Edited version of your written advice

Authorisation Number: 1051321205606

Date of advice: 15 December 2017

Ruling

Subject: Capital gains tax and foreign exchange

Questions and answers

1. Can you disregard the capital gain you made on the sale of your foreign property?

Yes.

2. Will the forex provisions apply to any transfer of funds made from your foreign bank account to your Australian bank account?

Yes.

This ruling applies for the following periods;

Year ending 30 June 2018

Year ended 30 June 2017

Year ended 30 June 2016

Year ended 30 June 2015

The scheme commences on;

1 July 2014

Relevant facts and circumstances

You acquired a property in a foreign country before 1985 when you were a resident of that country.

You relocated to Australia some years later.

You entered into a sale contract for the foreign property some years after you had relocated to Australia.

You made a capital gain on the sale of the property.

The proceeds from the sale have been held in a bank account you have in the foreign country.

The bank account earns interest of approximately 1% per annum.

You intend to transfer funds from the bank account to Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Division 775

Income Tax Assessment Act 1997 Section 775-15

Income Tax Assessment Act 1997 Section 775-30

Income Tax Assessment Act 1997 Section 775-45

Income Tax Assessment Act 1997 Section 855-45

Reasons for decision

Capital gains tax

The capital gains tax provisions apply to assets such as real property acquired on or after 20 September 1985.

On becoming an Australian resident, there are special rules that apply to CGT assets a company or individual owns; however, these rules do not apply to assets acquired before 20 September 1985 (section 855-45 of the Income Tax Assessment Act 1997 (ITAA 1997)).

In your case, you can disregard the capital gain you made from the sale of your foreign property as you acquired it before 20 September 1985.

Forex realisation gains and losses

Division 775 of the ITAA 1997 applies to the realisation of assets, rights and 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 respectively.

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).

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) under section 775-45 of the ITAA 1997. The relevant right is created at the time the foreign currency was deposited into the account and the time of the FRE 2 is when the right or part of the right ceases.

Therefore, a forex realisation gain or loss arises when an amount is withdrawn from the savings account and is brought to account either as assessable income under section 775-15 of the ITAA 1997 or as an allowable deduction under section 775-30 of the ITAA 1997.

Forex realisation gains and losses of a private or domestic nature

Forex realisation gains or losses are disregarded to the extent to which that gain or loss is of a private or domestic nature (sections 775-15 and 775-30 of the ITAA 1997).

There is no definition of private and domestic contained in the Income Tax Assessment Act 1997. Therefore, both words take on their ordinary meaning. The ordinary meaning of private is ‘belonging to or for the use of one particular person or group of people only’ and that of domestic, ‘relating to the running of the house or to family relations’. It is our view that whether a forex gain or loss from a bank is private or domestic is ultimately determined by the dominant purpose for which the bank account is held. Other factors may be of assistance (but not determinative) include:

● The character of the right held by the taxpayer;

● The source of the funds used to open the account;

● The nature of the deposits and withdrawals from the account;

● The intention to earn interest from the account.

In your case, you deposited a substantial amount into your foreign bank account from the sale of your property and the account is also interest bearing, albeit with a small annual rate of return.

Based on these two factors, we consider that any loss or gain you make on the withdrawal of the funds from the account will not be of a private or domestic nature.

Therefore, any forex realisation gain or loss you make will be brought to account either as assessable income or as an allowable deduction.