Edited version of your private ruling

Authorisation Number: 1012501510805

Ruling

Subject: Forex realisation loss

Question and answer

1. When you transfer funds from your overseas bank accounts to your bank account in Australia will a forex realisation event 2 occur?

Yes.

2. Under section 775-30 of the Income Tax Assessment Act 1997 are you entitled to an income tax deduction for realised foreign exchange losses upon withdrawal of funds held in overseas bank accounts, before 1 July 2003?

No.

3. Under section 775-30 of the Income Tax Assessment Act 1997 are you entitled to an income tax deduction for realised foreign exchange losses upon withdrawal of funds held in overseas bank accounts, opened after 1 July 2003?

Yes

This ruling applies for the following periods

1 July 2007 to 30 June 2015

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 moved to Australia with the intentions to permanently reside in Australia.

You have continued to reside in Australia.

You currently do not have any intentions of leaving Australia.

Prior to 1 July 2003 you opened an overseas bank account.

You did not make a transitional election in relation to your overseas bank account opened before 1 July 2003.

After 1 July 2003 and over a number of years you and your spouse, or Personal Banker at the bank, opened further overseas bank accounts.

The intended purpose of the funds was to purchase a private residence in Australia.

The reason for opening multiple accounts and transferring balances from one to the other was to avail the best introductory interest rates.

The funds held in all the accounts were deposits made over a number of years by you and your spouse.

The deposited funds were generated entirely through employment income of both you and your spouse.

When you move to Australia you were of the opinion that the foreign exchange rate was going to decrease, therefore increasing the AUD value of the overseas funds held. Therefore you did not transfer any significant funds from the overseas bank accounts to your Australian bank accounts at the time of moving to Australia.

You made the first significant withdrawals from the overseas bank accounts.

The withdrawals were made due to a favourable exchange rate and resulted in a foreign exchange profit.

Due to increases in the foreign exchange rate no further significant withdrawals were made until you decided you could not wait until the exchange rate decreased and decided to withdraw funds and deposit the proceeds in your Australian bank accounts with the intention to fund the purchase of a private residence in Australia.

The significant withdrawals realised a foreign exchange loss.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 775-30(1)

Income Tax Assessment Act 1997 subsection 775-30(2)

Income Tax Assessment Act 1997 subsection 775-45(1)

Income Tax Assessment Act 1997 subsection 775-45(1)(a)

Income Tax Assessment Act 1997 subsection 775-45(1)(b)(iii)

Income Tax Assessment Act 1997 subsection 775-45(4)

Income Tax Assessment Act 1997 subsection 775-45(4)(a)

Income Tax Assessment Act 1997 section 775-85

Income Tax Assessment Act 1997 Section 775-105

Income Tax Assessment Act 1997 Section 775-145

Income Tax Assessment Act 1997 subsection 775-165(2)(a)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not considered the application of Part IVA to the arrangement you asked us to rule on.

Reasons for decision

Forex gains and losses for accounts opened before 1 July 2003

Subsection 775-165(2) (a) of the Income Tax Assessment Act 1997 (ITAA 1997) disregards any forex gains or losses as a result of forex realisation events 1, 2 or 5 happening to a right or part of a right if the right or part of the right was acquired before the eligible commencement date, i.e.,

1 July 2003 (section 775-155 of the ITAA 1997), and the taxpayer has not made an election under section 775-150 of the ITAA 997, the transitional election.

You opened an overseas bank account prior to 1 July 2003 and you did not make a transitional election in relation to your overseas accounts.

Accordingly any forex gains or losses you made, as a result of forex realisation events happening to your overseas bank account that were opened prior to 1 July 2003, will be disregarded.

Forex gains and losses for accounts opened after 1 July 2003

Under subsection 775-45(1)(a) and subsection 775-45(1)(b)(iii) of the ITAA 1997 a forex realisation event 2 (FRE 2) happens if you cease to have a right, or part of a right, to receive foreign currency, and the right or the part of the right is created or acquired in return for your paying an amount of Australian currency or foreign currency:

You therefore had the right to receive the balance standing to the credit of your overseas bank account, (a right to receive a certain amount of foreign currency). This right to receive foreign currency is a relevant right within the terms of subsection 775-45(1)(b)(iii) of the ITAA 1997 if it can be said to have been acquired in return for your paying or agreeing to pay an amount of Australian currency or foreign currency.

When you transfer funds from your overseas account into your Australian accounts, your right to receive this foreign currency from the overseas bank ceased. Upon this right ceasing, a forex realisation event 2 happened (pursuant to subsection 775-45(1) of the ITAA 1997).

Under subsection 775-45(4) of the ITAA 1997 you made a forex realisation loss when FRE 2 happened in respect of your overseas bank accounts if the amount you received in respect of the event happening fell short of the forex cost base of your right to receive foreign currency, and some or all of the shortfall was attributable to a currency exchange rate effect.

Under section 775-85 of the ITAA 1997The forex cost base of your right to receive foreign currency from the overseas bank accounts was the money you paid to acquire the right.

The forex cost base is worked out at the tax recognition time, which is when deposits were made into your overseas bank accounts (pursuant to subsection 775-45(4)(a) and item 5 of the table to subsection 775-45(7) of the ITAA 1997), generally on a first-in first-out basis (see section 775-145 of the ITAA 1997).

Therefore the forex cost base of your right to foreign currency which ceased is the total of the Australian dollar value of each amount deposited (that had not already been withdrawn), worked out by translating each relevant deposit at the exchange rate on the day it was made: item 11 of table in subsection 960-50(6) of the ITAA 1997.

Alternatively, you may chose to calculate the forex cost base of your right to receive foreign currency from the overseas bank accounts by translating the relevant amounts deposited using any of the applicable rules set out in Schedule 2 to the Income Tax Assessment Regulations 1997 (which include the choice to use a reasonable average exchange rate).

Any difference between your forex cost base (as calculated) and the amount you received upon transferring the balance of your overseas bank accounts into your Australian accounts (or alternatively translated amount) will be entirely attributable to currency fluctuations. This is an example of a currency exchange rate effect as defined in section 775-105 of the ITAA 1997.

Accordingly, if the amount you received upon transferring the balance from your overseas bank accounts fell short of the forex cost base of your right to receive that foreign currency, you will have made a forex realisation loss equal to the difference.

According to subsection 775-30(1) of the ITAA 1997, you can deduct from your assessable income for an income year a forex realisation loss that you made as a result of a forex realisation event that happened during that year.

However, under subsection 775-30(2) of the ITAA 1997 you cannot deduct certain forex realisation losses of a private and domestic nature.

Any forex realisation loss made when you transferred the balance of your overseas bank accounts was not a loss of a private and domestic nature since the accounts were opened with the purpose of earning a greater return than possible elsewhere.

Therefore, any such forex realisation loss made may be deducted from your assessable income in the year it was incurred.