Edited version of private advice

Authorisation Number: 1051789064607

Date of advice: 26 February 2021

Ruling

Subject: Assessable income traditional security

Question 1

Is the product a 'traditional security' pursuant to section 26BB of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 2

Is a gain from the product at the maturity assessable under section 26BB of the ITAA 1936?

Answer

Yes

Question 3

Is a gain from the product at the maturity assessable as a capital gain?

Answer

Yes

Question 4

Are the foreign exchange gains or losses made when you transferred the proceeds to your Australian bank account assessable or deductible?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You made deposits (in foreign currencies) into a financial product in 20xx.

The product details are:

•         The product is the equity linked deposit of a foreign bank.

•         The product is linked to the performance of different Indexes.

•         The product is a fixed tern deposit.

•         At maturity, the product provides a minimum return of x%.

•         The return over and above your original deposit is the greater of the minimum return or xx% of the Market performance.

The proceeds were deposited into their respective foreign currency bank accounts in 20yy.

You transferred the proceeds via bank transfer into your Australian bank on different dates.

You became a resident of Australia in 20zz.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 118-20

Income Tax Assessment Act 1997 section 775-15

Income Tax Assessment Act 1997 section 855-45

Income Tax Assessment Act 1936 Division 16E

Income Tax Assessment Act 1936 section 26BB

Income Tax Assessment Act 1936 section 70B

Reasons for decision

Question 1 and 2

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. As you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

Section 10-5 of the ITAA 1997 lists provisions which include:

•         sections 159GQ and 159GW of the ITAA 1936;

•         section 26BB of the ITAA 1936;

•         section 102-5 of the ITAA 1997; and

•         section 775-15 of the ITAA 1997.

Qualifying Security

Subsection 159GP(1) of the ITAA 1936 defines a 'security' to mean:

(a)  stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security;

(b)  a deposit at bank or other financial institution;

(c)   a secured or unsecured loan; or

(d)  any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured.

Taxation Ruling TR 96/14 Income tax: traditional securities provides that each fixed deposit, being a separate contract, is a paragraph (b) security for the purposes of the definition in subsection 159GP(1).

Division 16E of the ITAA 1936 applies to securities with certain characteristics called 'qualifying securities'. A qualifying security is defined under subsection 159GP(1) as:

'qualifying security' means any security:

(a)          that is issued after 16 December 1984;

(b)          (Repealed by No 47 of 2016)

(ba)       that is not part of an exempt series (see subsection (9A)) (That is, where the first security in a series is not a qualifying security, later securities issued with the same terms will not be treated as securities assessable in accordance with Div 16E.);

(c)          the term of which, ascertained as at the time of issue of the security will, or is reasonably likely to, exceed 1 year;

(d)          that has an eligible return; and

(e)          where the precise amount of the eligible return is able to be ascertained at the time of issue of the security - in relation to which the amount of the eligible return is greater than 1½% of the amount ascertained by multiplying the amount of the payment or the sum of the payments (excluding any periodic interest) liable to be made under the security by the number (including any fraction) of years in the term of the security;

but does not, except as provided by subsection (10), include an annuity.

The definition or 'eligible return is given by subsection 159GP(3). It states:

For the purposes of this Division, there shall be taken to be an eligible return in relation to a security if at the time when the security is issued it is reasonably likely, by reason that the security was issued at a discount, bears deferred interest or is capital indexed or for any other reason, having regard to the terms of the security, for the sum of all payments (other than periodic interest payments) under the security to exceed the issue price of the security, and the amount of the eligible return is the amount of the excess.

Where a 'security' does not have an 'eligible return' subsection 26BB(1) states:

traditional security, in relation to a taxpayer, means a security held by the taxpayer that:

(a)  is or was acquired by the taxpayer after 10 May 1989;

(b)  either:

(i)            does not have an eligible return; or ...

Subsection 26BB(2) states:

Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any gain on the disposal or redemption shall be included in the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place.

Application to your circumstances

Your deposits fulfil the characterisation of a traditional security:

•         they were issued after 10 May 1989;

•         they are not part of an exempt series;

•         the term of the deposits was expected to exceed one year;

•         they do not have an eligible return.

Tax treatment of traditional securities for Australian residents

A gain made on a traditional security is income of the taxpayer pursuant to subsection 26BB(2). Section 70B provides that a loss on disposal or redemption of a traditional security may be an allowable deduction.

Paragraph 4(ix) of the TR 96/14 provides that the amount of any 'gain' on the disposal or redemption of a traditional security is the difference between the consideration for the acquisition of the security plus any relevant costs associated with the acquisition or disposal, and the consideration received on the disposal of the security.

Question 3

Capital gains tax

You may make a capital gain or capital loss when a capital gains tax (CGT) event happens to a CGT asset. A CGT asset is any kind of property or a legal or equitable right that is not property.

In your case, your CGT assets were the rights you received when you made deposits.

Subsection 104-25(1) of the ITAA 1997 states that CGT event C2 happens if your ownership of an intangible CGT asset ends by being redeemed, cancelled, released, discharged, satisfied, expired, abandoned, surrendered or forfeited, among other things.

The redemption or surrendering of a right to a deposit is a CGT event. The time of the event is when a contract is entered into that results in the asset ends, or, if there is no contract, when the asset ends.

You make a capital gain if the capital proceeds from the ending of the asset are more than the asset's cost base.

Section 102-5 will bring into your assessable income any capital gain which arose on maturity of the term deposits, worked out from acquisition date on commencement of your Australian residency.

When calculating your net capital gain, you will need to establish the cost base of the deposits which has been affected as a result of becoming an Australian resident.

Subsection 855-45(2) of the ITAA 1997provides that where a non-resident becomes a resident of Australia, the first element of the cost base and reduced cost base of the asset is its market value at that time you become an Australian resident except for an asset that is taxable Australian property or acquired by the taxpayer before 20 September 1985.

Accordingly, for CGT purposes, you are taken to have acquired your deposits on the date you became an Australian resident and the first element of your cost base will be their market value as at that date.

Any change of value between purchase and deemed acquisition date does not fall under any consideration within the Australian taxation system as you are not considered to have held the assets for taxation purposes in Australia until the deemed acquisition date.

The anti-overlap rule

Section 118-20 of the ITAA 1997 provides that a capital gain you make from a CGT event is reduced if, because of the event, a provision (other than a CGT provision) includes an amount in your assessable income. The gain is reduced to zero if the gain does not exceed the amount included in your assessable income.

Section 118-20 of the ITAA 1997 applies in your case as amounts assessed under 26BB of the ITAA 1936 will reduce any capital gain that is assessed at maturity to zero

Question 4

FOREX

Division 775 of the ITAA 1997 applies to the realisation of foreign currency 'Forex' related 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.

As 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.

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

Your right to receive the balance standing to the credit of your foreign currency accounts is a relevant right within the terms of subparagraph 775-45(1)(b)(iii). Pursuant to subsection 775-45(2), a 'Forex Realisation Event' (FRE 2) happens when you withdraw amounts from these accounts. Therefore, a forex realisation gain or loss arises under subsections 775-45(3) or 775-45(4) when an amount is withdrawn from the account.

The currency exchange effect is the difference in the Australian dollar value of the deposit at the maturity and at time the deposited took place. The difference is brought to account as assessable income under section 775-15 or an allowable deduction under section 775-30.

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