another. Additionally, it is possible to design a crypto-asset that falls within one of the categories initially but over time may gain new attributes.

The most well established and highly traded type of digital asset is a digital currency token (eg Bitcoin). While described and considered by some to be an actual currency, it is important to note that from a tax perspective, the Commissioner does not regard digital currencies as a foreign currency.[4] This view that digital currencies are not ‘foreign currencies’ for tax purposes has been accepted by the Administrative Appeals Tribunal.[5]

Controlled foreign company (CFC) provisions

Broadly, a CFC is a non-resident company that is effectively ‘controlled’; for example, by 5 or fewer Australian residents.[6] The CFC rules may attribute income earned by the CFC to one or more Australian residents. The provisions are anti-avoidance in nature and prevent certain Australian residents from otherwise indefinitely deferring paying tax in Australia on the earnings of a CFC. Without these rules, such profits would not be taxed in Australia until the CFC pays a dividend to the Australian shareholders. The CFC provisions attribute profits of the CFC to Australian residents on an accruals basis in circumstances where the profits are not returned to the Australian resident(s) via dividends.

Subject to certain exceptions, the general rule is that the CFC provisions will only apply to attribute profits back to Australia if the CFC is not mainly engaged in genuine business activities; that is, if it fails the ‘active income test’. The active income test will be met if the tainted income ratio (gross tainted turnover divided by its gross turnover) is less than 5%. Even if the CFC fails the active income test, the provisions broadly only attribute to the Australian residents the income that comprises the adjusted tainted income (ie non-active/passive income).

Tainted income refers to passive income (such as dividends and interest etc) but, importantly, it also extends to:

  • income derived from carrying on a business of trading in ‘tainted assets’.[7]

This means that even if a CFC is engaged in a business of actively trading assets, if that otherwise active trading results in the derivation of income from carrying on a business of trading in ‘tainted assets’, then that income will be deemed to be passive income. This will therefore increase the likelihood that the CFC fails the active income test and has its profits subject to attribution.

From the perspective of a trader, whether this is so will depend on whether the crypto-assets constitute ‘tainted assets’. In this respect, ‘tainted asset’ is defined as:[8]

(a)        tainted asset, in relation to a company, means, any of the following:

(i)         loans (including deposits with a bank or other financial institution);

(ii)        debenture stock, bonds, debentures, certificates of entitlement, bills of exchange, promissory notes or other securities;

(iii)       shares in a company;

(iv)      an interest in a trust or partnership;

(v)       futures contracts;

(vi)      forward contracts;

(vii)      interest rate swap contracts;

(viii)     currency swap contracts;

(ix)      forward exchange rate contracts;

(x)       forward interest rate contracts;

(xi)      life assurance policies;

(xii)      a right or option in respect of such a loan, security, share, interest, contract or policy;

(xiii)      any similar financial instrument; or

(b)        an asset that was held by the company solely or principally for the purpose of deriving tainted rental income; or

(c)        an asset other than:

(i)         trading stock; or

(ii)        any other asset used solely in carrying on a business

but does not include a commodity investment.

The crypto-assets/tokens should not be ‘tainted assets’ by virtue of subsection (c). This is because the crypto-assets should either be held as trading stock (acquired and held for the purposes of sale or exchange in the ordinary course of its business[9]) or in any event, would likely constitute any other asset used solely in carrying on a [trading] business. However, falling outside of subsection (c) does not mean it will escape subsection (a).[10]

Returning to subsection (a), the most relevant subsections within (a) that could apply to crypto- assets would likely be:

  • ‘other securities’ at (a)(ii); or
  • ‘any similar financial instrument’ at (a)(xiii).

We discuss each in turn below.

‘Other securities’ at (a)(ii)

The term ‘securities’ is not defined in the Tax Act but with some exceptions is defined at section 92 of the Corporations Act 2001 (Cth) as:


Subject to this section, securities means:

(a)        debentures, stocks or bonds issued or proposed to be issued by a government; or

(b)        shares in, or debentures of, a body; or

(c)        interests in a managed investment scheme; or

(d)        units of such shares.

This definition within the Corporations Act does not provide much further assistance beyond the context in which ‘other securities’ appears at subsection (a)(ii). In particular, the preceding securities that are explicitly listed are equivalent to the definition in the Corporations Act and include ‘debenture stock, bonds, debentures, certificates of entitlement, bills of exchange, promissory notes’. All of these securities are issued by an entity (the issuer) that confers on the holder rights against the issuing party and often represents a financial investment. As such, ‘other securities’ is likely referring to other securities that are not ‘debenture stock, bonds, debentures, certificates of entitlement, bills of exchange, promissory notes’ but possess similar characteristics such as having been issued by a party that confers on the holder a right against the issuing party and that represents a financial investment.

Of the four main categories of crypto-assets listed above, the ‘security token’ would most likely answer that description (unsurprisingly, the term ‘security’ is used to conveniently describe crypto-assets that possess security-like characteristics).

On the other end of the spectrum are the digital currencies such as Bitcoin, which are unlikely to be regarded as ‘other securities’. Bitcoin has no actual central issuing entity, and no rights are conferred on the holder of a bitcoin against an issuing party.

