Edited version of your written advice

Authorisation Number: 1012787695736

NOTICE

This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.

This notice must not be taken to imply anything about:

● the binding nature of the private advice issued to the applicant

● the correctness of other edited versions.

Ruling

Subject: Foreign currency bank account

Questions and Answers:

1. Are the foreign exchange gains and losses made from your foreign currency bank account in Country A disregarded under Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes

2. Are the foreign exchange gains or losses made on withdrawals from your foreign currency bank account subject to the capital gains tax (CGT) provisions?

Yes

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

You and your spouse are residents of Australia for tax purposes.

You and your spouse arrived in Australia in the 2014-15 income year.

You and your spouse buy and sell shares on foreign share exchanges primarily in Country A on capital account as share investors.

To facilitate the buying and selling of shares you each have a bank account in Country A. These accounts receive proceeds from the sale of shares and fund the purchase of new shares.

You each typically withdraw funds from your respective account once or twice a year and convert to $A for personal use in Australia.

The two bank accounts were opened after 1986 when you both were non-residents of Australia for income tax purposes.

For the period of this ruling you and your spouse are not in the business of buying and selling shares.

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 Division 775.

Income Tax Assessment Act 1997 Paragraph 775-15(2)(a)

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 are share investors and trade shares on capital account. You both trade shares mainly in Country A and each hold a bank account in Country A only to facilitate share trading. The accounts receive proceeds from the sale of shares and fund the purchase of new shares. As you are not in the business of buying and selling shares, the bank accounts themselves are not a business asset.

As the two bank accounts in question serve for personal use only, any foreign exchange gain made in relation to these accounts is private or domestic in nature and is not included in your assessable income under paragraph 775-15(2)(a) of the ITAA 1997. However, gains or losses may still be taken into account under other provisions of the ITAA 1936 or the ITAA 1997 as a result of a withdrawal from such a foreign account.

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. However, bank accounts denominated in a foreign currency are not foreign currency but rather a chose in action, or more specifically a debt (or debts), denominated in a foreign currency.

The depositing of foreign currency into a bank account results in the acquisition of a debt by the depositor, the debt being a chose in action and a CGT asset. The chose in action is the ability to require payment of the account balance, or part of it, on demand.

A bank account is a single asset, the one debt and chose in action. That is, a single debt existing between the customer and the banker in their respective capacities as creditor and debtor.

As the bank account is one asset, each deposit adds to its cost base and reduced cost base and 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).

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 section 960-50(6) of the ITAA 1997.

Therefore, each deposit and withdrawal must be converted to Australian dollars to work out the relevant cost base and capital proceeds of the debt asset.

On this basis, foreign exchange gains or losses will be brought to account at the time of a withdrawal depending on the movement of the foreign currency as against the Australian dollars under the CGT provisions.

Becoming an Australian resident

When an individual becomes an Australian resident, then for each CGT asset that is not a taxable Australian property:

(a) the asset is taken to be acquired by the individual, company or trustee (as the case may be) at the time of becoming resident, and

(b) the first element of the cost base and reduced cost base of the asset is its market value at that time (sections 855-45, 855-50 of the ITAA 1997).

An Australian resident is assessable on the capital gains or losses made from CGT events that happen on his or her worldwide assets.

Therefore, when you became an Australian resident you are deemed to have acquired the foreign currency bank account at its market value at the time you became an Australian resident. This will form the first element of your cost base when calculating your CGT. Gains or losses made from withdrawals made from the foreign currency bank accounts constitute a CGT event C2 happening to the relevant part of the CGT asset. A capital gain or capital loss is calculated by deducting the cost base from the capital proceeds. The capital proceeds are the amount in Australian dollars that you received upon the exchange of your foreign currency.

Conclusion

As a share investor, the gains or losses made on converting to Australian dollars upon withdrawals from your foreign currency bank account are subject to the CGT provisions.