Edited version of your written advice

Authorisation Number: 1051379273036

Date of advice: 29 May 2018

Ruling

Subject: Foreign exchange rules

Question 1

Will any forex realisation gains or losses made on the withdrawal, transfer or payment out of the term deposit or savings account be disregarded under Div 775 of the Income Tax Assessment Act 1997 (Div 775) ?

Answer

No

Question 2

Will any forex realisation gain or loss made on the premium bonds purchased after 1 July 20xx be assessable or deductable under Div 775?

Answer

Yes

Question 3

Does the private or domestic exception apply to the premium bonds?

Answer

No

Question 4

If the forex realisation gain or loss on the redemption of the premium bond purchased after 1 July 20xx will be subject to Div 775, will the cost of acquisition of the bond (translated to $AUD) be the calculated at the original purchase date?

Answer

Yes

Question 5

If the forex realisation gain or loss on the redemption of the premium bond purchased after 1 July 20xx will be subject to Div 775, will the cost of acquisition of the bond (translated to $AUD) be the calculated at the date the taxpayer became a resident?

Answer

No

Question 6

Will the gains or losses made on disposal of the premium bonds purchased prior to 1 July 20xx be assessable income or an allowable deduction respectively?

Answer

Yes

Question 7

If the forex realisation gain or loss made on the withdrawal, transfer or payment out of the term deposit or savings account is disregarded under the Forex Measures, will capital gain or capital loss arise under the CGT provisions?

Answer

Not applicable

Question 8

Is there an exemption from the capital gains tax provisions for forex gains or losses of a private or domestic nature made on the withdrawal, transfer or payment out of the foreign currency term deposit or savings account?

Answer

Yes

Question 9

Can the CGT discount apply to any assessable capital gains made on the withdrawal, transfer or payment from the foreign currency bank account and term deposit where the deposit was made more than twelve before the withdrawal?

Answer

Not applicable

This ruling applies for the following periods:

Year ended 30 June 201X

Year ended 30 June 201X

Year ended 30 June 201X

Year ended 30 June 201X

Year ended 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

You and your spouse became residents of Australia for taxation purposes on July 20xx.

At the time of becoming residents of Australia for taxation purposes you and your spouse held term deposits, savings transactional accounts and Country A premium bonds in the Country A.

All savings accounts and term deposits were opened after 1 July 20xx.

All of the Country A holdings were denominated in Country A currency.

You and your spouse purchased Country A premium bonds between 19xx and 30 June 20xx and the remainder of the bonds were purchased on or after1 July 20xx.

During the period between July 20xx (date the taxpayers became an Australian resident) and August 20xx (time the funds were transferred to Australian bank account and exchanged for Australian dollars) the following transactions in general occurred.

1. Interest earned on the term deposits was deposited into the savings account.

2. Withdrawals were made from the savings account to fund the taxpayers holiday expenses while in the Country A and for private purposes. The withdrawals were made in Country A currency and not exchanged for Australian Dollars.

3. Deposits were made into the savings account at different times in Country A currency, being interest received on term deposits, savings accounts and premium bonds.

4. All term deposits were closed and funds denominated in the foreign currency were placed in Country A Bank Savings Account.

5. Premium Bond holdings were redeemed and the funds in the foreign currency placed in Country A Bank Savings account. These were redeemed at the same value as their purchase price.

The majority of funds held in the Country A bank savings account were transferred in 20xx to an Australian bank account. Funds were exchanged at the prevailing bank rates for Australian Dollars as part of the transfer.

The bank accounts and term deposits earnt interest.

The source of the income for the original opening of the bank accounts were accumulated savings from employment positions. The money from the redemption of the Country A bonds was placed into term deposits.

No election has been made under section 775-150 of the ITAA 1997.

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

Forex realisation gains and losses

Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) 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.

Section 775-165 states that for the purposes of forex the time of acquisition is determined using the CGT acquisition rules in Division 109 of the ITAA 1997. In terms of residency this means that section 855-45 of the ITAA 1997 is used to determine the time of acquisition.

Under section 855-45 of the ITAA 1997, an entity that becomes an Australian resident is taken to have acquired each asset that they own just before becoming an Australian resident at the time of becoming an Australian resident, except for an asset:

(a) that is taxable Australian property as defined in section 855-15 of the ITAA 1997; or

(b) that was acquired before 20 September 1985.

You are taken to have acquired the bank accounts, term deposits and premium bonds on the day you became a resident of Australia for taxation purposes on July 20xx.

It is important to note that Section 775-165 of the ITAA 1997 only provides for the acquisition date and the legislation does not include a market value rule for the cost of acquisition. Unlike the CGT provisions, for Forex purposes the cost base is whatever the cost base was when the right was first acquired, i.e. when the bank account was originally opened and funds were deposited into the account.

Bank Accounts and Term Deposits

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.

Your right to receive the balance standing to the credit of your savings account and term deposit in Country A is a relevant right within the terms of subparagraph 775-45(1)(b)(iii). Pursuant to subsection 775-45(2), FRE 2 happen when you withdraw amounts from the savings account and the term deposit in Country A.

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 and the term deposit.

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.

Premium bonds

Forex realisation event 2 will happen when you redeem your Premium Bonds, you will make a forex realisation gain or loss on the redemption. However, section 775-168 of the ITAA 1997 states that a forex realisation gain or loss you make as a result of forex realisation event 2 is disregarded if the event happened because of a disposal or redemption is covered by:

(a) subsection 26BB(4) or 5) of the Income Tax Assessment Act 1936 (ITAA 1936); or

(b) subsection 70B(2B) or (2C) of the ITAA 1936.

Sections 26BB and 70B of the ITAA 1936 deal with gains and losses on the disposal of traditional securities. The subsections mentioned deal with the disposal or redemption occurring because the traditional security is converted into ordinary shares in a company.

Upon disposal or redemption your premium bonds will not be converted into ordinary shares in a company, accordingly section 775-168 of the ITAA 1997 will not apply to disregard any forex gain or loss.

Therefore, you will make a forex gain or loss when you make withdrawals from your bank accounts and term deposits or when you redeem your Premium Bonds.

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).

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.

You kept the bank accounts for mainly private transactions however you also deposited amounts of money from transactions that could not be considered private and domestic. An example would be the money earned from employment. The account was an interest bearing account and you earned interest on this account. The term deposits are interest bearing and used to earn income.

Any gains from the bank accounts, term deposits and Premium Bonds are not private and domestic. The conclusion that the gain is not of a private and domestic nature is enough to lead it to being included as assessable income under section 775-15 of the ITAA 1997. However an alternative CGT argument will be discussed below.

CGT Provisions

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.

‘Foreign currency’ itself is clearly listed as a CGT asset under section 108-5 of the ITAA 1997 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) of the ITAA 1997).

As the bank accounts and term deposits are each a single 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) of the ITAA 1997. A capital gain you make from a personal use asset is disregarded if the first element of the asset’s cost base is $10,000 or less. 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) of the ITAA 1997).

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 accounts and term deposits are interest earning, they cannot be described as being used solely for personal use and enjoyment. They are 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 accounts and term deposits in Country A earn interest, are used mainly for private expenses and do 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. Even if it was determined to be a personal use asset, gains from personal use assets are assessable when the first element of the cost base of the asset is over $10,000.

Accordingly any forex realisation gains made when withdrawing amounts from the bank accounts and term deposits are not of a private or domestic nature and will not be disregarded under subsection 775-15(2).

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.