Edited version of your written advice

Authorisation Number: 1013015597015

Date of advice: 18 May 2016

Ruling

Subject: Foreign exchange

Questions and answers

1. Are you required to pay any tax on the transfer of funds made prior to you becoming an Australian resident for taxation purposes?

No.

2. Will the forex provisions apply to your portion of the transfers made from the joint bank account in Country Y to your bank account in Australia after you became an Australian resident for taxation purposes?

Yes.

3. Is the inheritance you received from your parent's estate assessable in Australia?

No

4. Are you required to declare your portion of the interest earned on the joint bank account in Country Y in the year it is derived in your Australian tax return?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ending 30 June 2016

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You came to Australia and became an Australian resident for taxation purposes in the relevant income year.

You have never been a temporary resident of Australia.

You have made a number of transfers from your bank account in Country Y to your Australian bank account.

The bank account was opened in Country Y in the 20XX income year in joint names with your spouse.

You made one transfer of funds prior to becoming a resident of Australia for taxation purposes from your bank account in Country y to your bank account in Australia.

You made a number of transfers from the bank account in country y to your bank account in Australia.

You received an inheritance from your parent's estate which was transferred into your Australian bank account.

You kept the bank account opened after coming to Australia.

The bank account earns interest in Country Y.

You have not made a balancing election in relation to the account in Country Y.

Relevant legislative provisions

Income Tax Assessment Act 1997 section102-20

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 136-40

Income Tax Assessment Act 1997 Division 775

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.

The transfer that was made prior to you becoming an Australian resident for taxation purposes in June 20YY has no tax consequences in Australia as you were a foreign resident when the transfer was made.

Forex realisation gains and losses

Division 775 applies to the realisation of 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. Bank accounts are considered to be rights or obligations. The relationship between banker and customer in respect of a bank account is that of debtor and creditor.

Each deposit one makes to the account does not represent a new contract. Rather, the nature of the contractual relationship remains constant. That is, there is a single chose in action in respect of the customer's right to be repaid the amount previously deposited. Thus, when a customer deposits money into a bank account with a credit balance, the customer acquires a contractual right as a creditor of the bank. Those rights are extinguished or satisfied to the extent to which an amount is withdrawn from the account.

If you are 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.

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

Under Division 775, a forex realisation gain or loss is made when a forex realisation event happens to an asset, right or an obligation. Withdrawals from a foreign currency denominated bank account with a credit balance is a forex realisation event 2 (FRE2) pursuant to section 775-45. The relevant right is created at the time the foreign currency was deposited into the account pursuant to subparagraph 775-45(1)(b)(iii). Subsection 775-45(2) then provides that the time of the FRE 2 is when the right or part of the right ceases.

Your right to receive the balance standing to the credit of your savings account in Country Y is a relevant right within the terms of subparagraph 775-45(1)(b)(iii). Pursuant to subsection 775-45(2), FRE 2 happens to the taxpayers upon withdrawing amounts from the savings account in Country Y.

A forex realisation gain or loss arises under subsections 775-45(3) or 775-45(4) when an amount is withdrawn from the savings account. The currency exchange effect is the difference in the exchange rate of the Australian dollar value of amounts deposited into the bank account. The difference is brought to account as assessable income under section 775-15 or an allowable deduction under section 775-30.

Forex realisation gains and losses of a private or domestic nature

The general deduction provision 8-1 disallows a deduction for a loss or outgoing to the extent that it is of a private or domestic nature. Division 775 mirrors the same concept to disallow a forex realisation gain or loss to the extent to which that gain or loss is of a private or domestic nature pursuant to subsections 775-15(2) and 775-30(2).

The CGT provisions capture some gains and losses of a private and domestic nature under Part 3-1 or 3-3 of the ITAA 1997. The table in subsection 775-15(2)(b) provides that a forex realisation gain will be assessable even if the gain is of a private or domestic nature by virtue of:

Item 1- FRE 2 happens to a foreign currency or a right or part of a right to receive foreign currency, and gain from the realisation event be taken into account for CGT purposes;

'Foreign currency' itself is clearly listed as a CGT asset under section 108-5 of the CGT provisions even though the bank account itself is a chose in action. The chose in action is the ability to require payment of the account balance, or part of it, on demand. The debtor/creditor relationship between the bank and the account holder is nevertheless a CGT asset which is a legal right that is not property (subsection 108-5(1)(b)).

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

In working out a net capital gain or a net capital loss, the capital loss one makes from a personal use asset is disregarded under subsection 108-20(1). The definition of a personal use asset is 'a CGT asset that is used or kept mainly for your personal use or enjoyment' (paragraph 108-20(2)(a)).

ATOID 2009/33: CGT Small Business Concessions: maximum net asset value test- assets used solely for personal use and enjoyment- personal bank account (ATOID 2009/33) discussed whether an interest earning personal bank account of an individual can be a personal use asset. It states that:

As the bank account is interest earning, it cannot be described as being used solely for personal use and enjoyment. It is used to produce income. The fact that the funds in the bank account are used only for personal living expenses does not affect this outcome.

Your savings account in Country Y earns minimal interest, is used mainly for private expenses and does not constitute a 'personal use asset' for CGT purposes. The nature of the debtor/creditor relationship between the account holder and the bank is considered a commercial contractual relationship. ATOID 2009/33 supports the view that whilst the funds are used for personal expenses, the account is not a personal use asset even if a minimal amount of interest is earned. ATOID 2003/551 Capital Gains Tax: foreign exchange gains or losses, states that foreign currency denominated bank accounts are CGT assets and each withdrawal constitutes a CGT event C2.

Accordingly the forex realisation gains made when withdrawing amounts from the savings Account in Country Y are not of a private or domestic nature and will not be disregarded under subsection 775-15(2).

Paragraph 775-30(2)(a) states that, a forex realisation loss may not be deductible if it is a loss of a private or domestic nature. As above any losses made when withdrawing amounts from the savings account in Country Y are not of a private or domestic nature and will not be disregarded under subsection 775-30(2).

Note paragraphs 775-15(4) and 775-309(4) ensure that there is no double taxation or deduction by ensuring that any gain or loss is only assessable or deductable under sections 775-15 or 775-30 respectively.

The inheritance you received from your parent's estate is not assessable and is not required to be declared in your Australian tax return.

The portion of the interest derived by you on the savings account in Country Y is required to be declared in your Australian tax return in the year it is derived as interest is assessable income.