Edited version of your written advice

Authorisation Number: 1051251455985

Date of advice: 14 July 2017

Ruling

Subject: Forex gains

Question 1

Will the forex provisions apply to include an amount as assessable income on the forex gain from transfers made from the bank account in the Country X to your Australian bank account?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

You opened a bank account in Country X in February 2004 with an opening deposit greater than $10,000.

The bank account earns interest in Country X.

You came to Australia and became an Australia resident for taxation purposes in 2009.

An amount was deposited into the Country X bank account in March 2015. This amount was for from the sale of shares and options from your former employer.

You waited until the exchange rate improved before moving the money from your Country X bank account to your Australian bank account.

You transferred substantially the amounts from your Country X bank account to your Australian bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 775

Income Tax Assessment Act 1997 xection 108-5

Reasons for decision

Forex realisation gains and losses

Division 775 applies to the realisation of assets, rights (or part of rights) and obligations (or part of obligations) and explains how to calculate forex gains and losses that are attributable to currency exchange rate fluctuations. Bank accounts are considered to be rights or obligations. The relationship between banker and customer in respect of a bank account is that of debtor and creditor.

Each deposit made to the account does not represent 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. Thus, when a customer deposits money into a bank account with a credit balance, the customer acquires a contractual right as a creditor of the bank. Those rights are extinguished or satisfied to the extent to which an amount is withdrawn from the account.

If you are an Australian resident, you make a forex realisation gain or loss on withdrawals and transfers from a foreign currency denominated bank account (with a credit balance). The holder of a foreign currency denominated bank account has a contractual right (a chose in action) under a single contract with the bank, to receive amounts previously deposited.

When withdrawing or transferring money from a bank account that has a credit balance, those previously acquired rights are extinguished or satisfied to the extent of the withdrawal.

Under Division 775, a forex realisation gain or loss is made when a forex realisation event happens to an asset, right or an obligation. Withdrawals from a foreign currency denominated bank account with a credit balance is a forex realisation event 2 (FRE2) pursuant to section 775-45. The relevant right is created at the time the foreign currency was deposited into the account pursuant to subparagraph 775-45(1)(b)(iii). Subsection 775-45(2) then provides that the time of the FRE 2 is when the right or part of the right ceases.

Your right to receive the balance standing to the credit of your savings account in Country X are a relevant right within the terms of subparagraph 775-45(1)(b)(iii). Pursuant to subsection 775-45(2), FRE 2 happens to the taxpayers upon withdrawing amounts from the savings account in Israel.

A forex realisation gain or loss arises under subsections 775-45(3) or 775-45(4) when an amount is withdrawn from the savings account. The currency exchange effect is the difference in the exchange rate of the Australian dollar value of amounts deposited into the bank account. The difference is brought to account as assessable income under section 775-15 or an allowable deduction under section 775-30.

Forex realisation gains and losses of a private or domestic nature

The general deduction provision 8-1 disallows a deduction for a loss or outgoing to the extent that it is of a private or domestic nature. Division 775 mirrors the same concept to disallow a forex realisation gain or loss to the extent to which that gain or loss is of a private or domestic nature pursuant to subsections 775-15(2) and 775-30(2).

There is no definition of private and domestic contained in the Income Tax Assessment Act 1997. Therefore both words take on their ordinary meaning. The ordinary meaning of private is 'belonging to or for the use of one particular person or group of people only’ and that of domestic, 'relating to the running of the house or to family relations’. It is our view that whether a forex gain or loss from a bank is private or domestic is ultimately determined by the dominant purpose for which the bank account is held. Other factors may be of assistance (but not determinative) include:

● The character of the right held by the taxpayer;

● The source of the funds used to open the account;

● The nature of the deposits and withdrawals from the account;

● The intention to earn interest from the account.

You kept this bank account for mainly private transactions however you also deposited large amounts of money from transactions that could not be considered private and domestic. An example would be the money earned from the deposit on the sale of your shares and options from your previous employment. The account was an interest bearing account and you earned interest on this account. You also speculated on the exchange rate by waiting for the exchange rate to appreciate before you moved the funds to your Australian bank account. These factors combined would lead to a conclusion that the gain was not of a private and domestic nature.

The conclusion that the gain is not of a private and domestic nature is enough to lead it to being included as assessable income under section 775-15. However an alternative CGT argument will be discussed below.

CGT Provisions

The CGT provisions capture some gains and losses of a private and domestic nature under Part 3-1 or 3-3 of the ITAA 1997. The table in subsection 775-15(2)(b) provides that a forex realisation gain will be assessable even if the gain is of a private or domestic nature by virtue of:

Item 1- FRE 2 happens to a foreign currency or a right or part of a right to receive foreign currency, and gain from the realisation event be taken into account for CGT purposes;

'Foreign currency’ itself is clearly listed as a CGT asset under section 108-5 of the CGT provisions even though the bank account itself is a chose in action. The chose in action is the ability to require payment of the account balance, or part of it, on demand. The debtor/creditor relationship between the bank and the account holder is nevertheless a CGT asset which is a legal right that is not property (subsection 108-5(1)(b)).

As the bank account is one asset, each deposit adds to its cost base and reduced cost base whilst each withdrawal constitutes a part ending or part satisfaction of the debt asset. Each withdrawal will constitute CGT event C2 happening to the relevant part of the asset (the amount withdrawn).

In working out a net capital gain or a net capital loss, the capital loss one makes from a personal use asset is disregarded under subsection 108-20(1). A capital gain you make from a personal use asset is disregarded if the first element of the asset’s cost base is $10,000 or less. The definition of a personal use asset is 'a CGT asset that is used or kept mainly for your personal use or enjoyment’ (paragraph 108-20(2)(a)).

ATOID 2009/33 CGT Small Business Concessions: maximum net asset value test- assets used solely for personal use and enjoyment- personal bank account discussed whether an interest earning personal bank account of an individual can be a personal use asset. It states that:

As the bank account is interest earning, it cannot be described as being used solely for personal use and enjoyment. It is used to produce income. The fact that the funds in the bank account are used only for personal living expenses does not affect this outcome.

Your bank account in Country X earns interest, is used mainly for private expenses and does not constitute a 'personal use asset’ for CGT purposes. The nature of the debtor/creditor relationship between the account holder and the bank is considered a commercial contractual relationship. ATOID 2009/33 supports the view that whilst the funds are used for personal expenses, the account is not a personal use asset even if a minimal amount of interest is earned. ATOID 2003/551 Capital Gains Tax: foreign exchange gains or losses, states that foreign currency denominated bank accounts are CGT assets and each withdrawal constitutes a CGT event C2. Even if it was determined to be a personal use asset, gains from personal use assets are assessable when the first element of the cost base of the asset is over $10,000. The bank account was opened with a deposit that was greater than this threshold. This is over the $10,000 threshold and the gain will be assessable.

Accordingly any forex realisation gains made when withdrawing amounts from the Country X bank account are not of a private or domestic nature and will not be disregarded under subsection 775-15(2).

Paragraphs 775-15(4) and 775-309(4) ensure that there is no double taxation or deduction by ensuring that any gain or loss is only assessable or deductable under sections 775-15 or 775-30 respectively.

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