Private ruling: Foreign exchange
Published: December 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: Year ending 30 June 2011

Ruling: Q1: Will the conversion of foreign currency (FC) to Australian Dollars (AUD) trigger foreign exchange event (FRE) 2? | A1: Yes. | Q2: Under Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) will the "private or domestic" exemption apply for gains or losses made on the conversion of FC into AUD? | A2: No. | Q3: Under Division 775 of the ITAA 1997 will the cost base of the bank account be the value of the account at the exchange rate on the day of becoming a resident? | A3: Yes. | Q4: Under Division 775 of the ITAA 1997 will any gain be taxed as income and or any loss be deductible at D15 of the relevant year Australian Income Tax Return? | A4: Yes. | Q5: Under Division 775 of the ITAA 1997 will the taxation implications differ if you converted amounts with a cost base of less than $X on multiple occasions? | A5: No.

Relevant facts and circumstances: You became a resident of Australia in year ended 20YY this was also the day you arrived in Australia. At the time of becoming a resident, you had FC in an overseas bank account. These funds originally arose from the sale of an overseas property. Funds also arose from employment and business ventures in the overseas country. These funds have been taxed in foreign country where applicable. A period after arriving in Australia further FC was deposited. This was the proceeds from the sale of your overseas principal place of residency; this took increased the balance of the overseas bank account. The contract date for the disposal of the property that resulted in the FC being deposited was prior to you becoming and Australian resident. Settlement was after you became a resident. Half the FC was converted into AUD and brought into the country in relevant year. Half the funds are held in a savings account, the other half are currently held on a term deposit where both accounts earn interest. It is intended that the balance of the funds will be converted in subsequent year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 108-5, | 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 Subsection 775-45(1) | Income Tax Assessment Act 1997 Section 775-85 and | Income Tax Assessment Act 1997 Subsection 960-50(1).

Reasons for decision: Summary: The conversion of FC to AUD will trigger FRE2. | Detailed Reasoning - Detailed reasoning: Forex gains or losses from 1 July 2003 are covered by Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997). The general principle is that foreign currency gains or losses have a revenue character rather than a capital nature. Foreign currency gains or losses are assessable or deductible when they are realised if they occur as result of a forex realisation event (FRE). They are realised when an FRE happens. There are five forex realisation events listed between sections 775-40 and 775-60 of the ITAA 1997. A forex realisation events take place when certain rights and obligations cease or are disposed of in whole or in part. FRE2 will occur when you make withdrawals from your foreign currency denominated account. Under subsection 775-45(1) of the Income Tax Assessment Act 1997 (ITAA1997) each withdrawal that you make constitutes a part ending or part satisfaction of your right to receive foreign currency. This right was acquired in return for you paying an amount of foreign currency, therefore FRE2 will occur on each occasion that you convert FC to AUD. | Summary: The private or domestic exemption will not apply to the transfer of funds. | Detailed Reasoning - Detailed reasoning: Whether a forex realisation gain or loss is of a private or domestic nature is ultimately a question of fact to be decided on the particular circumstances of each case. In your case you are holding the money in the overseas bank account for two reasons. The first reason is for the generation of interest and the second reason is to speculate on future exchange rate movements and to take advantage of any favourable changes. As you are using this account to generate income and for currency speculation it is not considered to be private or domestic in nature, therefore the provision of Division 775 of the ITAA 1997 will apply. | Summary: The cost base of the bank account will be the value of the account at the exchange rate on the day of becoming a resident. | Detailed Reasoning - Detailed reasoning: Broadly, the forex cost base is defined in section 775-85 of the ITAA 1997 as the amount you paid, or are required to pay and the market value of any non-cash benefit you provided or are required to provide in respect of acquiring the right to receive foreign currency reduced by any amounts that are deductible under a provision of the ITAA 1997 other than this division. In your case, you provided a cash benefit in return for the right to receive foreign currency against your bank. Being an amount of foreign currency, it is necessary to translate this figure into AUD under subsection 960-50(1) of the ITAA 1997. The market value of the payment is translated into AUD at an exchange rate applicable at the time you became a resident. In year ended 20YY you became a permanent resident and subject to operative provisions of the Australian income tax legislation applicable to Australian residents. The effect on you when you become a permanent resident of Australia is that you are taken to have acquired assets (section 108-5 of the ITAA 1997 provides an example of a CGT asset to include foreign currency, other than those acquired before 20 September 1985) that are not Australian taxable property for the market value at the time you became a permanent resident. When you became a permanent resident your foreign bank accounts were recognised as assets that are subject to the foreign exchange rules of division 775 of the ITAA 1997. As a result, the cost base of the bank account will be the value of the account at the exchange rate on the day you became a resident. | Summary: Under division 775 a forex gain will be included as income and any forex loss will be deductible at D15. | Detailed Reasoning - Detailed reasoning: Subsection 775-15(1) of the ITAA 1997 states that your income for an income year includes a forex realisation gain you make as a result of a forex realisation event that happens during that year. As FRE2 will occur when you convert your FC to AUD, any gain you make will be assessable. Subsection 775-30(1) of the ITAA 1997 states that you can deduct from your assessable income for an income year a forex realisation loss that you make as a result of a forex realisation event that happens during that year. As FRE2 will occur when you convert your FC to Australian Dollars any loss you incur will be deductible. Information from ato.gov.au regarding D15 -Other Deductions 2012 (enclosed) advises that; unless you carried on a business and have included all your foreign exchange losses in calculating your business net income or loss at item 15, your deductible forex losses must be shown at this item. | Detailed Reasoning - Question 5: The taxation implications under Division 775 of the ITAA 1997 will not differ if the client converts amounts with a cost base of less than $10,000 multiple times. Division 775 of the ITAA 1997 does not make concessions based on the value of the cost base. As the conversion of FC into AUD will trigger FRE2 under Division 775 of the ITAA this will be the case when the conversion is undertaken.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.