The first ruling has the effect that an employer’s payments to an employee in crypto-assets will be treated as “PAYE income payments” if the payments:
- are for services performed by the employee under an employment agreement;
- are for a fixed amount; and
- form a regular part of an employee’s remuneration.
The ruling only applies where the crypto-assets are not subject to a “lock-up” period. That is, the PAYE income treatment won’t apply where the employee receiving the crypto-assets agrees not to convert or sell those assets for a material period of time after the employee receives them. In addition:
- the crypto-assets should be able to be converted directly into a fiat currency (like NZD, USD or AUD) on an exchange; and
- a significant purpose of the crypto-asset should be to function as a currency, or the value of the crypto-asset should be pegged to one or more fiat currencies.
Where this ruling applies, the crypto-asset payments received by the employee will be subject to the PAYE regime and not the FBT regime. In addition, an employee’s receipt of crypto-asset payments that are covered by the ruling will have an impact on the employee’s other obligations, eligibility and entitlements in relation to government programs that will now be calculated by reference to the employee’s (crypto-asset inclusive) salary and wages. Those government programs include Kiwisaver, Working for Families Tax Credits and government-assisted student loans.
The following points are of general interest to observers outside New Zealand:
- The IRD recognises that the typical payment arrangement will involve an employee receiving crypto-assets by reference to NZD, e.g. NZD 500 worth of the crypto-asset in question. But if the payment is not denominated in NZD, e.g. if the employee is to be paid 0.001 bitcoin per fortnight, the NZD value of the crypto-asset needs to be calculated as at the date that payment is made to the employee. The IRD says that one way of doing this will be to use a conversion rate from any centralised data repository site that may be listed from time to time on the IRD website. In addition, other methods for determining conversion rates are suggested by the IRD. Over time, we may see taxation authorities and other regulators worldwide formulate corresponding rules to determine crypto-to-fiat conversion rates at a particular time.
- The IRD’s view is that crypto-assets are property but not “money” – as commonly understood – at least at the present time. These assets are not generally accepted as payment for goods and services and given their volatility there is a question as to the ability of these assets to be a store of value.
- The IRD correctly adds that crypto-assets are not legal tender. However, we note that being legal tender is not synonymous with being treated as money. It is possible for a thing to be treated as money for legal purposes without being legal tender.
- The ruling only applies to a crypto-assets which have a significant purpose of functioning as a currency. For this purpose, the IRD distinguishes between:
- crypto-assets that “are designed to function as an alternative to fiat currency in the sense they provide a general purpose peer-to-peer payment system” – covered by the ruling; and
- crypto-assets that “are designed primarily for other purposes…[such as to provide]…rights of access, operate, use or control a platform or other property/services (often referred to as ‘utility tokens’) [or] providing rights to underlying tradeable assets such as precious metals or real estate [or] providing ownership or control of a financial asset” – not covered by the ruling and therefore presumably subject to the FBT regime.
The second IRD ruling sets out the criteria for a payment by an employer to an employee in crypto-assets being an incentive or bonus for PAYE purposes. The reasoning generally corresponds with the reasoning adopted in the first ruling. The third IRD ruling applies where neither the first or the second ruling applies and deals with the FBT treatment in cases where the employer is the issuer of the crypto-asset in question. The first and second rulings will apply for a period of three years beginning 1 September 2019. The third ruling applies for a period of three years from 30 July 2019.
Cornwalls will issue a more detailed analysis of the corresponding position in Australia. Watch this space.
This article is the second in our Cryptocurrency series. You can find our article on Taxation and Digital Currency on our website.
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.
For further information please contact the author or any member of our Fintech, Privacy & Emerging Technologies team