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Edited version of private advice
Authorisation Number: 1051622544775
Date of advice: 19 December 2019
Ruling
Subject: Foreign exchange gains and losses
Question 1
Does the $250,000 balance election mean any forex gains or losses are not assessable or deductable?
Answer
Yes.
Question 2
Are there any taxation implications if funds are moved from a foreign currency account, subject to the balance election, to an $A bank account located in Australia?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The SMSF set up an account with an online brokerage firm for buying and selling foreign shares. The nature of this account is that funds must be in the account prior to placing a trade order and this results in a balance remaining in the account. The purpose of this account is for the facilitation of share purchases and sales and not intended to hold the funds as an investment over a period of time.
The SMSF purchases shares with the intention to be held for the long term.
The SMSF intends to transfer further funds to the account to purchase shares. When shares are sold in the future, the intent is to not transfer the proceeds to Australia but to purchase other shares. The shares will be sold and the account closed and transferred to Australia when the SMSF no longer requires exposure to the foreign share market.
The SMSF has made a limited balance election on the account and this has not been breached. The balance of the account will not exceed A$250,000 in the future.
The following transaction types have occurred in the account: deposits, share purchases, interest, dividends received, interest and dividend withholding tax and dividend reinvestment.
A conversion to $A will be performed annually at 30 June for financial accounts purposes.
Relevant legislative provisions
Income tax Assessment Act 1997 Division 775
Reasons for decision
Gains and losses in foreign currency accounts
The ordinary operation of the foreign exchange (forex) measures, as contained in Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997), is that deposits to, and withdrawals from, foreign currency denominated bank accounts may give rise to a gain or loss that is realized under the measures. Withdrawals from an account with a credit (positive) balance will also generally have a consequence under the capital gains tax (CGT) provisions.
FOREX measures
The $250,000 balance election broadly enables you to disregard certain foreign currency gains and losses on certain foreign currency denominated bank accounts and credit card accounts (called qualifying forex accounts) with balances below the specified limit.
An election can be made for a qualifying forex account. A qualifying forex account is an account that is:
· denominated in a foreign currency
· either a credit card account, or an account held for the primary purpose of facilitating transactions.
The limited balance test
The limited balance test applies to all of the accounts for which a $250,000 balance election is in force. Credit and debit balances of these accounts are separately added, without netting, to arrive at the total credit balance and the total debit balance. The limited balance test is passed at a particular time if the total credit balances, and the total debit balances, of all qualifying forex accounts for which an election is in force are each not more than the equivalent of $250,000.
Breaching the limited balance test
When the balance of your elected account breaches the A$250,000 limit the exemption under the election will cease for the period of the breach.
There is a buffering rule which has a breach tolerance for a period of 15 days or less.
The SMSF has made a limited balance election for the account for buying and selling foreign shares.
The A$250,000 limit has not been breached on this account and will not be in the future.
Any foreign currency gains or losses that have been realised on the account are disregarded under the balance election.
There will be no taxation implications when the funds are transferred from the foreign currency account to Australian dollar account in Australia again because of the balance election on the account.
Note: If the funds are transferred into another foreign account or an Australian Account denominated in a foreign currency then there may be assessable income or losses.
The end of financial year conversion to Australian dollars for record keeping purposes does not have any consequences under Division 775 of the ITAA 1997.
Subdivision 960-C sets out the calculation method for capital gains and losses for foreign investments.
The calculation in simple terms is:
· apply the exchange rate to the purchase price on the date of purchase, and then
· apply the exchange rate to the proceeds of the sale of the asset on the day it is sold
· you then include the difference from the purchase price to the proceeds of the sale in the tax return.