Edited version of private advice

Authorisation Number: 1052136491168

Date of advice: 4 July 2023

Ruling

Subject: Forex provisions

Question

Will the forex provisions apply to any transfer of funds from each of your foreign currency denominated bank accounts?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You deposited an amount of Country X denominated currency from the sale of an overseas company you owned to your Country X denominated bank account. The Australian dollar (AUD) equivalent of this transaction was more than $XXX.

Subsequently you withdrew an amount from your Country X denominated bank account. The AUD equivalent of this transaction was more than $XXX.

Subsequently, an amount of Country Y denominated currency was then deposited to a Country Y denominated bank account you held. The AUD equivalent of this transaction was more than $XXX.

Subsequently you withdrew an amount from the Country Y denominated bank account. The AUD equivalent of this transaction was more than $XXX.

Subsequently you deposited an amount to another Country Y denominated bank account you held with an Australian financial institution. The AUD equivalent of this transaction was more than $XXX.

Subsequently you withdrew an amount from the newer Country Y account. The AUD equivalent of this transaction was more than $XX, and the balance of the account remained above $XXX.

Subsequently you withdrew an amount from the newer Country Y account. The AUD equivalent of this transaction was more than $XX, and the balance of the account remained above $XXX.

You plan on making more withdrawals from the newer Country Y account for daily spending.

The running balance of your share of your Country X denominated bank account and each of your Country Y denominated bank accounts remained above $XXX AUD equivalent.

A number of the preceding transactions resulted in financial gains or losses due to currency exchange rate fluctuations.

Your Country X and Country Y denominated accounts were non-interest bearing and mainly transactional based accounts, and both of these accounts have since been closed.

Relevant legislative provisions

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 775-230

Income Tax Assessment Act 1997 Section 775-245

Income Tax Assessment Act 1997 Section 775-250

Reasons for decision

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. 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 foreign currency bank accounts (both RUB and USD denominated) is a relevant right within the terms of subparagraph 775-45(1)(b)(iii). Pursuant to subsection 775-45(2), FRE 2 is brought forth upon each withdrawal from these foreign currency denominated bank accounts.

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 from when they were first deposited into the bank account, to when they are later withdrawn from the account. The difference is brought to account as assessable income under section 775-15 or an allowable deduction under section 775-30.

Qualifying forex account

Section 775-230 of the ITAA 1997 states that you may elect to have this subdivision apply to one or more qualifying forex accounts held by you.

A qualifying forex account is an account that is:

•         denominated in a foreign currency; and

•         either a credit card account, or an account held for the primary purpose of facilitating transactions.

If the election is made to have this subdivision apply to an account, a forex realisation gain or a forex realisation loss you make in relation to the account as a result of forex realisation event 2 or 4 is disregarded if the account passes the limited balance test (see subsection 775-250(1) of the ITAA 1997).

Limited balance test

For an account to pass the limited balance test, the combined balance of all the accounts covered by your election must not be more than the foreign currency equivalent of $250,000 (see subsection 775-245(1) of the ITAA 1997).

Once a limited balance election is made, meeting the A$250,000 limit is measured on an ongoing basis.

Subsection 775-230(3) of the ITAA 1997 states that:

An election continues in effect, in relation to a particular account, until:

(a) you cease to hold the account; or

(b) the account ceases to be a *qualifying forex account; or

(c) the election is varied by removing the account; or

(d) a withdrawal of the election takes effect;

whichever happens first.

Pursuant to subsections 775-245(2) and (3) of the ITAA 1997, if the combined balance of the account or accounts that are the subject of the election breaches the A$250,000 limit, the exemption treatment under the election will cease for the period of the breach.

This is subject to a buffering rule, which allows you to retain the $250,000 balance exemption if the breach is remedied within a short period of time.

The buffering rule allows you to continue to meet the limited balance test if all of the following apply:

•         The A$250,000 equivalent balance limit is breached no more than two times in any one income year.

•         All breaches, including those (if any) extending into or beyond the relevant income year, are remedied within 15 days of occurring.

•         The balance does not exceed the equivalent of A$500,000.

During the period of the breach, if any of the above conditions are not met, you will become subject to forex realisation gains and losses on both:

•         withdrawals from foreign currency denominated bank accounts with a credit balance (forex realisation event 2)

•         deposits into a foreign currency denominated bank account with a debit balance (forex realisation event 4).

This will be the case from the time the conditions were failed. That is, any forex realisation gains or losses made on withdrawals and deposits during the period after the buffering period has expired will be brought to account during the period of continued breach.

Application to your circumstances

Whilst your Country X denominated bank account and each of your Country Y denominated bank accounts were mainly transactional accounts, and therefore meeting the definition of a qualifying forex account, as the running balance of your share of your Country X denominated bank account and each of your Country Y denominated bank accounts remained above $250,000 AUD, you will not pass the limited balance test.

As such, you will be subject to forex realisation gains and losses on all withdrawals from foreign currency denominated bank accounts with a credit balance (forex realisation event 2). These gains and losses will be either assessable or deductible under subsections 775-45(3) or 775-45(4) of the ITAA 1997.