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Edited version of your written advice
Authorisation Number: 1013090042473
Date of advice: 15 September 2106
Ruling
Subject: Foreign exchange rules
Questions
1. Does the $250,000 balancing election mean any forex gains or losses are not assessable or deductable?
Yes.
2. Are there any taxation implications if funds are moved from a foreign currency account, subject to the balance election, to an $AU located in Australia?
No.
This ruling applies for the following periods
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
The scheme commences on
1 July 2016
Relevant facts and circumstances
The fund was created in the XXXX income year.
The fund opened a transaction account to buy and sell shares.
The fund purchases shares with the intention to be held for the long term.
The fund has made a limited balance election on the transaction account.
A conversion to $ will be performed annually at 30 June for financial accounts purposes.
Relevant legislative provisions
Income tax Assessment Act 1997 Div 775
Reasons for decision
Gains and losses in foreign currency accounts
The ordinary operation of the foreign exchange (forex) measures, as contained in Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997), is that deposits to, and withdrawals from, foreign currency denominated bank accounts may give rise to a gain or loss that is realized under the measures. Withdrawals from an account with a credit (positive) balance will also generally have a consequence under the capital gains tax (CGT) provisions.
FOREX measures
The A$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 (called qualifying forex accounts) with balances below the specified limit.
An election can be made for a qualifying forex account. A qualifying forex account is an account that is:
• denominated in a foreign currency
• either a credit card account, or an account held for the primary purpose of facilitating transactions.
The limited balance test
The limited balance test applies to all of the accounts for which a, A$250,000 balance election is in force. Credit and debit balances of these accounts are separately added, without netting, to arrive at the total credit balance and the total debit balance.
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.
Breaching the limited balance test
When the balance of your elected account breaches the A$250,000 limit the exemption under the election will cease for the period of the breach.
There is a buffering rule which has a breach tolerance for a period of 15 days or less.
The fund has made a limited balancing election for the transaction account for buying and selling Shares.
The $250,000 has not been breached on this account.
Any foreign currency gains or losses that have been realised on the transaction account are disregarded under the balancing election.
There will be no taxation implications when the funds are transferred from the foreign currency account to Australian dollar account in Australia again because of the balancing election on the transaction account.
Note: If the funds are transferred into another foreign account or an Australian Account denominated in a foreign currency then there may be assessable income or losses.
The end of financial year conversion to Australian dollars for record keeping purposes does not have any consequences under Division 775 of the ITAA 1997
Subdivision 960-C sets out the calculation method for capital gains and losses for foreign investments.
The calculation in simple terms is:
• apply the exchange rate to the purchase price on the date of purchase, and then
• apply the exchange rate to the proceeds of the sale of the asset on the day it is sold
• you then include the difference from the purchase price to the proceeds of the sale in the tax return.
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