Private ruling: Foreign exchange gains and losses
Date of advice: 13 July 2018
Published: September 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the checking account, money market account and goal savings account considered qualifying foreign exchange (FOREX) accounts? | A1: Yes | Q2: For each of the accounts, does a withdrawal from or closure of the account lead to income that is assessable or deductable under Income Tax Assessment Act 1936 (ITAA 1936) S26BB or S70B? | A2: No | Q3: For each account for which a forex realisation gain or loss is assessable under Division 775 of the ITAA 1997, does a withdrawal from the account cause a forex realisation event 2? | A3: Yes | Q4: For each account for which a forex realisation gain or loss is assessable under Division 775 of the ITAA 1997, does no withdrawal cause a realisation event? | A4: No | Q5: For each account that is a qualifying forex account that passes the limit balance test, does a withdrawal lead to any assessable income or deductable loss? | A5: No | Q6: For each account that is not a qualifying forex account, is a forex gain or loss assessable or deductable under Division 775 of the ITAA 1997? | A6: Not applicable | Q7: For each of the accounts that is not a qualifying forex account, is a forex gain or loss assessable or deductable under the capital gains tax (CGT) rules? | A7: Not applicable | Q8: For each of the three accounts for which a forex gain or loss is assessable or deductable under the CGT rules but not under Division 775 of the ITAA 1997 and for each part of the account balance that is withdrawn, is it permitted to determine the cost base or reduced cost base for the withdrawal amount according to the first in first out (FIFO) method? | A8: Yes | Q9: For each of the accounts where a forex realisation gain or loss is assessable or deductable under Division 775 of the ITAA 1997, is it permissible in the calculations of the forex realisation gain or loss of each part of the account balance which is withdrawn to determine the forex cost base of the withdrawal amount according to the FIFO method? | A9: Not applicable | Q10: For each of the accounts where a forex realisation gain or loss is assessable or deductable under Division 775 of the ITAA 1997, is it assumed that the entire account balance was acquired on 13 November 2017 and the forex cost base of the rights to receive is determined by the daily exchange rate on 13 November 2017? | A10: Yes | Q11: For each of the accounts where a forex realisation gain or loss is assessable or deductable under Division 775 of the ITAA 1997, if a withdrawal leads to a capital gain, does the CGT discount of 50% apply to the part of a withdrawal which corresponds to an account balance which has been in the account for at least 12 months as determined by the FIFO method? | A11: Not applicable | Q12: For each of the accounts where a forex realisation gain or loss is assessable or deductable under CGT rules but not under Division 775 of the ITAA 1997, is it assumed that the entire account balance was acquired on 13 November 2017 and the forex cost base of the rights to receive is determined by the daily exchange rate on 13 November 2017? | A12: Yes | Q13: For each of the accounts where a forex realisation gain or loss is assessable or deductable under CGT rules but not under Division 775 of the ITAA 1997, and for which the CGT discount applies and for which some of the account balance is withdrawn, is it permissible to determine on a FIFO basis if and which part of the withdrawal satisfies the holding time of at least 12 months that is a condition for the CGT discount? | A13: Yes | Q14: For each of the accounts where a forex realisation gain or loss is assessable or deductable under CGT rules but not under Division 775 of the ITAA 1997, and for which the CGT discount applies and for which some of the account balance is withdrawn for all parts of the account balance existing as of 13 November 2017, will the CGT discount apply earliest for withdrawals on 14 November 2017? | A14: Yes | Q15: For the purpose of converting Euro (EUR) to Australian dollars (AUD) in the context of determining the cost base or reduced cost base for CGT purposes, the forex cost base for Division 775 of the ITAA 1997 purposes or the proceeds of withdrawing part or all of the account balance from one of the three accounts, is it permitted to use the Daily exchange rate between EUR and AUD published by the Reserve Bank of Australia (RBA)? | A15: Yes | Q16: Are any forex gains or losses resulting from a withdrawal from one of the three accounts disregarded for income tax purposes due to a private or domestic exemption such as subsection 775-15(2) or subsection 775-30(2) of the ITAA 1997? | A16: Yes | Q17: Do the short term rules of section 775-70 and section 775-75 of the ITAA 1997 apply to a forex gain or loss caused by the withdrawal from one of the three accounts? | A17: Not applicable | Q18: Is a forex gain or loss associated with a spot contract assessable or deductable? If yes, does the assessable forex gain or deductable loss equal the amount of AUD received from the spot contract minus the sum of EUR paid, translated into AUD using the exchange rate of the day on which the EUR is debited from the checking account? | A18: Not applicable

