Private ruling: Foreign Exchange
Published: July 2012
Ruling period: Year ended 30 June 2008
Date scheme commenced: 1 November 2000

Ruling: Q1: Are you entitled to a deduction for the foreign exchange loss incurred on the conversation of Country B dollars into Australian dollars upon disposal of your investment in Country B? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You became a resident of Australia in November 2000. At that time you had a fixed deposit in Country B. You decided to invest the funds in Country B due to the beneficial exchange rate offered at that time. This investment decision remained in force until the 2008 income year when you determined it best to realise the foreign exchange loss, and changed your investment strategy to invest in Australian dollars instead. You incurred a foreign exchange loss. You made no elections under the Division 775 foreign exchange measures.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 25 section 51 | Division 3B of Part III subsection 82V(1) | section 82U | section 82V | section 82Y | section 82Z | Income Tax Assessment Act 1997 section 8-1 Subdivision 775-D subsection 775-45(1) subsection 775-45(3) subsection 775-45(5) subparagraph 775-45(1)(b)(iii) section 775-155 section 775-150 section 775-155 section 775-165 subsection 775-165(2) subparagraph 775-165(2)(a)(ii) section 775-230 | New Business Tax System (Taxation of Financial Arrangements) Act (No.1) 2003 paragraph 77(1)(a) of Schedule 4

