Edited version of private ruling

Authorisation Number: 1011705190760

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Ruling

Subject: Foreign exchange gains and losses

Question

Are the foreign exchange gains and losses made from your foreign currency bank accounts assessable to you under Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) when the conditions for the $250,000 limited balance election are breached?

Answer: Yes.

This ruling applies for the following period:

Income year ended 30 June 2010

Income year ending 30 June 2011

Relevant facts

You and your spouse have two foreign currency bank accounts in the foreign country X.

Your first bank account was opened after 1 July 2003 and you made a $250,000 limited balance election for this bank when it was opened.

Your pension income from foreign country X is deposited into this bank account.

During the 2009-10 income year, you received an inheritance some of which was also deposited into this bank account.

You closed this bank account in May 2010 and the balance from this bank account was transferred to a new bank account.

You also made a $250,000 limited balance election for this new bank account when it was opened.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 775-45(1)

Income Tax Assessment Act 1997 Subsection 775-45(2)

Income Tax Assessment Act 1997 Subsection 775-45(3)

Income Tax Assessment Act 1997 Subsection 775-45(5)

Income Tax Assessment Act 1997 subparagraph 775-45(1)(b)(iii)

Income Tax Assessment Act 1997 Subsection 775-230(3)

Reasons for decision

A forex realisation gain or loss is made when a forex realisation event happens.

Subsection 775-45(1) of the Income Tax Assessment Act 1997 (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 Case 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 Similarly, when an amount is withdrawn from a bank account some or all of these previously acquired rights are extinguished or satisfied.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.

A 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 you direct 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 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).

However, the $250,000 balance election broadly enables a taxpayer to disregard certain foreign currency gains and losses on certain foreign currency denominated bank accounts with balances below a specified limit.

The limited balance test applies to all the accounts for which the $250,000 balance election is in force. The credit and debit balances of these accounts are separately added, without netting, to arrive at the total credit balances and the total debit balances. 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 (subsection 775-245(4) of the ITAA 1997). There is an additional 'buffering' provision. If either the total credit balance, or the total debit balance, is more than the equivalent of $A250,000, but not more than the equivalent of A$500,000, for a maximum of two periods of no more than 15 days in an income year, the limited balance test is still passed during such buffering periods.

Both of your foreign currency denominated bank accounts were opened after 1 July 2003, the applicable commencement date under Division 775 of the ITAA 1997. You made limited balance election for both foreign currency bank accounts when the accounts were opened. Both accounts are transactions accounts and they are qualifying accounts for the purposes of this election. Both bank accounts did not exist at the same time. The second bank account was opened when you closed the first bank account and you transfer the balance of the funds into the second bank account. Subsection 775-230(3) of the ITAA 1997 provides that an election continues in effect until you cease to hold the account, therefore the balances of both bank accounts will not be added to determine whether you breach the limit.

Using the average exchange rate for the third month preceding the 2009-10 income year, the credit balance of the first bank account exceed the A$250,000 from the end of September 2009. The balances exceed A$250,000 but it was less than A$500,000 from September 2009 to until the account was closed in May 2010. The period this bank account exceeded the limit was more than the periods allowed under the buffering provisions (section 775-245 of the ITAA 1997). Therefore this first bank account did not satisfy the conditions of the limited balance election under section 775-225 of the ITAA 1997.

FRE2 event happened for the first bank account when a withdrawal was made in May 2010 and again when the whole balance was withdrawn and the account was closed. On both these occasions when the withdrawals were made you did not satisfy the limited balance test and the buffering provision applicable to this election.

The second bank account opened in May 2010 also exceeded the A$250,000 credit balances and not more than A$500,000 but for a period that exceeded the period(s) allowed under the buffering provisions.

However, as of 30 June 2010, no withdrawal was made from the second foreign currency denominated bank account. Therefore no FRE2 event had occurred for this second bank account as of 30 June 2010.

Accordingly, the foreign exchange gains and losses from your foreign currency bank accounts are assessable under Division 775 of the ITAA 1997, when the conditions for the $250,000 limited balance election are breached and a FRE2 event happened.

The URLs below to fact sheets on the Tax Office website on Foreign exchange: foreign currency denominated bank accounts and Foreign exchange and use of first in- first out method will provide more information on how you determine your gains or loss under Division 775 of the ITAA 1997.

http://www.ato.gov.au/businesses/content.asp?doc=/content/64180.htm

http://www.ato.gov.au/businesses/content.asp?doc=/content/59214.htm

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