The ordinary operation of the foreign exchange (forex) measures, as contained in Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997), is that deposits to, and withdrawals from, foreign currency denominated bank accounts may give rise to a gain or loss that is realised under the measures. Withdrawals from an account with a credit (positive) balance will also generally have a consequence under the capital gains tax (CGT) provisions.
However, the $250,000 balance election broadly enables you to disregard certain foreign currency gains and losses on certain foreign currency denominated bank accounts and credit card accounts (called qualifying forex accounts) with balances below a specified limit.
An election can be made for a qualifying forex account. A qualifying forex account is an account that is:
- denominated in a foreign currency
- either a credit card account, or an account held for the primary purpose of facilitating transactions.
You can elect (in writing) to have the election apply for any number of qualifying forex accounts. An election can be varied (in writing) by adding or removing one or more qualifying forex accounts. Removing an account, or withdrawing an election, does not prevent a fresh election being made for the same account at a later time.
An election generally applies for a particular account from the time the election is made, and continues in force for that account until one of the following applies:
- you cease to hold the account
- the account ceases to be a qualifying forex account
- the election is varied by removing the account
- the election is withdrawn.
However, if you made an election between 17 December 2003 and 16 January 2004, you could specify it to apply from a date between 1 July 2003 and the making of the election. A withdrawal of an election will not have effect before it was made.
An election made after 16 January 2004 will only have prospective effect.
The limited balance test applies to all of the accounts for which a $250,000 balance election is in force. Credit and debit balances of these accounts are separately added, without netting, to arrive at the total credit balance and the total debit balance. The limited balance test is passed at a particular time if the total credit balances, and the total debit balances, of all qualifying forex accounts for which an election is in force are each not more than the equivalent of A$250,000.
For the purposes of this test, the foreign currency amounts are translated into Australian currency at the average exchange rate for the third month before the start of the income year. There is an additional buffering provision. If either the total credit balance, or the total debit balance, is more than the equivalent of A$250,000, but not more than the equivalent of A$500,000, for - subject to certain conditions - a maximum of two periods of 15 days or less in an income year, the limited balance test is still passed during such buffering periods.
A forex realisation event 1 that arises on depositing foreign currency to an account is not affected by this election.
However, the election does have the effect that, while the limited balance test is passed, the following gains and losses for qualifying forex accounts for which an election is in force are ignored for tax purposes:
- A forex gain or loss under forex realisation event 2 resulting from you withdrawing an amount from a foreign currency denominated account with a credit balance.
- A forex gain or loss resulting from you depositing an amount into a foreign currency denominated account with a debit balance, but only to the extent that the reduction in the debit balance is a forex realisation event 4 (forex realisation event 1 will still apply to any disposal of foreign currency that occurs by making the deposit).
- A gain or loss under the CGT provisions resulting from you withdrawing an amount from an account with a credit balance, to the extent that gain or loss is attributable to fluctuations in exchange rates.
An election will not necessarily apply to an account for an entire income year. It will depend on when the election takes effect, and when (if at all) the election ceases to have effect.
A limited balance election must be made in writing and should be kept with your tax records. The election should not be sent to us. There is no prescribed form for making a limited balance election, but it should include all the following information:
- your name and tax file number (if you are the taxpayer making the election)
- a statement that you elect under section 775-230 of the ITAA 1997 to have Subdivision 775-D of the ITAA 1997 apply to one or more specified qualifying forex accounts held by you
- details of your specified qualifying forex accounts (such as your account numbers and the financial institutions with which they are held)
- if the election was made on, or before, 16 January 2004, the day on which the election was to come into effect (this cannot be earlier than 1 July 2003)
- your signature
- the date the election was made.
Example
This limited balance election is made under section 775-230 of the Income Tax Assessment Act 1997 (ITAA 1997).
I, Joe Taxpayer, elect to have Subdivision 775-D of the ITAA 1997 apply to the following qualifying foreign exchange accounts with effect from today:
Financial institution
|
Account name
|
Account number
|
XYZ bank
|
Joe Taxpayer
|
123 456 789
|
ABC credit union
|
Joe Taxpayer
|
987 654 321
|
Once a limited balance election is made, meeting the A$250,000 limit is measured on an ongoing basis. If the balance of the account or accounts that are the subject of the election breaches the A$250,000 limit, the exemption treatment under the election will cease for the period of the breach. This is subject to a buffering rule, which allows you to retain the $250,000 balance exemption if the breach is remedied within a short period of time.
The buffering rule allows you to continue to meet the limited balance test if all of the following apply:
- The A$250,000 equivalent balance limit is breached no more than two times in any one income year.
- All breaches, including those (if any) extending into or beyond the relevant income year, are remedied within 15 days of occurring.
- The balance does not exceed the equivalent of A$500,000.
During the period of the breach, if any of the above conditions are not met, you will become subject to forex realisation gains and losses on both:
- withdrawals from foreign currency denominated bank accounts with a credit balance (forex realisation event 2)
- deposits into a foreign currency denominated bank account with a debit balance (forex realisation event 4).
This will be the case from the time the conditions were failed. That is, any forex realisation gains or losses made on withdrawals and deposits during the period after the buffering period has expired will be brought to account during the period of continued breach.
Additionally, any withdrawals made from an account with a credit balance during the time after the buffering period has expired may result in a gain or loss under the CGT provisions during any period of continued breach.
Example
A1 Pty Ltd (A1), a manufacturing company, has a qualifying forex account. It makes a limited balance election as its account generally fluctuates between +/- A$250,000. No other bank account is subject to this election.
A1 sells one of its manufacturing plants for the equivalent of A$300,000 and deposits the money into the qualifying forex account. Immediately after this deposit, the account balance was the equivalent of A$450,000. Ten days later, A1 withdraws the equivalent of A$250,000 from the qualifying forex account.
The balance of the account remains within the +/- A$250,000 equivalent limit for the remainder of the income year.
A1 can still apply the $250,000 account rules as the account balance was corrected within the buffering period of 15 days.
If A1 had made the withdrawal more than 15 days after the deposit, the account would not have passed the limited balance test at the time of the withdrawal. This would mean that a gain or loss made under forex realisation event 2 would not be disregarded under the election during the period of the breach.
For more information:
Last Modified: Tuesday, 21 May 2013