Relevant facts and circumstances: You were a temporary tax resident of Australia beginning in the 20XX financial year You were not a tax resident prior to 20XX On 20XX you became a permanent resident of Australia You have three accounts denominated in in a foreign currency and currently held with the a financial institution in Country A The accounts are held for the primary purpose of facilitating transactions. You are the sole account holder of all three accounts You have not made a transitional election under section 775-150 of the ITAA 1997 You have not made a choice under section 775-80 of the ITAA 1997 to have sections 775-70 and 775-75 of the ITAA 1997 not apply to you You have made an election under section 775-230 of the ITAA 1997 to have the subdivision apply to your accounts The total of your accounts does not exceed the equivalent of $250,000 AUD You use the accounts for number of different transactions including payment to a foreign exchange service to satisfy your obligations under foreign exchange spot contracts, banking of gifts you receive, banking of investment income such as interest and dividend payments and transfers between accounts to fulfil contractual obligations.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 775 | Income Tax Assessment Act 1997 Section 775-45 | Income Tax Assessment Act 1997 Section 775-85 | Income Tax Assessment Act 1997 Section 775-230 | Income Tax Assessment Act 1997 Section 775-245 | Income Tax Assessment Act 1997 Section 775-250 | Income Tax Assessment Act 1997 S ection 115-10 | Income Tax Assessment Act 1997 S ection 115-15 | Income Tax Assessment Act 1997 S ection 115-20 | Income Tax Assessment Act 1997 S ection 115-25

Reasons for decision: Detailed Reasoning - Forex realisation events: 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. | Detailed Reasoning - Forex gain and losses: 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. 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. This does not mean that each deposit made by a customer represents 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: Hart (Inspector of Taxes) v. Sangster [1957] 1 Ch 329; [1957] 2 All ER 208; [1984] AC 580 . The taxpayer's right to receive the balance standing to the credit of their foreign account is a relevant right within the terms of subparagraph 775-45(1)(b)(iii) of the ITAA 1997. Pursuant to subsection 775-45(2) of the ITAA 1997, FRE 2 happens when the taxpayer withdraws the credit balance of the foreign account or any part of it. | Detailed Reasoning - 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). | Detailed Reasoning - 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. In your case, you have: ● made the election to have section 775-230 of the ITAA 1997 apply to the three accounts and ● the accounts meet the definition of qualifying forex accounts as they are denominated in a foreign currency and ● they have the primary purpose of facilitating transactions and ● have met the limited balance test as the total of the three accounts is not more than $250,000 AUD Therefore a forex realisation gain or loss you make as a result of a forex realisation event 2 or 4 can be disregarded when the event is in relation to these accounts. | Detailed Reasoning - CGT Discounts: To be eligible for the CGT discount, there are four criteria that must be met; ● the capital gain must be made by an individual, trust or complying super fund (sect 115-10 of the ITAA 1997) and ● the capital gain must result from a CGT event happening after 11.45am on 21 September 1999 (section 115-15 of the ITAA 1997)and ● the capital gain must have been worked out by either using a cost base that has been calculated without reference to indexation at any time or, for a capital gain that arose under CGT event K7, using the cost of the depreciating asset concerned (section 115-20 of the ITAA) and ● the capital gain must result from a CGT event happening to a CGT asset that was acquired at least 12 months prior to the CGT event (section 115-25 of the ITAA) In your case, where a capital gain is assessable under CGT rules but not under Division 775 of the ITAA 1997 and the above conditions are met then the capital gain will be considered a discount capital gain and can be reduced by the discount percentage when working out your net capital gain. | Detailed Reasoning - Conclusions: The three accounts are considered qualifying forex accounts and as such can disregard a forex realisation gain or loss you make as a result of a forex realisation event 2 or 4 when the event is in relation to these accounts. Where a capital gain is assessable under CGT rules but not under Division 775 of the ITAA 1997 and the relevant conditions are met then discounting is available when calculating your net capital gain. The FIFO method will not apply in your case but in an event where it is applicable then it can be used to determine the forex cost base as it is the method required under subsection 775-250(1) of the ITAA 1997.