ATO Interpretative Decision

ATO ID 2006/320

Income Tax

Foreign exchange (forex) gains and losses: bank account opened before 19 February 1986
FOI status: may be released

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).

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Are forex realisation gains and losses made as a result of the withdrawal of funds deposited on or after 1 July 2003 into a foreign currency denominated bank account opened before 19 February 1986 brought to account for the purposes of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Forex realisation gains and losses made as a result of the withdrawal of funds from a foreign currency denominated bank account opened before 19 February 1986 are taken into account in determining taxable income but only to the extent that they are made as a result of the withdrawal of funds deposited on or after 1 July 2003.

Facts

An Australian resident taxpayer opened a foreign currency denominated bank account (foreign account) prior to 19 February 1986.

The foreign account pays interest and it has always had a credit balance. It has been primarily used to pay business expenses and deposit proceeds from the sale of shares.

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.

Any forex realisation gains or losses made as a result of the withdrawal of funds from the foreign account were not of a private or domestic nature.

Reasons for Decision

A forex realisation gain or loss is made when a forex realisation event happens. Subsection 775-45(1) of the ITAA 1997 provides that forex realisation event 2 (FRE 2) happens if an entity ceases to have a right, or part of a right, to receive foreign currency which is created or acquired in return for paying an amount of Australian currency or foreign currency. Subsection 775-45(2) of the ITAA 1997 provides that the time of FRE 2 is when the right or part of the right ceases.

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; [1984] AC 580.

The taxpayer's right to receive the balance standing to the credit of their foreign account is a relevant right within the terms of subparagraph 775-45(1)(b)(iii) of the ITAA 1997. Pursuant to subsection 775-45(2) of the ITAA 1997, FRE 2 happens when the taxpayer withdraws the credit balance of the foreign account or any part of it.

As the taxpayer did not make a transitional election under section 775-150 of the ITAA 1997, subparagraph 775-165(2)(a)(i) of the ITAA 1997 operates to disregard any forex realisation gains or losses made as a result of FRE 2 happening to a right or part of a right acquired before the applicable commencement date. To the extent the balance standing to the credit of the foreign account consists of deposits made before 1 July 2003, this part of the right was be acquired before the applicable commencement date and any forex realisation gain or loss made upon a withdrawal of these funds is disregarded pursuant to subparagraph 775-165(2)(a)(i) of the ITAA 1997.

Because currency within a bank account is 'fungible', there is difficulty in identifying which particular units of currency are withdrawn from the foreign account at the time of withdrawal. However, to determine which withdrawals relate to deposits made on or after 1 July 2003, subsection 775-145(1) of the ITAA 1997 provides that a first-in first-out ordering rule be applied to determine from which deposits a particular withdrawal is made.

Date of decision: 20 November 2006

Year of income: Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   subsection 775-45(1)
   subparagraph 775-45(1)(b)(iii)
   subsection 775-45(2)
   subsection 775-145(1)
   subsection 775-150
   subsection 775-155
   subparagraph 775-165(2)(a)(i)

Case References:
Foley v Hill and Ors
(1848) 2 HL Cas 28
[1843-60] All ER Rep 16

Hart (Inspector of Taxes) v Sangster
   [1957] 1 Ch 329
   [1957] 2 All ER 208
   [1984] AC 580

Related ATO Interpretative Decisions
ATO ID 2004/855

Keywords
Bank accounts
Banking, finance & securities
Foreign currency
Foreign currency rights
Foreign exchange gains and losses
Forex realisation event
Forex realisation gain
Forex realisation loss
Fungible rights and obligations
Transitional election

Siebel/TDMS Reference Number: 5318915; 1-DKWZFW3

Business Line: Private Groups and High Wealth Individuals

Date of publication: 24 November 2006
Date reviewed: 1 February 2018

ISSN: 1445-2782

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