Capital Gains Tax: foreign exchange gains or losses

Does the definition of Capital Gains Tax (CGT) asset include bank accounts denominated in a foreign currency so that deposits or withdrawals will be subject to the provisions of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. 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.

An Australian resident subsidiary of an offshore parent company acts as a retailer for goods produced by various subsidiaries of the Group and has acted as a 'banker' for the Group.

The Australian resident subsidiary has a United States dollar (USD) bank account and a USD short-term deposit account. These accounts are used to make repayments of USD loans. Funds deposited in the bank accounts are derived from sales, inter-account transfers, and repayments of loans by the parent company.

No amounts of the foreign exchanges have been converted into Australian dollars (AUD).

Under section 108-5 of the ITAA 1997, foreign currency is 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 ( Joachimson v. Swiss Bank Corporation [1921] 3 KB 110 at 127).

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 ( Foley v. Hill [1843-1860] All ER 16).

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 Each withdrawal will constitute CGT event C2 happening to the relevant 'part' of the asset (the amount withdrawn).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 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 AUD. NOTE 1: Additional ATO Interpretative Decisions will issue explaining how the cost base and capital proceeds of the debt asset are calculated, when deposits and withdrawals are made. NOTE 2: This ATO Interpretative Decision has been amended to remove the reference to section 103-20 of the ITAA 1997 which has been repealed by the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003. This rule is now contained in item 5 of the table in subsection 960-50(6) of the ITAA 1997 and applies to transactions and events that happen on or after 1 July 2003.