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. 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 Similarly, when an amount is withdrawn from a bank account some or all of these previously acquired rights are extinguished or satisfied.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; Alcom v. Republic of Colombia [1984] AC 580. The taxpayer therefore has the right to receive the balance standing to the credit of their foreign account (a right to receive a certain amount of foreign currency). This right to receive foreign currency is a relevant right within the terms of subparagraph 775-45(1)(b)(iii) of the ITAA 1997. A part of this right will cease if the taxpayer directs that money be withdrawn or transferred out of the foreign account. Upon this right, or part of this right ceasing, a forex realisation event 2 will happen (pursuant to 775-45(1) of the ITAA 1997). A forex realisation gain or loss may be made as a result of a forex realisation event 2 happening on a withdrawal transfer or payment out of the foreign account (pursuant to subsections 775-45(3) and (5) of the ITAA 1997). Subparagraph 775-165(2)(a)(ii) of the ITAA 1997 operates to disregard forex gains or losses made as a result of forex realisation event 1, 2 or 5 happening to rights or parts of rights that: - arose under an eligible contract (within the meaning of the former Division 3B of Part III of the Income Tax Assessment Act 1936) that was entered into before the applicable commencement date, - where the taxpayer has not made a transitional election under section 775-150 of the ITAA 1997. Under Division 3B of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), an eligible contract is defined by subsection 82V(1) of the ITAA 1936 as: (a) A contract entered into by the taxpayer on or after the commencing day, other than a hedging contract; or (b) A hedging contract entered into by the taxpayer, on or after the commencing day, in relation to a contract to which paragraph (a) applies Subsection 82V(1) of the ITAA 1936 also provides that 'commencing day' means 19 February 1986. Accordingly, as your foreign account was opened after 19 February 1986, it is an eligible contract within the meaning of Division 3B of Part III of the ITAA 1936. Whether or not the taxpayer's right to be paid the amount standing to the credit of their foreign account 'arose under' their foreign account contract (the eligible contract), will depend on the meaning given to the phrase in the context of section 775-165 of the ITAA 1997. In FC of T v. Energy Resources of Australia Ltd 94 ATC 4923; (1994) 29 ATR 553 (the ERA Case), Gummow J and Hill J discussed the meaning of 'under an eligible contract'. Gummow J at 4943 stated: In ordinary parlance, to speak of a gain being made "under" an eligible contract suggests that the gain was made in exercise of a right or discharge of an obligation conferred or imposed, as the case may be, by the terms of the eligible contract. In the ERA Case Hill J noted at 4956 that in Elmslie & Ors v. FC of T 93 ATC 4964; (1993) 26 ATR 611 Wilcox J held that the relevant contract under which relevant assets were acquired was the immediately empowering contract rather than a more remote source of authority. Wilcox J considered that the relevant contract was not that which envisaged or provided for the relevant acquisition, but rather had to be the means by which the asset was actually acquired. In N. Joachimson v. Swiss Bank Corporation [1921] All ER 92; [1921] 3 KB 110 Atkin LJ (at All ER 100; KB 127) noted that there is only one contract between the bank and its customer. While the making of deposits with a bank may create a credit balance, the banking contract confers on the customer the right to be repaid that balance. Accordingly, rights conferred by the terms of the taxpayer's eligible contract (their foreign account) properly arise 'under' that contract. In your case, 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. As the foreign account is an eligible contract entered into before 1 July 2003 and you had not made a transitional election, any forex realisation gains or losses made by you as a result of forex realisation event 2 happening upon a withdrawal, transfer or payment out of the foreign account will be disregarded (see subsection 775-165(2) of the ITAA 1997). Please note however, that gains or losses may still be taken into account under other provisions of the ITAA 1936 or the ITAA 1997 as a result of a withdrawal from such a foreign account. Under the New Business Tax System (Taxation of Financial Arrangements) Act (No.1) 2003 , Division 3B of Part III of the ITAA 1936 (Division 3B) was repealed, but continues to apply in relation to an eligible contract entered into before 1 July 2003, unless a transitional election is made under section 775-150 of the ITAA 1997. You did not make a transitional election under section 775-150 of the ITAA 1997. Division 3B applies to certain currency exchange gains made and losses incurred of a capital nature under eligible contracts (sections 82U, 82Y and 82Z of the ITAA 1936). A currency exchange gain or loss is a gain or loss to the extent to which it is attributable to currency exchange rate fluctuations (section 82V of the ITAA 1936). In FC of T v. Energy Resources of Australia Ltd (1996) 185 CLR 66; 96 ATC 4536; (1996) 33 ATR 52, ( Energy Resources ) an Australian taxpayer issued and retired promissory notes that were denominated in US dollars. One of the issues before the High Court was whether there was a gain or loss to the taxpayer on issuing and returning the notes that was attributable to currency exchange rate fluctuations. In relation to the application of sections 25 and 51 of the ITAA 1936, the High Court found as follows (at CLR 79; ATC 4542; ATR 58-59): Where a taxpayer borrows money on capital account in US dollars and repays the loan in US dollars, it makes no revenue profit or loss from the borrowing even though the exchange rate may be different at each date. And later, in relation to the application of Division 3B of the ITAA 1936, the High Court held (at CLR 81; ATC 4543; ATR 52 at 6): ... for the reasons that we have already given, the taxpayer made no currency exchange gain or loss. The unit of account and the unit of payment under the contract or contracts involved in this case were US dollars. The taxpayer made no gain or loss under those contracts that was "attributable to currency exchange rate fluctuations". In Victoria Co Ltd v. Deputy Commissioner of Taxation 2000 ATC 4755; (2000) 46 ATR 119 ( Victoria Co ) Lee J said, (at ATC 4579; ATR 123): In Energy Resources the High Court pointed out that there was nothing in the Act which required notional conversions to be made of a transaction in foreign currency made by a taxpayer, where the transaction was on capital, and not revenue account. Thus the Act did not apply to a hypothetical or notional capital loss or gain for a taxpayer that resulted from a fluctuation in a currency exchange rate. The reasons for the decisions in those cases are relevant to the instant matter - the taxpayer here has not made a currency exchange gain or loss. In Victoria Co Lee J also said, (at ATC 4762; ATR 127): Division 3B is concerned with the outcome of a contract and events under a contract that establish that a currency exchange gain or loss has occurred and has been realised. And further, (at ATC 4763; ATR 127): Division 3B is concerned with the currency exchange gain or loss that arises under an "eligible contract" namely, the net position after receipt and repayment of the loan by currency exchange. In order to calculate an amount of a currency exchange gain or loss for the purposes of Division 3B, the net position of foreign currency exchange rate fluctuations is measured between two points in time - the time the taxpayer entered into the eligible contract and the time repayment was made under that contract. In your case, there is no net position that can be calculated. There was no exposure to any foreign currency exchange rate fluctuations when the contract was entered into. At that time, you were a resident of Country B and the fixed deposit was denominated in Country B dollars.

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. | Reasons for decision: These reasons for decision accompany the Notice of private ruling .