Edited version of private advice

Authorisation Number: 1052109839152

Date of advice: 24 April 2023

Ruling

Subject: Forex - qualifying forex account

Question 1

Does forex realisation event 2 in section 775-45 of the Income Tax Assessment Act 1997 (ITAA 1997) happen on making withdrawals from your Trading Account?

Answer

Yes.

Question 2

Does Capital Gains Tax (CGT) event C2 in section 104-25 of the ITAA 1997 happen on making withdrawals from your Trading Account?

Answer

Yes.

Question 3

Is your Trading Account a qualifying forex account for the purposes of subdivision 775-D of the ITAA 1997?

Answer

Yes.

Question 4

Can you disregard the forex gains and losses and the capital gains and capital losses made on your Trading Account under section 775-250 of the ITAA 1997 from the time you make an election in writing?

Answer

Yes.

Question 5

Can the balance of the international securities held in your Trading Account be disregarded for the purposes of applying the limited balance test in section 775-245 of the ITAA 1997?

Answer

Yes.

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

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You own a portfolio of Australian and international shares.

You opened a Trading Account (Trading account) with a broker to assist you in acquiring international shares.

Under the arrangement, an International Custodian holds the securities on your behalf, which means that the name of the International Custodian rather than your name appears on the share registry. You retain beneficial ownership but not legal ownership of your international securities.

When acquiring international shares, your broker requires you to place Australian currency in your Trading account and convert this into the relevant foreign currency before placing an order to acquire the shares.

Foreign currencies held in the Trading account may be converted to other foreign currencies or withdrawn in Australian currency.

Both foreign currency and the international securities you acquired are 'held' in your Trading account and you can access the balances of both through your account.

Dividends from the international shares you hold are also paid into the Trading account in the relevant foreign currency.

Your Trading account may hold various foreign currencies at any one time.

Any foreign currencies held in your Trading account are held for the purpose of acquiring additional shares.

You do not hold foreign currencies in the Trading account to attempt to profit on movements in the exchange rate.

The balance of the foreign currency held in your trading account does not currently exceed the equivalent of A$XXX and is not expected to exceed A$XXX in the future.

You are going to make an election in writing to have subdivision 775-D of the ITAA 1997 (concerning qualifying forex accounts that pass the limited balance test) apply to your Trading account.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 775-15(4)

Income Tax Assessment Act 1997 subsection 775-30(4)

Income Tax Assessment Act 1997 subsection 775-45(1)

Income Tax Assessment Act 1997 subparagraph 775-45(1)(b)(iii)

Income Tax Assessment Act 1997 subsection 775-45(3)

Income Tax Assessment Act 1997 subsection 775-45(5)

Income Tax Assessment Act 1997 Subdivision 775-D

Income Tax Assessment Act 1997 section 775-230

Income Tax Assessment Act 1997 section 775-245

Income Tax Assessment Act 1997 section 775-250

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1 - Forex realisation event 2

Under the provisions of Division 775 of the ITAA 1997, foreign exchange (forex) gains or losses may be included in assessable income or deducted as an expense as a result of a forex realisation event happening.

Forex realisation event 2 in section 775-45 of the ITAA 1997 occurs when you cease to have a right, or part of a right, to receive foreign currency. A right to receive foreign currency includes a right to receive an amount of Australian currency that is calculated by reference to an exchange rate.

ATO Interpretative Decision ATO ID 2004/855 Income Tax: Foreign exchange (forex) gains and losses: bank account opened between 19 February 1986 and 1 July 2003 provides guidance on the application of the forex rules in Division 775 of the ITAA 1997 to bank accounts denominated in a foreign currency. Although the analysis in the ATO ID deals with 'bank' accounts, the principles apply similarly to accounts of that general nature. That is, a facility offered by one entity to another entity whereby funds can be deposited and withdrawn by the latter (for example).

The relationship between banker and customer in respect of a bank account is that of debtor and creditor: Foley v. Hill and Ors (1848) 2 HL Cas 28; [1843-60] All ER Rep 16. Thus, when a customer deposits money into a bank account the customer acquires contractual rights as a creditor of the bank. Similarly, when an amount is withdrawn from a bank account some or all of these previously acquired rights are extinguished or satisfied.

This does not mean that each deposit made by a customer represents 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: Hart (Inspector of Taxes) v. Sangster [1957] 1 Ch 329; [1957] 2 All ER 208; Alcom v. Republic of Colombia [1984] AC 580.

The taxpayer therefore has the right to receive the balance standing to the credit of their foreign account (a right to receive a certain amount of foreign currency). This right to receive foreign currency is a relevant right within the terms of subparagraph 775-45(1)(b)(iii) of the ITAA 1997.

A part of this right will cease if the taxpayer directs that money be withdrawn or transferred out of the foreign account. Upon this right, or part of this right ceasing, a forex realisation event 2 will happen (subsection 775-45(1) of the ITAA 1997).

A forex realisation gain or loss may be made as a result of a forex realisation event 2 happening on a withdrawal, transfer or payment out of the foreign account (subsections 775-45(3) and (5) of the ITAA 1997).

