ATO ID 2006/293: Foreign exchange (forex) gains and losses: rights to receive foreign currency created or acquired in return for a third party paying an amount of foreign currency for your benefit
Date of decision: 20 October 2006
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
Does forex realisation event 2 occur when you withdraw an amount that was previously deposited by an agent, at your direction, into your foreign currency denominated investment account?

Decision
Yes. Forex realisation event 2 does occur when you withdraw an amount that was previously deposited by an agent, at your direction, into your foreign currency denominated investment account.

Facts
The taxpayer maintained a United Kingdom (UK) pound sterling investment account in the UK (the foreign currency bank account). The taxpayer sold a property it owned in the UK and instructed their solicitor to deposit the proceeds from the sale of the property into the foreign currency bank account. The taxpayer subsequently withdrew the balance from that account, converted into Australian dollars, and deposited the amount withdrawn into an Australian dollar denominated bank account in Australia.

Reasons for decision
Summary: Forex realisation event 2 happens when a taxpayer ceases to have a right, or part of a right, to receive foreign currency, and the right or the part of the right is created or acquired in return for the taxpayer paying an amount of Australian currency or foreign currency (see paragraph 775-45(1)(a) and subparagraph 775-45(1)(b)(iii) of the Income Tax Assessment Act 1997 (ITAA 1997)). 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 Similarly, when an amount is withdrawn from a bank account, some or all of these previously acquired rights are extinguished or satisfied. The taxpayer therefore has the right to receive the balance standing to the credit of their foreign currency bank 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 if it can be said to have been acquired in return for the taxpayer paying or agreeing to pay an amount of Australian currency or foreign currency. The funds were deposited by the taxpayer's agent, at the taxpayer's direction, into the foreign currency bank account. As a general rule of law, what a person may do him or herself, the person may do by an agent unless a statute requires a person to execute an act personally ( JM Christie v. Permewan Wright & Co (1904) 1 CLR 693 at 700; Jackson & Co v. Napper (1887) 35 Ch D 162). There is nothing that specifically limits subparagraph 775-45(1)(b)(iii) of the ITAA 1997 to rights to receive foreign currency created or acquired in return for you personally paying an amount of Australian currency or foreign currency. Therefore, under general principles, rights created or acquired in return for a payment of an amount of foreign currency made by your agent also fall within the terms of the subparagraph. In the context of this subparagraph, any payment made by a third party for and on the taxpayer's account and with the taxpayer's prior authority or subsequent ratification may be regarded as payment by the taxpayer ( Simpson v. Eggington (1855) 10 Exch 845; Belshaw v. Bush (1851) 11 CB 191; James v. Isaacs (1852) 12 CB 791; Smith v. Cox [1940] 2 KB 558). Where relevant, the third party payment may be ratified by acquiescence ( Lapraik v. Burrows (The Australia) (1859) 13 Moo PCC 132 at 158; 15 ER 50 at 60). Therefore the total balance of the foreign currency bank account may be regarded as a right to receive foreign currency created or acquired in return for the taxpayer paying an amount of foreign currency. The taxpayer's right to receive foreign currency ceased and forex realisation event 2 happened (pursuant to 775-45(1) of the ITAA 1997) when the taxpayer withdrew the balance of the foreign currency bank account.

Legislative references: Income Tax Assessment Act 1997 section 775-45
Case references: Belshaw v. Bush (1851) 11 CB 191
Related ATO interpretative decisions: ATO ID 2004/855
Subject references: Foreign currency Foreign exchange gains and losses Forex realisation event