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Ruling

Subject: Deductibility of foreign exchange losses

Questions and answers:

Did you have a right to receive foreign currency from the deceased estate?

Yes

Did your right to receive foreign currency from the deceased estate end when the amount was paid into your onshore foreign currency account?

Yes

Did forex realisation event 2 occur when your right to receive foreign currency ended when the executor deposited the funds into your onshore foreign currency account at your direction and thereby ending your entitlement to receive the foreign currency from the estate?

Yes

Are you entitled to claim a deduction under section 775-30 for any forex realisation loss you make when forex realisation event 2 occurs in relation to your right to receive foreign currency from the deceased estate?

No

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You inherited a sum of foreign currency in the 2009-10 financial year.

This was a result of being entitled to a share of the money in the estate after administration expenses.

There was a delay in you receiving the funds due both to difficulties in the executor of the deceased estate getting the money from the foreign bank holding it and your willingness to have the money held in foreign currency by the executor on your behalf.

The foreign currency was ready to be transferred to you approximately 12 months after the death of the deceased however you did not want the funds transferred to you at that time.

The money was held in an interest bearing account in the name of the executor until it was deposited to your onshore foreign currency account.

You opened your onshore foreign currency account in the 2010-11 financial year.

This account is denominated in foreign currency and is a personal transaction account held in your name.

You had the right to receive foreign currency from the deceased estate until the executor paid the amount into your onshore foreign currency account as you directed.

This was some twenty months after you acquired the right to receive the foreign currency from the deceased estate.

You are currently at the time of the deposit, an Australian resident for income tax purposes.

You have not elected into the Taxation of Financial Arrangements regime.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 6-5

Income Tax Assessment Act 1997 Section 104-85

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 128-10

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

Please note, all references are to the Income Tax Assessment Act 1997 (ITAA 1997).

A foreign exchange (forex) realisation gain or loss happens under Division 775 when a right to receive or an obligation to pay foreign currency ceases. Generally, such events only apply to rights and obligations created after 1 July 2003 (unless a taxpayer has made a transitional election under section 775-150).

You had a right to receive a share of a deceased estate, which once fully administered, was calculated as being an amount of foreign currency.

The Division 775 consequences of this right are considered below.

Right to receive a 1/6^th share from the deceased estate

On the date of death, the assets of the deceased passes to the estate, legal control of which is exercised by the executors.

When the assets pass to the executors on the date of death the executors have a fiduciary duty in favour of the beneficiaries. At this stage, however, the beneficiaries have no legal interest in the assets of the estate other than an equitable right to see that the estate is properly administered. Even though they may have an indefeasible interest in the assets of the estate, those interests cannot crystallise until probate has been granted.

Upon the death of the deceased the executor, who was residing in Australia, thereby had the right to receive foreign currency in the deceased's overseas bank accounts in the capacity as executor.

You became entitled to a share of the estate on the date of death of the deceased.

At that time you were not absolutely entitled to the share of the estate because it had not yet been determined how much your share of the money would be until such time as all expenses had been taken care of.

The executor of the estate was in control and was the legal owner of the assets of the estate at that time. The first date the executor was able to allocate your share of the estate was approximately 12 months after the death of the deceased. You became absolutely entitled on this date; you were then able to direct how the money should be dealt with.

Your share of the estate deposited into the executor's foreign currency account

You advised the executor that you were not ready to receive the funds at that time. The executor placed the funds in his own onshore foreign currency account. There was no change in beneficial ownership; the executor was merely holding the funds for you waiting direction from you.

You directed that the money be placed in your own onshore foreign currency account approximately 9 months after the executor had been holding the funds for you.

At the time the foreign currency was deposited into your onshore foreign currency bank account by the executor your right to receive the foreign currency from the executor ended and forex realisation event 2 (FRE2) occurred.

Deductibility of a forex realisation loss

The basic rule contained in section 775-30 is that you can deduct from your assessable income for an income year a forex realisation loss made as a result of a forex realisation event that happens during the year.

This basic rule is subject to exceptions.

There are circumstances in which you cannot deduct a forex realisation loss arising from a forex realisation event as outlined in section 775-30(2).

Exceptions to basic rule

A forex realisation loss may not be deductible if it is a loss of a private or domestic nature (section 775-30(2)(a)). The private or domestic nature exclusion does not, however, apply to forex realisation losses in the following circumstances:

· you make a loss from the release of a right where that right was acquired in return for the realisation of another capital gains tax (CGT) asset (forex realisation event 2 section 775-45(1)(b)(iv)) and the gain would be taxable under the CGT provisions in Part 3-1 or 3-3; or

· you make a loss from the release of an obligation where the obligation is incurred to acquire a CGT asset (forex realisation event 4 section 775-55) and the gain would be taxable under the CGT provisions in Part 3-1 or 3-3.

You acquired a right to a share of the deceased estate. That right was not acquired in return for the realisation of another CGT asset; inheriting a share of the estate is not taxable under the CGT provisions n Part 3-1 or 3-3.

Section 104-85(1) explains that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital.

Division 128 explains the rules that apply when a taxpayer dies and a CGT asset owned just before death devolves to the taxpayer's legal personal representative (LPR) or passes to a beneficiary in the estate. Section 128-10 advises that the general rule is, when a taxpayer dies, a capital gain or capital loss from a CGT event that results for a CGT asset owned by the taxpayer just before dying is disregarded.

Consequently CGT event E7 did not happen when the executor disposed of the foreign currency to you as a beneficiary of the estate because the exception relating to deceased estates applies.

Private or domestic

Whether a loss is of a private or domestic nature is ultimately a question of fact to be decided on the particular circumstances of each case.

For most individual taxpayers, forex gains are not assessable and forex losses are not deductible if the gain or loss is of a private or domestic nature, but where the gain or loss results from carrying on a business or a profit-making undertaking or plan, the gain or loss will be assessable income or an allowable deduction.

Profit is not defined for the purposes of the ITAA 1997. However, the relevant sense of the term is the excess of receipts over expenses. Interest income earned by an individual taxpayer who is not carrying on a business falls within the meaning of ordinary income and is assessable to taxpayers under section 6-5.

In your case, the foreign currency you received was derived from a deceased estate which is private or domestic in nature; not business-related or a profit-making plan. You opened a foreign currency account in Australia for the purpose of holding the foreign currency you had inherited; also not business-related or a profit-making plan.

Conclusion

In accordance with section 775-30(2) you are not entitled to claim the forex losses as a deduction against your assessable income as they are private or domestic in nature.