Private ruling: Foreign exchange losses
Date of advice: 8 January 2018
Published: May 2018
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Questions and Answers | 1. Is your bank A account subject to the foreign exchange (forex) provisions in Division 775 of the Income Tax Assessment Act 1997 ? | No. | 2. Is your bank A account subject to the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1997 ? | Yes. | 3. Does every withdrawal of funds from your bank A account give rise to capital gains or losses from the time you became an Australian resident for taxation purposes? | Yes. | 4. Is the cost base of the funds in the bank A account at the time you became an Australian resident for taxation purposes the market value in Australian dollars at that time? | Yes. | 5. Is your bank B account subject to the forex provisions in Division 775 of the Income Tax Assessment Act 1997 from the time you became an Australian resident for taxation purposes? | Yes. | 6. Is the cost base of the funds in the bank B account at the time you became an Australian resident for taxation purposes the market value in Australian dollars at that time? | No. | 7. Is the cost base of the funds in the bank B account the market value in Australian dollars at the particular time of each deposit to the account? | Yes. | 8. Is your bank B account a private account for the purposes of the forex provisions in Division 775 of the Income Tax Assessment Act 1997 ? | No.

Relevant facts and circumstances: You were born in Australia and are an Australian citizen. You lived in Australia. You then travelled to a foreign country on a working holiday visa. You worked in the financial services industry in a foreign country for several years. While living in a foreign country you opened two bank accounts: ● Prior to 1 July 2003 opened a bank A account. ● After 1 July 2003 you opened a bank B account. You had your foreign country salary paid into the bank A account. Over several years you saved money, which was deposited into the bank A account. Later, you transferred your savings to the bank B account as this account paid higher interest and had more ATMs from which to access your savings. Your travel records show that you departed the foreign country. Your intention was to of return to Australia permanently to live and work. Your partner accompanied you. You travelled to several countries before arriving back in Australia. Prior to your departure from the foreign country, you gave up your abode in that country. You transferred funds from your bank A account to your bank B account. At the time you returned to Australia, some of your foreign savings of approximately X was held in your bank B account and, at the exchange rate on that date, was worth was approximately $X. As a result of the global financial crisis, the foreign country currency fell substantially in value against the Australian dollar in the weeks before you arrived back in Australia. You decided to not to convert your foreign currency into Australian dollars in the belief that the foreign currency would regain its former value against the Australian dollar. However, this never happened as the Australian dollar remained strong for years. You transferred foreign savings from bank A account to the bank B account after you returned to Australia. You converted X foreign currency into Australian dollars. This amount came out of your bank B account. You received $X. You have calculated that this transaction resulted in a foreign exchange loss of $X. You realized the foreign currency would weaken and it was never likely to recover back to the value it was when you were living and working in the foreign country. You converted the rest of your foreign savings into Australian dollars. This amount also came out of your bank B account. You received $X. You have calculated that this transaction resulted in a foreign exchange loss of $X. All of the funds transferred from the foreign country were paid into your Australia bank mortgage account to assist with a mortgage on an Australian property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 136-40 | Income Tax Assessment Act 1997 Division 775 Forex gains and losses for accounts opened before 1 July 2003 | Subsection 775-165(2) (a) of the Income Tax Assessment Act 1997 (ITAA 1997) disregards any forex gains or losses as a result of forex realisation events 1, 2 or 5 happening to a right or part of a right if the right or part of the right was acquired before the eligible commencement date, i.e., 1 July 2003 (section 775-155 of the ITAA 1997), and the taxpayer has not made an election under section 775-150 of the ITAA 997, the transitional election. | Capital gains tax | Under section 108-5 of the ITAA 1997, foreign currency is defined as 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. | 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. | 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 happening to the relevant 'part' of the asset (the amount withdrawn). | When calculating any capital gain or loss relating to the exchange of foreign currency, you are required to translate the foreign currency to Australian dollars at the time of a transaction or event, under section 960-50(6) of the ITAA 1997. | Therefore, each deposit and withdrawal must be converted to Australian dollars to work out the relevant cost base and capital proceeds of the debt asset. | On this basis, foreign exchange gains or losses will be brought to account at the time of a withdrawal depending on the movement of the foreign currency as against the Australian dollar under the CGT provisions. | Becoming an Australian resident | When an individual becomes an Australian resident, then for each CGT asset that is not a taxable Australian property: | (a) the asset is taken to be acquired by the individual, company or trustee (as the case may be) at the time of becoming resident, and | (b) the first element of the cost base and reduced cost base of the asset is its market value at that time (sections 855-45, 855-50 of the ITAA 1997). | An Australian resident is assessable on the capital gains or losses made from CGT events that happen on his or her worldwide assets. | Forex gains and losses for accounts opened after 1 July 2003 | Division 775 of the ITAA 1997 relates to forex gains and losses and foreign denominated bank accounts. If you opened a foreign bank account after 1 July 2003, forex gains and losses made in respect of a foreign currency denominated bank account come under the provisions of Division 775 of the ITAA 1997. | 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 Income Tax Assessment Act 1997 (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. | Every 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). 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. | Application to your situation | Bank A account | You opened this overseas bank account prior to 1 July 2003 and you did not make a transitional election in relation to your overseas accounts. | Accordingly any forex gains or losses you made, as a result of forex realisation events happening to your overseas bank account that were opened prior to 1 July 2003, will not be covered by Division 775. | When you became an Australian resident you are deemed to have acquired the bank A foreign currency bank account balance at its market value in Australian dollars at the time you became an Australian resident. This will form the first element of your cost base when calculating your CGT gains or losses made on withdrawals made from the existing funds in the foreign currency bank accounts. | Any deposits made after becoming a resident will have a cost base equal to the Australian dollar value at the time of the deposit. | We note that you have said you became an Australian resident for taxation purposes on your arrival back in Australia. This does not appear to be correct, it seems to the Commissioner that you became an Australian resident at the latest when you departed the foreign country and visited various locations as a holiday, and it may have been sooner, for example when you gave up your permanent home in the foreign country. | A capital gain or capital loss is calculated by deducting the cost base from the capital proceeds. | The capital proceeds are the Australian dollar value of the proceeds you received upon withdrawal. | For example, this means that the cost base of foreign currency of 100 in the account when you became a resident will be calculated using the conversion rate on that day, if it is withdrawn after becoming a resident the proceeds will be the value in Australian Dollars at the date of withdrawal and any gain or loss will be calculated on that basis, even if the foreign currency is immediately deposited in another account without actually being converted to Australian dollars | Bank B account | As this account was opened after 1 July 2003 for the purpose of earning interest we accept it is not a private account so gain or losses can be taken into account under Division 775. | The cost base of funds in this account are determined under section 775-85 of the ITAA 1997 as being the Australian dollar value of the money a taxpayer pays or is required to pay in respect of acquiring the right or part of a right. | The funds deposited in this account have a cost base equal to the Australian dollar value on the day the funds are deposited into the account, even for amounts deposited before you became a resident, for tax purposes, again. | Each withdrawal from the bank B account will have to have the respective gain or loss calculated on the difference between the Austrian dollar values on the day of deposit and the day of the withdrawal. Depending on the actual amounts deposited the funds withdrawn may have been deposited on different days with different cost bases.