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Australian Taxation Office Publishes Interpretation of Foreign Currency Tax Provisions
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| Author: |
Alan Collett |
| Date: |
Sunday, October 31, 2004 |
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In an important announcement for migrants to Australia the Australian Taxation Office has issued two Interpretative Decisions in the last 8 days that have an impact on individuals who retain bank account and loan account balances that are denominated in a currency other than A$’s once they have become tax resident in Australia.
ATO IDs 2004/855 and 2004/857 discuss the taxation of bank balances and loan account balances respectively where the accounts were opened before 1 July 2003. This date is significant as it is the date from which new foreign exchange taxation provisions were given effect.
In ID 2004/855 it has been confirmed that if a non-A$ bank account was opened before 1 July 2003 any gain arising upon a withdrawal, transfer, or other payment from that account is not assessed to income tax so long as a transitional election has not been made under section 775-150 of the Income Tax Assessment Act 1997 (it will usually be the case that this election has not been made).
ID 2004/857 confirms that any A$ loss arising on (for example) the redemption of a non-A$ denominated loan account balance will not be deductible against the taxpayer’s general income unless a section 775-150 election was made.
These are significant announcements by the ATO. In recent months many migrants have chosen to retain UK£’s in anticipation of an improvement in the A$ exchange rate. Until now it has been generally thought that any currency gain arising would be assessable as income under the forex provisions that were introduced earlier this year with an effective date of 1 July 2003; the ATO has now confirmed that this is not the case so long as the bank account in which non-A$ currency was retained was open before 1 July 2003.
However, this “exemption” from the charge to income tax will not apply if the non-A$ currency is retained in a newly opened bank account.
Some Examples
1. Consider Susan, who is planning to move to Australia from the UK and has a net £100,000 after the disposal of her former home. She believes that the UK£-A$ exchange rate will move in her favour over the next few months, and upon investigation into which bank account will pay the largest amount of interest on her capital Susan decides to open a new interest bearing bank account that is denominated in UK£’s. Susan then moves to Australia when the exchange rate is £1 = A$2.50 => the equivalent value of her UK£’s is A$250,000.
Three months later the exchange rate has moved to £1 = A$2.70. Susan decides that she wants to buy A$’s at this rate, so she instructs her currency broker to convert all of her UK£’s => she receives A$270,000.
Because the bank account in which the UK£’s were retained was opened after I July 2003 the gain of A$20,000 arising on the disposal of the UK’s and the purchase of the A$’s is assessable as income in Australia, and will be subject to tax in Australia in the income tax year in which the UK£’s are sold.
2. Compare this with the situation if Susan had decided to retain the £100,000 in a bank account which she had maintained for several years. In this scenario the gain arising would be outside the charge to income tax under the forex provisions as the account was opened before 1 July 2003.
However, it should be noted that this gain may be assessable under the capital gains tax provisions.
3. Mike also has £100,000 following the sale of his home in the UK. He also opens a new interest bearing bank account denominated in UK’s and deposits his funds in that bank account. He also moves to Australia when the exchange rate is £1 = A$2.50.
Like Susan he decides to hang onto his UK£’s because he thinks the UK£-A$ exchange rate will move in his favour over time. Mike sees the exchange rate at £1 = A$2.70 and decides to hang onto his UK£’s because he thinks the exchange rate will move towards A$2.90 to the £. Unfortunately for Mike the exchange rate suddenly moves against him and he eventually decides to buy A$’s when the exchange rate is £1 = A$2.38 => he receives A$238,000.
Mike has therefore realised a loss of A$12,000 on the disposal of his UK£’s, but is pleasantly surprised when he is advised that he can claim the A$12,000 “loss” (the difference between the value of his UK£’s when he arrived in Australia and the value when they are sold) as a deduction against his income for the year in which he sold the UK£’s. As he is paying income tax at 48.5% this means his tax bill has been reduced by over A$5,800.
4. David has retained a property in the UK on which he has a mortgage and which he has rented out to tenants. The balance on his loan on the date he moved to Australia several years ago was £60,000, when the exchange rate was £1 = A$2.45 => the equivalent value of the loan on the date of his arrival was A$147,000.
After a number of years renting a property in Australia David decides that he will sell his property in the UK as he has decided to buy his first home in his adopted country. He therefore sells his UK property and redeems the loan on completion of the sale, on which date the exchange rate is £1 = A$2.60 => the A$ equivalent of the loan when it is redeemed is A$156,000.
David hopes that this “loss” of A$9,000 can be claimed as a deduction against his income for the year in which he sold his UK property. Unfortunately this isn’t possible as the mortgage loan was taken out before 1 July 2003 and David hasn’t made the necessary election under section 775-150.
Note that any gain arising on the disposal of David’s property may be outside the charge to capital gains tax if David can rely on the exemption from CGT that is available where a taxpayer derives income from a former main residence for a period of up to 6 years, so long as there is no other dwelling that is occupied as the taxpayer’s main residence.
As noted above these tax provisions will impact on many migrants to Australia – if you would like a written report of your situation please complete the details at the weblink below. We can then send you a Tax Planning Questionnaire for completion and return, after which we can advise you of our fee for reporting to you.
Note: the above examples are illustrative only and deal with a very technical area of taxation law in Australia. As such, a taxpayer’s circumstances can easily give rise to a very different outcome to those shown above. If you think you may be affected by the issues described above we therefore strongly recommend that you take professional advice before contemplating any transaction involving financial matters, including the retention of currency other than A$’s.
Errors and Omissions Excepted.
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http://www.collettandco.com/contact.cfm |
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