Capital gains tax: foreign exchange gains or losses - calculating the cost base of withdrawals from bank accounts denominated in foreign currency

How do you calculate the cost base or reduced cost base of withdrawals from bank accounts denominated in foreign currency where the amount withdrawn is less than the entire balance?

The cost base or reduced cost base of withdrawals from bank accounts denominated in foreign currency is calculated in accordance with the formula set out in subsection 112-30(3) of the Income Tax Assessment Act 1997 (ITAA 1997). However, the first in first out (FIFO) or weighted average cost method may be available in some circumstances.

The taxpayer maintains share portfolios and bank accounts in certain foreign countries. The taxpayer is not a share trader.

Deposits to these bank accounts include funds transfers, banking of dividends received and banking of proceeds from share sales.

There are a number of withdrawals from the bank accounts. They are for such things as share purchases and general expenses incurred in each foreign country.

The balance in each bank account consists of many transactions that have been recorded in the taxpayer's books of accounts in Australian dollars ($AUD) at the date of each deposit.

A bank account is a single asset (the one debt and chose in action), each deposit adds to its cost base or reduced cost base and each withdrawal constitutes a part ending or part satisfaction of the debt asset. Each withdrawal will constitute CGT C2 event happening to the relevant part of the asset (the amount withdrawn).

The cost base or reduced cost base of an asset that ends in part or is satisfied in part is apportioned under subsection 11-30(2) of the ITAA 1997 using the formula set out in subsection 112-30(3) of the ITAA 1997.

In calculating the cost base or reduced cost base section 103-20 of the ITAA 1997 requires each deposit and withdrawal that is denominated in foreign currency to be converted to $AUD at the time of the deposit or withdrawal.

For bank accounts with a relatively high turnover, applying the formula set out in subsection 112-30(3) of the ITAA 1997 will require the taxpayer to complete many calculations. However, the results of these calculations will generally equate to results using other accepted methods of calculating the cost of funds withdrawn, such as first in first out (FIFO) and weighted average cost.

Therefore, where a bank account has relatively high turnover or a low value, the calculation of cost base using these alternative methods is considered to satisfy the requirements of section 112-30 of the ITAA 1997 because the different methodology gives a result that is not materially different from the result that would be obtained by using the formula set out in subsection 112-30(3).

The FIFO method assigns costs on the assumption that the outstanding balance represents the most recent deposits into the bank account. Under the weighted average cost method, the cost of a withdrawal is the weighted average of the deposits. This weighted average can be determined for each withdrawal or for a year of income.

Accordingly, for bank accounts denominated in foreign currency that have relatively high turnover or a low value, and where there are no unusual transactions (in terms of volume, frequency or value), the FIFO method or the weighted average cost method are considered acceptable methods to calculate the cost base or reduced cost base of withdrawals.