Is remuneration paid in cryptocurrency subject to PAYE and FBT?
Tax Alert - August 2018
By Oscar Jones and Ian Fay
Industry 4.0 is rapidly redefining how we do business. One of the key ways we are seeing this play out currently is the use of Blockchain technology to securely remunerate employees – i.e. paying employees via transfers of cryptocurrency. As the use of cryptocurrency in business starts to gain momentum, new questions are emerging as people turn their mind to the tax treatment of such transactions and whether the existing tax rules are sufficient to tax transactions arising using Blockchain technology.
Recently, Inland Revenue released an issues paper on whether remuneration paid to an employee in cryptocurrency is subject to PAYE or FBT because the answer is not clear in certain situations, particularly where the arrangement is structured as a salary sacrifice.
Where the employee’s after-tax remuneration is in effect being traded for a payment of cryptocurrency, then because the employee has derived the full amount of salary or wage before the agreed deduction, Inland Revenue consider this is clearly subject to PAYE. In contrast, the main issue of the paper concerns whether arrangements are valid salary sacrifice arrangements and, if so, whether the payment in cryptocurrency is subject to PAYE or FBT.
Inland Revenue consider a valid salary sacrifice will only arise where the employee has no right under the employment contract to receive the relevant part of their salary in money instead of cryptocurrency. While freely acknowledging the answer is not clear, Inland Revenue’s tentative view is that regular payments to employees of crypto-remuneration under a valid salary sacrifice arrangement are subject to PAYE. This is because regular payments received in cryptocurrency have many of the same hallmarks of “salary or wages” (as defined in the Income Tax Act 2007). Inland Revenue consider that this definition is wide enough to capture regular payments in cryptocurrency.
The alternative view discussed by Inland Revenue is that the definition of “salary or wages” could be interpreted more narrowly so that the FBT regime applies. The primary argument being that the scheme of the Income Tax Act suggests that payments in money are subject to PAYE whereas (generally) non-monetary payments are subject to FBT and that cryptocurrency is not money in the technical sense although it shares some of its characteristics. This argument would classify crypto-remuneration as an “unclassified benefit” for the purposes of the FBT rules. However the delineation between monetary and non-monetary payments is “not hard and fast” and the salary and wages definition is wide enough to encompass regular payments in cryptocurrency, hence the preference for PAYE applying.
Issues we have encountered in practice, which are not covered in the issues paper, include: determining the New Zealand dollar value of the cryptocurrency on the relevant date; potential illiquidity of cryptocurrency (e.g. where tokens are subject to lock-up provisions) meaning that tax liabilities may be triggered but the value of the cryptocurrency changes materially before it can be sold to fund the tax; and the treatment of rewards which are provided in addition to rather than in substitution for salary.
The issues paper is seeking input on how employers are currently treating these payments and what compliance difficulties arise as a consequence.
Submissions on the issues paper were due by 3 August 2018. If you pay or receive crypto-remuneration and would like to discuss the issues further, please contact your Deloitte advisor.
August 2018 Tax Alert contents