In your case, you hold a Trading Account that holds foreign currency in one or more denominations from time to time. As such, on the depositing of an amount of foreign currency to the account, a right to receive the foreign currency arises.

Therefore, forex realisation event 2 will happen on each withdrawal of an amount of foreign currency from your Trading account.

Question 2 - CGT event C2

CGT event C2 in section 104-25 of the ITAA 1997 happens if your ownership of an intangible CGT asset ends in certain ways, including because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. A right is an intangible asset.

ATO Interpretative Decision ATO ID 2003/551 Income Tax: Capital Gains Tax: foreign exchange gains or losses provides guidance on the application of the CGT provisions to bank accounts denominated in a foreign currency. Although the analysis in the ATO ID deals with 'bank' accounts, as mentioned above, the principles apply similarly to accounts of that general nature. That is, a facility offered by one entity to another entity whereby funds can be deposited and withdrawn by the latter (for example).

Under section 108-5 of the ITAA 1997, foreign currency is 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 (Joachimson v. Swiss Bank Corporation [1921] 3 KB 110 at 127).

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 (Foley v. Hill [1843-1860] All ER 16).

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 in section 104-25 of the ITAA 1997 happening to the relevant 'part' of the asset (the amount withdrawn).

However, to the extent that that a forex gain would be included in a taxpayer's assessable income under the forex rules and also the CGT provisions, the gain is only included in assessable income under the forex rules. The same applies to forex losses (subsections 775-15(4) and 775-30(4) of the ITAA 1997).

In your case, you hold a Trading account that holds foreign currency in one or more denominations from time to time. As such, on the depositing of an amount of foreign currency to the account, a right to receive the foreign currency arises.

Therefore, CGT event C2 will happen on each withdrawal of foreign currency from your Trading account.

Question 3 - Qualifying forex account

Subdivision 775-D of the ITAA 1997 deals with the tax consequences of qualifying forex accounts that pass the limited balance test.

A 'qualifying forex account' means an account that is denominated in a particular foreign currency and either has the primary purpose of facilitating transactions or is a credit card account (section 995-1 of the ITAA 1997).

The definition of 'qualifying forex account' was amended in 2009 by removing the condition that a qualifying forex account be held with an ADI (an authorised deposit-taking institution). This had the effect of broadening the number and type of accounts that an election could be made for.

In your case, you hold a Trading account with a broker that may hold one or more foreign currencies at any one time. Accordingly, the Commissioner accepts your account is denominated in a foreign currency. It is also evident that the purpose of the account is to facilitate share trading transactions and also to receive share dividend payments. Consequently, it is considered that your account has the primary purpose of facilitating transactions.

Therefore, your Trading account is a qualifying forex account for the purposes of subdivision 775-D of the ITAA 1997.

Question 4 - Tax consequences of passing the limited balance test

Section 775-230 of the ITAA 1997 provides that you can make an election to have Subdivision 775-D apply to one or more qualifying forex accounts held by you; generally known as the $250,000 balance election.

The election broadly enables you to disregard certain foreign currency gains and losses, as well as certain capital gains and losses, on qualifying forex accounts with balances below a specified limit. The election must be in writing and applies from the date it is made; it is unable to be applied retrospectively.

The availability of the election recognises that applying the forex rules to foreign currency denominated bank accounts with high transaction volumes may give rise to significant compliance costs for some taxpayers.

The limited balance test in section 775-245 of the ITAA 1997 applies to all 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 A$250,000. A buffering rule applies for balances that exceed the limit on a temporary basis.

The tax consequences of passing the limited balance test are contained in section 775-250 of the ITAA 1997 as follows:

A forex realisation gain or a forex realisation loss you make as a result of forex realisation event 2 or 4 is disregarded if the event happens in relation to a qualifying forex account that:

a)    you hold at the time of the event; and

b)    passes the limited balance test at the time of the event (subsection 775-250(1)).

Further, if CGT event C1 or C2 happens in relation to a qualifying forex account that:

a)    you hold at the time of the event; and

b)    passes the limited balance test at the time of the event;

disregard so much of any capital gain or capital loss you make as a result of the event as is attributable to a currency exchange rate effect (subsection 775-250(2)).

In your case, you hold a qualifying forex account and are going to make an election in writing to have Subdivision 775-D of the ITAA 1997 apply to the account.

Therefore, you will be able to disregard the forex gains and losses from forex realisation event 2 happening and also any capital gains and capital losses you make from CGT event C2 happening in regard to withdrawals made from your Trading account from the date the election is made.

Question 5 - Limited balance test

As stated above, the limited balance test in section 775-245 of the ITAA 1997 applies to all the accounts for which an election is in force. 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 A$250,000.

The forex rules in respect of qualifying forex accounts and the limited balance test are concerned with the balance of 'foreign currency' held in the relevant account.

In your case, in addition to holding foreign currency, your Trading account also 'holds' International Securities, that is, shares in foreign companies. While this may be the case, the shares are CGT assets that are subject to their own tax treatment when disposed of; they are not foreign currency.

As such, it is considered that the amount representing International Securities held in your Trading account is not 'foreign currency' for the purposes of the limited balance test in section 775-245 of the ITAA 1997 and can be disregarded in determining the balance of your account.