The label of a crypto-asset will not be determinative, and it is necessary to consider the precise rights that attach to a given token. In this respect, whether a utility token that entitles a holder to consume or participate within a specific ecosystem is a ‘security’ will depend on the particular rights of that token. It is difficult to determine if a utility token (crypto-asset) that permits immediate consumption is a ‘security’, as such a token arguably confers rights on the holder against the issuing party but lacks financial investment properties. If, however, there are no immediate rights conferred but possession of the token may entitle the holder to priority or to further tokens at some future point (if certain contingencies are met), then the analysis may change.

Similar issues arise in certain jurisdictions in order to determine whether a particular crypto-asset is subject to regulatory oversight by the regulatory body. For example, in the US, the ‘Howey test’[11] is used to determine whether a security is an ‘investment contract’. If the Howey Test is not met, the crypto-asset will not be an investment contract and will not be a security. The US Securities and Exchange Commission (SEC) has stated that Bitcoin is not a security.

In the US, this has tended to result in tokens that do not have a current (utility) use as constituting ‘securities’ under the relevant securities laws (as they presumably are held with the expectation of being rewarded in the future, akin to a financial investment), while leaving open the possibility that with the passage of time and after the tokens have achieved sufficient practical use, the tokens may lose their status as ‘securities’ and be considered utility tokens that are not subject to the securities laws.[12]

An asset-backed crypto asset is unlikely to be a security for US regulatory purposes because, depending on the asset that is backing the token, the third prong of the Howey Test may not be met because the expectation of profits is not from the ‘entrepreneurial or managerial efforts of others’ but rather from the market price of the underlying asset.[13]

While the definition of a ‘tainted asset’ at subsection 317(a)(ii) does not refer to the Howey Test, the third prong of the Howey Test may indirectly be relevant as the securities referred to in the subsection do typically have an expectation of a return (leaving aside securities that have a negative interest rate such as certain European government bonds).

Other jurisdictions have indicated that, insofar as the totality of facts shows that the tokens were acquired for purposes of use and not for financial reasons, such tokens would not be considered ‘securities’ under the securities law.[14] As mentioned, this may also be indirectly relevant to the ‘tainted asset’ test in that the listed securities at (a)(ii) all represent financial investments rather than consumption, indicating that utility tokens may not constitute a tainted asset. Considering purpose can present its own difficulties as different parties may acquire the same token but for different reasons, and it may not be desirable for the same asset to be treated differently depending on the (subjective or objective) purpose of the acquirer. However, such concepts are not entirely foreign to the Australian tax system that requires, for example, the deductibility of expenditure to be determined from the perspective of the taxpayer and by reference to the taxpayer’s specific purpose (consider the capital versus revenue distinction). Such an approach however would not provide certainty as each year the courts are forced to grapple with the capital revenue distinction often with different judges arriving at different conclusions.

In Australia, from a regulatory perspective, the question is whether the crypto-asset meets the legal definition of a financial product (whether it is an interest in a managed investment scheme, security, derivative or non-cash payment facility).

Any similar financial instrument at subsection (a)(xiii)

‘Any similar financial instrument’ requires the context of all of the instruments listed at subsection (a), and is likely to raise the same or similar considerations as the ‘other security’ analysis. For example, a crypto-asset backed by a financial instrument will likely itself be a financial instrument. On the other hand, if the digital asset is backed by a commodity, then arguably the crypto-asset would fall outside of the definition of a tainted asset.


Whether a particular crypto-asset falls within the definition of a tainted asset will depend on the precise rights attached to each asset and whether those rights are akin to the securities and financial instruments mentioned in the subsection.

For a crypto-asset trader, the task of identifying the portion of income that is active versus passive for the purposes of the CFC rules will not be straightforward.

Until the tax law is updated and/or further guidance is issued, if a taxpayer desires certainty, it may be advisable to seek a private binding ruling from the Commissioner.


For more information, please contact the author or any member of our Fintech, Privacy and Emerging Technologies team or our Tax team.


This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.

[1] Submission 61, see the note at paragraph 3(a)

[2] Submission 61, Appendix 1, paragraph 67

[3] See the definition of ‘cryptocurrency’ in The Committee to Examine the Regulation of Decentralized Cryptographic Currency Issuance to the Public Interim Report March 2018; also see Figure 1 of PwC’s submission to Treasury regarding its consultation and review of the Australian regulatory and taxation landscape surrounding Initial Coin Offerings (ICOs) dated 28 February 2018.

[4] The Commissioner might adopt a different approach to a further category of crypto-asset such as a central bank digital currency.

[5] Seribu Pty Ltd and Commissioner of Taxation (Taxation) [2020] AATA 1840

[6] There are other tests for ‘control’ too.

[7] Subsection 446(1)(j) of the ITAA 1936

[8] Section 317 within Part X of Division 1 of the ITAA 1936

[9] See section 70-10 of the Income Tax Assessment Act 1997.

[10] The terms of the provisions make this clear and the Commissioner has published this view in Tax Determination TD 93/168.

[11] The Howey Test asks whether the token is: (i) an investment of money; (ii) in a common enterprise; (iii) with a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others.



[14] The Committee to Examine the Regulation of Decentralized Cryptographic Currency Issuance to the Public Interim Report March 2018 (Israel Securities Authority)