Private ruling: Foreign exchange rules
Date of advice: 12 March 2021
Published: May 2021
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: If the forex realisation gain or loss on the withdrawal from a foreign currency dominated bank account opened after 1 July 2003 will be subject to Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997), will the cost (translated to $AUD) be calculated as at the time of the relevant deposit(s)? | A1: Yes | Q2: If the forex realisation gain or loss on the withdrawal from a foreign currency dominated bank account opened after 1 July 2003 will be subject to Division 775 of the ITAA 1997, will the cost (translated to $AUD) be the calculated at the date the taxpayer became a resident? | A2: No

Relevant facts and circumstances: You are a dual citizen of country A and B. You are currently living in country A and is a resident of country A for tax purposes. You have been granted an Australian Visa. You and your family expect to arrive in Australia this year to take up residence in Australia. You have several foreign bank accounts located in country A and B. They are savings accounts and transaction accounts. Your accounts listed above are not "qualifying forex accounts".

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 775 | Income Tax Assessment Act 1997 Section 855-45

Reasons for decision: Summary: Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the realisation of assets, rights (or part of rights) and obligations (or part of obligations) and explains how to calculate forex gains and losses that are attributable to currency exchange rate fluctuations. Bank accounts are considered to be rights or obligations. The relationship between banker and customer in respect of a bank account is that of debtor and creditor. Each deposit one makes to the account does not represent 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. Thus, when a customer deposits money into a bank account with a credit balance, the customer acquires a contractual right as a creditor of the bank. Those rights are extinguished or satisfied to the extent to which an amount is withdrawn from the account. You make a forex realisation gain or loss on withdrawals and transfers from a foreign currency denominated bank account (with a credit balance). The holder of a foreign currency denominated bank account has a contractual right (a chose in action) under a single contract with the bank, to receive amounts previously deposited. When withdrawing or transferring money from a bank account that has a credit balance, those previously acquired rights are extinguished or satisfied to the extent of the withdrawal. Your right to receive the balance standing to the credit of your foreign bank accounts is a relevant right within the terms of subparagraph 775-45(1)(b)(iii). Pursuant to subsection 775-45(2), Forex realisation event 2 (FRE 2) happens when you withdraw amounts from the savings accounts. A forex realisation gain or loss arises under subsections 775-45(3) or 775-45(4). The currency exchange effect is the difference in the exchange rate of the Australian dollar value of amounts deposited into the bank account. The difference is brought to account as assessable income under section 775-15 or an allowable deduction under section 775-30. Section 775-165 states that for the purposes of forex the time of acquisition is determined using the CGT acquisition rules in Division 109 of the ITAA 1997. It is important to note that Section 775-165 of the ITAA 1997 only provides for the acquisition date and the legislation does not include a market value rule for the cost of acquisition. Unlike the CGT provisions, for Forex purposes the cost base is whatever the cost base was when the right was first acquired, i.e. when the bank account was originally opened, and when the relevant deposits made into the account. | Detailed Reasoning - Further information: The CGT provisions can also apply in your case. While there are anti-overlap provisions (section 118-20 of the ITAA 1997), when the cost base is determined differently due to your residency status changes, there can be residual gains or losses for CGT purposes. ATO Interpretative Decision ATO ID 2003/551 Income Tax Capital Gains Tax: foreign exchange gains or losses provides that bank accounts denominated in a foreign currency are CGT assets and the provisions in Parts 3-1 and 3-3 of the ITAA 1997 apply to any deposits or withdrawals made by Australian residents to the bank accounts. 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). Item 5 of the table in subsection 960-50(6) of the ITAA 1997 requires a 'transaction or event' involving money or property denominated in foreign currency to be converted to AUD at the time of the 'transaction or event'. Therefore, each deposit and withdrawal must be converted to AUD to determine the relevant cost base and capital proceeds of the debt asset. In your case, you will become a resident of Australia for taxation purposes, this means that section 855-45 of the ITAA 1997 will be used to determine the time of acquisition and cost base for CGT purposes. Under section 855-45 of the ITAA 1997, an entity that becomes an Australian resident is taken to have acquired each asset that they own just before becoming an Australian resident at the time of becoming an Australian resident, except for an asset: (a) that is taxable Australian property as defined in section 855-15 of the ITAA 1997; or (b) that was acquired before 20 September 1985. You are taken to have acquired the bank accounts on the day you become a resident of Australia for taxation purposes. The gain is reduced to zero if the gain does not exceed the amount included in your assessable income (under Forex provisions). If the gain were instead a loss, section 110-55 of the ITAA 1997 covers the general rules about CGT reduced cost base. Subsection 110-55(9) of the ITAA 1997 provides that the reduced cost base of the CGT asset is to be reduced by any amount that you have deducted, or could have deducted except for Subdivision 170-D, as a result of a CGT event that happens in relation to a CGT asset. Where Forex losses are made, subsection 110-55(9) of the ITAA 1997 operates to reduce the CGT cost base by any Forex loss amount that is claimable as a deduction under Division 775.