Edited version of private ruling

Authorisation Number: 1011395625067

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Ruling

Subject: Division 775

1. Are the calculations using the First In First Out (FIFO) method to calculate the foreign exchange gains and losses in accordance with subsection 775-145(1) and Subdivision 960C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Are short term gains and losses on foreign currency held in a term deposit bank account subject to the 12 month exception rule?

No.

3. Is the re-translation election available in respect of term deposit accounts?

No.

This ruling applies for the following period/s:

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commences on:

1 July 2007

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

After becoming residents of Australia for taxation purposes, X and Y established a discretionary trust (the entity) and transferred by way of loan significant assets to the trust.

The trust invests in interest-earning deposits with banks or discounted securities or fee-earning securities in Australia or Country B.

Some funds are held in Australian currency but significant funds have been held in Country B currency mainly in Australian accounts and some in overseas accounts.

Settlement occurred on the sale of shares in a Country B company by X and Y. A significant amount of money was deposited into a bank account in their joint names.

The following day, this money was transferred into a term deposit account in the name of the discretionary trust.

Any bank accounts are not credit card accounts and are not held for the primary purpose of facilitating transactions.

The entity used the FIFO method for calculating any foreign exchange gains and losses on the cessation of a fungible right to receive foreign currency.

The entity has transferred Country B currency from one bank account to another.

The entity has transferred Country B currency from one account to another account with the same bank but with different terms.

The entity has terminated a fixed term bond.

These and other like transactions have been reflected in spreadsheets depicting the foreign exchange gains and losses incurred upon withdrawal, transfer or disposal of foreign currency funds for the income years.

Relevant legislative provisions

Section 775-15 of the Income Tax Assessment Act 1997

Section 775-30 of the Income Tax Assessment Act 1997

Paragraph 775-40(1)(b) of the Income Tax Assessment Act 1997

Paragraph 775-45(1)(a) of the Income Tax Assessment Act 1997

Subparagraph 775-45(1)(b)(iii) of the Income Tax Assessment Act 1997

Subsection 775-70(1) of the Income Tax Assessment Act 1997

Subsection 775-75(1) of the Income Tax Assessment Act 1997

Subsection 775-145(1) of the Income Tax Assessment Act 1997

Section 775-270 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Detailed reasoning

(1) The application of Division 775 and Subdivision 960C of the ITAA 1997

An entity with a foreign currency denominated bank account has the right to be paid any balance standing to the credit of that account on demand. A withdrawal (including a transfer) from an account with a credit balance extinguishes the account holder's rights in respect of the bank account, to the extent of the withdrawal.

Under the foreign exchange (forex) provisions the account holder's right to be repaid the amount standing to the credit of the account is a relevant right to receive foreign currency and falls within the terms of subparagraph 775-45(1)(b)(iii) of the ITAA 1997. When an amount is withdrawn from a foreign currency denominated bank account with a credit balance the account holder ceases to have a right to receive foreign currency from the bank to the extent of that withdrawal (paragraph 775-45(1)(a) of the ITAA 1997). Upon this right ceasing forex realisation event two happens.

Where a transfer from one bank account to another bank account where each account is denominated in the same foreign currency, forex realisation event two would happen for the reasons given above.

Accordingly, in the absence of a relevant election, any forex realisation gain or loss made as a result of forex realisation event two happening upon a withdrawal (including a transfer) from a foreign currency denominated bank account with a credit balance will generally be either assessable or deductible under section 775-15 of the ITAA 1997 or section 775-30 of the ITAA 1997 respectively, unless an exemption applies.

However, if there is a disposal from one entity to another entity in a foreign currency - forex realisation event one happens.

Accordingly, in the absence of a relevant election, any forex realisation gain or loss made as a result of forex realisation event one happening upon the disposal from one entity to another entity in a foreign currency will generally be assessable or deductible under section 775-15 of the ITAA 1997 or section 775-30 of the ITAA 1997 respectively, unless an exemption applies.

Furthermore, the disposal of a foreign denominated traditional security constitutes forex realisation event one happening as there is a disposal of a right to receive foreign currency (paragraph 775-40(1)(b) of the ITAA 1997).

In this case, the entity has transferred Country B currency from one bank account to another. The entity has transferred Country B currency from one account to another account with the same bank but with different terms. The entity has terminated a fixed term bond. All these transactions ensure that either forex realisation event one or forex realisation event two happens. Accordingly, the entity has used the FIFO method to calculate foreign exchange gains and losses in accordance with subsection 775-145(1) of the ITAA 1997.

(2) Short term gains and losses on foreign currency held in a term deposit bank account and the 12 month exception rule

In the absence of a relevant election being made, any forex realisation gain or loss as a result of a forex realisation event two happening upon a withdrawal (or transfer) from a foreign currency denominated bank account with a credit balance will generally be either assessable or deductible under subsection 775-15 of the ITAA 1997 or 775-30 of the ITAA 1997 respectively, unless an exemption applies.

Under the 12 month rule, where one of the items in the table in subsection 775-70(1) of the ITAA 1997 or subsection 775-75(1) of the ITAA 1997 respectively applies, certain forex realisation gains or losses made within a 12 month period are not included in the individual's assessable income or allowed as deductions under the forex provisions.

It should be noted that in the case of a forex realisation gain, it will be integrated into the tax treatment of the underlying asset. For example, where the gain arises in connection with a capital gains tax (CGT) asset both the cost base and the reduced cost base of the CGT asset is reduced by an amount equal to the forex realisation gain.

The 12 month rule is only concerned with assets of a capital nature, that is, CGT assets and depreciating assets.

Subsequently, the 12 month rule does not apply to a gain or a loss from forex realisation event two made upon a withdrawal (or transfer) from a foreign currency denominated bank account with a credit balance as described above. This is because the right to receive foreign income from the bank was not created in return for disposing of a CGT asset (other than foreign currency).

In this case, the 12 month rule does not apply for the reasons listed above.

(3) The re-translation election in regards to term deposits

Under section 775-270 of the ITAA 1997, a re-translation election can only be made in respect of a qualifying forex account. As per section 995-1 of the ITAA 1997, a qualifying forex account must have the primary purpose of facilitating transactions or be a credit card account.

The bank accounts of the entity are neither held for the purpose of facilitating transactions or are not credit card accounts. Accordingly, the re-translation election can not be made in respect of the bank accounts of the entity.

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