ATO Interpretative Decision

ATO ID 2004/855

Income Tax

• This ATO ID does not take account of the effect of Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 that implements Stages 3 and 4 of the reforms to the taxation of financial arrangements (TOFA 3 and 4).
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are forex realisation gains and losses made in respect of a foreign currency denominated bank account opened between 19 February 1986 and the applicable commencement date of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) disregarded for the purposes of Division 775?

Decision

Yes, forex realisation gains and losses made in respect of a bank account opened between 19 February 1986 and the applicable commencement date of Division 775 of the ITAA 1997 are disregarded for the purposes of Division 775. A gain or loss may however be taken into account under other provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

Facts

The taxpayer has held a foreign currency denominated savings account (foreign account) since 1998. The foreign account pays interest and has always had a credit balance.

The taxpayer's applicable commencement date under section 775-155 of the ITAA 1997 is 1 July 2003. The taxpayer has not made a transitional election under section 775-150 of the ITAA 1997.

Reasons for Decision

The relationship between banker and customer in respect of a bank account is that of debtor and creditor: Foley v. Hill and Ors (1848) 2 HL Cas 28; [1843-60] All ER Rep 16. Thus, when a customer deposits money into a bank account the customer acquires contractual rights as a creditor of the bank. Similarly, when an amount is withdrawn from a bank account some or all of these previously acquired rights are extinguished or satisfied.

This does not mean that each deposit made by a customer represents a new contract. Rather, the nature of the contractual relationship remains constant. That is, there is a single chose in action in respect of the customer's right to be repaid the amount previously deposited: Hart (Inspector of Taxes) v. Sangster [1957] 1 Ch 329; [1957] 2 All ER 208; Alcom v. Republic of Colombia [1984] AC 580.

The taxpayer therefore has the right to receive the balance standing to the credit of their foreign account (a right to receive a certain amount of foreign currency). This right to receive foreign currency is a relevant right within the terms of subparagraph 775-45(1)(b)(iii) of the ITAA 1997.

A part of this right will cease if the taxpayer directs that money be withdrawn or transferred out of the foreign account. Upon this right, or part of this right ceasing, a forex realisation event 2 will happen (pursuant to subsection 775-45(1) of the ITAA 1997).

A forex realisation gain or loss may be made as a result of a forex realisation event 2 happening on a withdrawal transfer or payment out of the foreign account (pursuant to subsections 775-45(3) and (5) of the ITAA 1997).

Subparagraph 775-165(2)(a)(ii) of the ITAA 1997 operates to disregard forex gains or losses made as a result of forex realisation event 1, 2 or 5 happening to a right or part of a right that 'arose under an eligible contract (within the meaning of the former Division 3B of Part III of the ITAA 1936) that was entered into before the applicable commencement date', provided the taxpayer has not made a transitional election under section 775-150 of the ITAA 1997.

Under Division 3B of Part III of the ITAA 1936, an 'eligible contract' is defined by subsection 82V(1) of the ITAA 1936 as:

(a)

A contract entered into by the taxpayer on or after the commencing day, other than a hedging contract; or

(b)

A hedging contract entered into by the taxpayer, on or after the commencing day, in relation to a contract to which paragraph (a) applies.

Subsection 82V(1) of the ITAA 1936 also provides that 'commencing day' means 19 February 1986.

Accordingly, as the taxpayer's foreign account was opened after 19 February 1986, it is an eligible contract within the meaning of Division 3B of Part III of the ITAA 1936.

Whether or not the taxpayer's right to be paid the amount standing to the credit of their foreign account 'arose under' their foreign account contract (the eligible contract), will depend on the meaning given to the phrase in the context of section 775-165 of the ITAA 1997.

In FC of T v. Energy Resources of Australia Ltd 94 ATC 4923; (1994) 29 ATR 553 (the ERA Case), Gummow J and Hill J discussed the meaning of 'under an eligible contract'. Gummow J at 4943 stated:

In ordinary parlance, to speak of a gain being made "under" an eligible contract suggests that the gain was made in exercise of a right or discharge of an obligation conferred or imposed, as the case may be, by the terms of the eligible contract.

In the ERA Case Hill J noted at 4956 that in Elmslie & Ors v. FC of T 93 ATC 4964; (1993) 26 ATR 611 Wilcox J held that the relevant contract under which relevant assets were acquired was the immediately empowering contract rather than a more remote source of authority. Wilcox J considered that the relevant contract was not that which envisaged or provided for the relevant acquisition, but rather had to be the means by which the asset was actually acquired.

In N. Joachimson v. Swiss Bank Corporation [1921] All ER 92; [1921] 3 KB 110 Atkin LJ (at All ER 100; KB 127) noted that there is only one contract between the bank and its customer. While the making of deposits with a bank may create a credit balance, the banking contract confers on the customer the right to be repaid that balance. Accordingly, rights conferred by the terms of the taxpayer's eligible contract (their foreign account) properly arise 'under' that contract.

The rights arising upon the making of a deposit into the foreign account will have arisen under the foreign account contract, which is an eligible contract. As the foreign account is an eligible contract entered into before 1 July 2003 and the taxpayer has not made a transitional election, any forex realisation gains or losses made by the taxpayer as a result of forex realisation event 2 happening upon a withdrawal, transfer or payment out of the foreign account will be disregarded (see subsection 775-165(2) of the ITAA 1997).

Note however that gains or losses may still be taken into account under other provisions of the ITAA 1936 or the ITAA 1997 as a result of a withdrawal from such a foreign account.

Amendment History

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   Division 3B of Part III (Repealed by Act No. 133 of 2003)
   subsection 82V(1) (Repealed by Act No. 133 of 2003)

Case References:
Alcom v. Republic of Colombia
    [1984] AC 580

Related ATO Interpretative Decisions
ATO ID 2003/551

Keywords
Banking, finance & securities
Foreign exchange gains and losses
Forex realisation event

Siebel/TDMS Reference Number:  4160927

Business Line:  Finance and Investment Centre of Expertise

Date of publication:  29 October 2004

ISSN: 1445-2782