Private ruling: Foreign Currency Accounts
Published: August 2014
Ruling period: Year ended 30 June 2103
Date scheme commenced: 1 July 2012

Ruling: Questions and Answers | Are you entitled to a deduction for foreign exchange losses relating to the funds held in overseas accounts which consist of proceeds from the sale of a home unit and savings? | No. | Are any gains or losses made on transfers between you foreign currency accounts and subsequent conversion to Australian dollars subject to the Capital Gains Tax provisions? | Yes

Relevant facts and circumstances: You lived in country D for a number of years. You owned a dwelling in country D which was your main residence. You had money in savings accounts overseas. You sold your dwelling depositing the proceeds into your savings account. You have returned to Australia. You became a resident of Australia for taxation purposes when you left country D. You have converted some of the funds in the saving account into Australian dollars and have purchased a residence in Australia with the funds. You have a number of savings and other accounts:

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: Summary: Forex realisation event 2 occurs when a taxpayer ceases 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. The term right includes a right that is contingent upon something happening (section 775-45 of the ITAA 1997). The right, or part of a right, must cease, and be one of the following 4 items: • A right to receive income, or a right that represents ordinary income or statutory income (other than under the capital gains tax (CGT) provisions); • A right created in return for ceasing to hold a depreciating asset; • A right created or acquired for paying or agreeing to pay Australian or foreign currency; or • A right created in return for a realisation event happening in relation to a CGT asset (section 775-45 of the ITAA 1997). The event happens when a taxpayer ceases to have the right commonly when a right to receive foreign currency is satisfied by the actual receipt of that currency. Each time money is deposited or withdrawn from an account a Forex gain or loss may occur. A taxpayer makes a Forex realisation gain if the value of the foreign currency received when the event happens exceeds the Forex cost base of the right, measured at the tax recognition time, to the extent that the gain is due to a currency exchange rate effect (subsection 775-45(3) of the ITAA 1997). A taxpayer will make a Forex realisation loss to the extent that the value of the foreign currency they receive when the event happens is less than the Forex cost base of the right, measured at the tax recognition time, because of a currency exchange rate effect (subsection 775-45(4) of the ITAA 1997). The Forex cost base of a right is defined in section 775-85 of the ITAA 1997 as the money a taxpayer pays or is required to pay in respect of acquiring the right or part of a right. Therefore the Forex cost base of a right to foreign currency which ceased is the total of the Australian dollar value of each amount deposited (that had not already been withdrawn), worked out by translating each relevant deposit at the exchange rate on the day it was made: item 11 of table in subsection 960-50(6) of the ITAA 1997. Alternatively, a taxpayer may choose to calculate the Forex cost base of a right to receive foreign currency by translating the relevant amounts deposited using any of the applicable rules set out in Schedule 2 to the Income Tax Assessment Regulations 1997 (which include the choice to use a reasonable average exchange rate). Income or losses that are taxable under both the foreign exchange (Forex) provisions and capital gains tax (CGT) provisions are taxed first under the Forex provisions (section 775-15(4) of the Income Tax Assessment Act 1997 (ITAA 1997)). This means that if an amount of money is assessable or deductible under the Forex provisions then they are not assessable under the CGT provisions. However, if an amount of money is not taxed (or is disregarded) under the Forex provisions, then the CGT provisions may apply. When you become an Australian resident there are rules relevant to each capital gains tax (CGT) asset that you owned just before you became an Australian resident, except those assets that have the necessary connection with Australia. The first element of the cost base and reduced cost base of the asset at the time you become an Australian resident is its market value at that time (section 136-40 of the ITAA 1997). Foreign currency is a capital gains tax (CGT) asset (section 108-5 of the ITAA 1997). You make a capital gain or a capital loss if a CGT event happens to a CGT asset (section 102-20 of the ITAA 1997). Foreign currency assets that are of a private nature are personal-use assets. 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) owed by the bank that are denominated in a foreign currency. When a customer deposits money into a bank account, the customer acquires contractual rights as the 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 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. Each bank account is a separate asset for CGT purposes, regardless of what currency the account is held in. Each deposit or withdrawal constitutes a CGT event happening to the relevant part of the asset, that is, the amount deposited or withdrawn. The rights arising upon the making of a deposit into the foreign account will have arisen under the foreign account contract, which is an eligible contract. In your case, the bank accounts denominated in foreign currency do not have the necessary connection with Australia. Therefore you are taken to acquire the bank accounts for their market value at the time you became an Australian resident. This will form the first element of your cost base when calculating any capital gain or loss. Subsection 775-30(1) of the ITAA 1997 provides that you can deduct a Forex realisation loss you make as a result of a Forex realisation event that happens during the year. Subsection 775-30(2) of the ITAA 1997 provides for exemptions to deduction if: (a) it is a loss of private and domestic nature, (b) it is not covered by an item in the table. | Detailed Reasoning - Application to your situation: The largest transactions involve the proceeds from the sale of your home unit in country D into a savings account. The sale occurred after you became an Australian resident. The majority of these funds were later moved to an online savings account. Some years later you have withdrawn all the funds from this account and converted it to Australian dollars and purchased a residence in Australia with the funds. Apart from small deposits of income from your prior overseas service the only other funds added to this account were accrued interest. These transactions are private and domestic in nature as the account was a savings account and the proceeds were from the sale of your main residence in country D and the funds were later used solely for the purchase of a main residence in Australia which is private in nature. A foreign exchange loss under Division 775 has not been realised on the conversion of funds from the savings account. As explained above as the Forex provisions do not apply you have made a Capital Gains loss on these transactions. That loss would be equal to the difference between the Australian dollar value of the foreign currency amount on the later of the date deposited into the account or on the date you became an Australian resident and the amount received on conversion when the amount was withdrawn from the account. Note: each deposit into the account will need to have the corresponding gain or loss calculated separately. The other country D accounts are also private and domestic in nature as they are general savings accounts and they were not part of a business or investment scheme. One of the entity E accounts was denominated in Australian dollars and there were no Forex or Capital Gains consequences when it was closed. Any gains or losses on the closure of the other entity E accounts would have accrued at the time of transferring the amounts into bank account F. There would also have been another gain or loss realised on the transfer of funds from that account into savings account G. The transactions relating to the entity E accounts and the bank account F and savings account G are also of a private nature and therefore subject to the Capital Gains provisions and not the Forex provisions of the Income Tax Assessment Act 1936