Edited version of private ruling

Authorisation Number: 1011762231484

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Ruling

Subject: Division 775

Question 1

Are you as a foreign resident holding foreign-denominated bank accounts in Australia required to include foreign exchange gains/losses in your income tax returns in Australia?

Yes.

Question 2

If Division 775 does not apply to foreign currency gains and losses, do the Capital Gains Tax (CGT) provisions apply to your foreign exchange gains and losses?

Decline to rule.

Question 3

Is the revaluation of the foreign currency account at year end a forex event for the purposes of calculating foreign currency gains and losses for the purposes of Division 775?

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2009

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.

You are a foreign resident of Australia for the 2009 income year.

You are a resident of Australia for the 2010 income year.

You have a number of accounts with a bank in Australia.

In the 2010 income year, an amount of foreign money was transferred into your Australian foreign-denominated bank account from one of your overseas bank accounts.

You have a history of investing in start-up ventures primarily outside of Australia. A reason for establishing and retaining the account was to allow for liquidity of funds should an appropriate venture present itself.

Your private and domestic transactions are conducted through the personal bank account and the online cash manager account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(3)

Income Tax Assessment Act 1997 Subsection 775-15(1).

Income Tax Assessment Act 1997 Subsection 775-15(2).

Income Tax Assessment Act 1997 Section 775-30.

Income Tax Assessment Act 1997 Section 775-45.

Income Tax Assessment Act 1997 Section 775-55.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

(1) Foreign resident with forex gains and losses:

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) says that if a taxpayer is a foreign resident, the taxpayer's assessable income includes only ordinary income and statutory income from all sources in Australia.

In 2003, the Government passed legislation which resulted in the inclusion of Division 775, foreign currency gains and losses in the ITAA 1997.

The general principle of the Division is that foreign currency gains are included in a taxpayer's assessable income, and foreign currency losses are deductible if they occur as a result of a forex event (sections 775-15 and 775-30 of the ITAA 1997).

There are five main forex realisation events.

1. Forex realisation event 1 happens when an entity disposes of foreign currency or the right to it (section 775-40 of the ITAA 1997).

2. Forex realisation event 2 happens when an entity's right (or part of a right) to receive foreign currency ends or is discharged, cancelled, surrendered, forfeited (section 775-45 of the ITAA 1997).

3. Forex realisation event 3 happens under section 775-50 of the ITAA 1997 when an entity ceases to have an obligation to receive foreign currency.

4. Forex realisation event 4 happens when an entity stops having an obligation to pay foreign currency (section 775-55 of the ITAA 1997).

5. Forex realisation event 5 happens when an entity stops having a right to pay foreign currency, provided that the right was obtained or created in exchange of an obligation to pay foreign currency under section 775-60 of the ITAA 1997.

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. 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.

Under Division 775 of the ITAA 1997, it is only those forex realisation gains and forex realisation losses made on or after your applicable commencement date that are brought to account. Section 775-155 of the ITAA 1997 provides that the applicable commencement date for the purposes of this Division for most taxpayers is 1 July 2003, unless an early substituted accounting period applies to them.

Some forex gains and losses of a private or domestic nature, or relating to exempt income or non-assessable non-exempt income, will not be taken into account under the forex measures.

You make a forex realisation gain/loss if:

(a) the amount you receive in respect of the event happening exceeds/falls short of the forex cost base of the right or the part of the right (the forex cost base is worked out as at the tax recognition time); and

(b) some or all of the excess is attributable to a currency exchange rate effect.

The amount of the forex realisation gain is so much of the excess/shortfall as is attributable to a currency exchange rate effect.

Forex cost base of a right to receive foreign currency is money you paid in respect of acquiring the right (section 775-85 of ITAA 1997).

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 with balances below a specified limit.

In your case, you are a foreign resident and had forex gains and losses sourced in Australia The balance of your foreign currency denominated bank account was over $250,000 and you have not made a $250,000 balance election.

Subsequently, Division 775 of the ITAA 1997 will apply to any forex gains and losses and will be required to be declared in your income tax return.

(2) Capital Gains Tax (CGT) and forex gains and losses:

We have declined to rule upon this question as it does not relate to a specific scheme and facts are not known with reasonable certainty and a question is posed on a hypothetical situation.

However, we offer this general advice -

The CGT provisions may apply to the taxation of foreign exchange gains and losses on some transactions - for example, bank accounts and to the disposal of foreign currency. However, where there is overlap between CGT and Division 775 of the ITAA 1997, the latter set of provisions take precedence so as to prevent double taxation.

(3)The revaluation of the foreign currency account at year end:

Foreign currency gains/losses are assessable/deductible, if they occur as a result of a forex event (sections 775-15 and 775-30 of the ITAA 1997).

There are five main forex realisation events for the application of Division 775 of the ITAA 1997 (as outlined in our response to Question 1).

The revaluation of the foreign currency at year end cannot be categorised as any of the events above.

Accordingly gains/losses calculated at the time of revaluation are not assessable/ deductible in accordance with Division 775 of the ITAA 1997.

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