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Edited version of your written advice
Authorisation Number: 1012701364503
Ruling
Subject: Foreign currency
Questions and Answers:
1. Was there a foreign exchange event for you as a result of the withdrawal on date B from your foreign currency bank account?
No
2. Was there a capital gains tax event for you as a result of the withdrawal on date B from your foreign currency bank account?
Yes
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
You and your spouse are residents of Australia for tax purposes.
After becoming Australian residents, your overseas relatives asked you and your spouse for a loan to purchase a property
You and your spouse agreed to give your relatives a certain amount.
On date A in the relevant income year you and your spouse transferred an AUD amount from you and your spouse's AUD joint savings bank account to your USD account.
Your relatives decided not to go ahead with the purchase of the property.
You and your spouse decided to buy a home in Australia and needed funds for a mortgage.
On date B (more than 12 months after date A) in the subsequent income year the balance of your USD account was transferred to your joint AUD account. A gain was made.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20.
Income Tax Assessment Act 1997 Section 104-25.
Income Tax Assessment Act 1997 Section 108-5.
Income Tax Assessment Act 1997 Section 115-5.
Income Tax Assessment Act 1997 section 110-25
Income Tax Assessment Act 1997 Division 775.
Income Tax Assessment Act 1997 Paragraph 775-15(2)(a)
Income Tax Assessment Act 1997 Subsection 960-50(6)
Reasons for decision
Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to include a forex realisation gain you make as a result of a forex realisation event.
The Division is intended to include in your assessable income any forex gain or loss you make from an obligation to pay money or a right to receive money.
However, a forex realisation gain is not included in your assessable income if it is a gain of a private or domestic nature (paragraph 775-15(2)(a) of the ITAA 1997).
In your case, you and your spouse transferred an amount from your joint AUD savings account into your USD account in order to help your relatives and subsequently to purchase a home for you and your spouse. A forex gain was made when the balance of your USD account was transferred to your joint AUD account. As the gain was private and domestic in nature, the forex gain is not included in your assessable income.
Capital gains tax
You make a capital gain or capital loss when a capital gains tax (CGT) event happens to a CGT asset.
Under section 108-5 of the ITAA 1997, foreign currency is defined as a CGT asset. You make a capital gain or loss as a result of CGT event occurring to a CGT asset under section 102-20 of the ITAA 1997. The gain or loss is made at the time of the event.
Choosing to convert foreign currency entitlement into Australian dollars regardless of whether it is left in a foreign bank account or transferred to an Australian bank account will result in CGT event C2 occurring under section 104-25 of the ITAA 1997. Each transfer of money will trigger a CGT event.
You will make a capital gain if the capital proceeds from the ending are more than the cost base of their funds. You make a capital loss if the capital proceeds are less than the reduced cost base of their funds.
Cost base
The cost base of an asset is generally what it costs the entity. It is made up of five elements (section 110-25 of the ITAA 1997):
1. money paid or property given for the asset
2. incidental costs of acquiring or selling it
3. costs of owning it
4. costs associated with increasing or preserving its value or installing or moving it and
5. what it has cost the entity to preserve or defend their title or rights to it.
Calculating your capital gain
When calculating any capital gain or loss relating to the exchange of foreign currency, you are required to translate the foreign currency to Australian dollars at the time of a transaction or event, under subsection 960-50(6) of the ITAA 1997.
In your case CGT event C2 happened on date B when the withdrawal was made from your USD account. A gain was made on withdrawal. To calculate the capital gain, the capital proceeds are the balance of the funds withdrawn, converted to AUD at the time of the withdrawal. The first element of the cost base is the amount converted into AUD at the time of deposit on date A.
CGT discount
You are entitled to apply the 50% CGT discount to your capital gain as you satisfy the relevant requirements. You are an individual, the relevant CGT event happened after 21 September 1999 and you held the CGT asset in question (foreign currency bank account) for greater than 12 months.