Division 775 qualifying forex account

Division provides rules for recognising foreign currency gains and losses for income tax purposes. There is a corresponding rule to prevent a double deduction in relation to a foreign currency loss. Income tax consequences As bitcoin is not a foreign currency, Div does not apply and transactions involving bitcoin give rise to the same tax consequences as other barter transactions.

The Australian dollar value of bitcoin may increase or decrease between the time a taxpayer acquires and disposes of bitcoin. Whether such fluctuations give rise to ordinary income or CGT consequences will depend on the particular facts and circumstances of the taxpayer.

Non-binding explanation Is bitcoin a CGT asset? These rights, however, do not amount to a chose in action as a Bitcoin holding does not give rise to a legal action or claim against anyone. However, there are other factors that support the conclusion that Bitcoin holding rights are proprietary in nature. The most compelling is that bitcoin are treated as valuable, transferable items of property by a community of Bitcoin users and merchants. There is an active market for trade in bitcoin and substantial amounts of money can change hands between transferors and transferees of bitcoin.

As the Bitcoin software prescribes how the transfer and trade of bitcoin can occur and transactions are verified through the Bitcoin mining process, Bitcoin holding rights are definable, identifiable by third parties, capable of assumption by third parties, and sufficiently stable. In weighing all these factors it is considered that Bitcoin holding rights amount to property within the meaning of s.

The capital proceeds from the disposal of the bitcoin are the money or the market value of any other property received or entitled to be received by the taxpayer. The money paid or the market value of any other property the taxpayer gave in respect of acquiring the bitcoin will be included in the cost base of the bitcoin.

Any capital loss made from a personal use asset is disregarded. Bitcoin as a personal use asset Whether or not bitcoin is used or kept mainly for personal use or enjoyment will depend on the particular facts and circumstances of each case. Relevant considerations include the purpose for which the bitcoin was acquired and kept, as well as the nature of the property acquired when the bitcoin is disposed of for example, whether the bitcoin is used to purchase an investment.

Bitcoin that is kept or used mainly to make purchases of items for personal use or consumption ordinarily will be kept or used mainly for personal use. An example of where bitcoin would be considered to be a personal use asset is where an individual taxpayer purchased bitcoin from a Bitcoin exchange and uses the bitcoin to make online purchases for their personal needs, for example clothing or music.

If the bitcoin were instead purchased to facilitate the purchase of income producing investments, they would not be personal use assets. An example of where bitcoin would not be a personal use asset is where an individual taxpayer mines bitcoin and keeps those bitcoin for a number of years with the intention of selling them at opportune times based on favourable rates of exchange.

Gains instead assessable as ordinary income? In the case of an isolated transaction that is not carried out as part of a business operation, the Commissioner considers that a gain will generally be ordinary income where the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and the transaction was entered into in carrying out a commercial transaction.

Particularly relevant factors are the amount of money involved in the mining or acquisition and disposal of the bitcoin, the magnitude of the profit sought or obtained, the length of time the bitcoin is held before disposal and whether that bitcoin has no other immediate use other than as an object of trade.

For example, where a taxpayer mines a small amount of bitcoin as a hobby and after two years decides to sell the bitcoin for a small profit in order to purchase a more stable investment item, the gain will be assessed under the CGT provisions, not as ordinary income. Further, as the bitcoin were used to purchase an investment, the capital gain will not be disregarded under the personal use asset exception.

Any excess of a forex gain over an asset s cost base or opening adjustable value or over an opening pool balance is included in the taxpayer s assessable income. Item 3 in 1 does not apply because the foreign currency obligation was not incurred to start holding a depreciating asset and it was not incurred as the second element of the cost of a depreciating asset.

Item 2 may apply if its conditions are satisfied. ITAA 97 S 2. Any excess is included in assessable income. Items 1 and 2 of the table in s 1 cover a forex loss that is made in relation to and within 12 months of the realisation or acquisition of a CGT asset. Item 2 also covers forex losses in relation to other expenditure included in the asset s cost base or reduced cost base.

Such losses are recognised on capital rather than revenue account. Where a realisation event happens to the taxpayer s CGT asset and the forex loss is made within 12 months of that event, CGT event K11 happens and effectively converts the forex loss into a capital loss: ITAA 97 s If the forex loss is made in relation to the acquisition or improvement of a CGT asset, the forex loss is recognised by an increase in the asset s cost base and reduced cost base for the purposes of the capital gains provisions.

If the asset is not allocated to a pool see ITAA 97 sub-divs E, D and the forex loss arises in the year in which its start time occurs, the forex loss is not deductible under s 1 and the asset s cost base is increased by the forex loss. If the forex loss arises in a later year the asset s opening adjustable value for that year is increased by the amount of the loss.

The conditions for these increases are that the relevant foreign currency obligation must have been incurred by the taxpayer to start to hold the asset and it must have become due for payment within the month period that began 12 months before the time the taxpayer began to hold the asset or the obligation must have been incurred as the second element of the cost of a depreciating asset and it must have become due for payment within 12 months.

If the asset has been allocated to a pool the opening pool balance for the year in which the forex loss is made is increased by the amount of the loss. Item 4 covers a short term forex loss in relation to a project pool. If a taxpayer makes a forex loss on an obligation to pay a foreign currency project amount that was allocated to a pool pursuant to ITAA 97 sub-div I and the foreign currency was due for payment within 12 months after the debt was incurred, the forex loss is not deductible and the pool value of the project pool for the year in which the foreign debt was incurred is increased by the loss.

Presumably any forex losses from A s foreign currency obligations, net of input tax credits, that are referable to taxable supplies for the purposes of the goods and services tax regime, are deductible because the net obligations are deductible even to the extent that they relate to the taxpayer s non-exempt non-assessable GST remittances. If the economic effect of the arrangement is to provide for the set-off, in whole or in part, of one or more amounts against one or more other amounts, the parties are taken to have paid and received the respective amounts that they would have paid and received if the economic set-off were structured as a legal set-off of rights and obligations.

The operation of these provisions is discussed below in relation to forex realisation event 4. If an effective choice has been made for a retranslation period, forex gains and losses from forex realisation events 2 or 4 and capital gains and losses from CGT event C1 or C2 that are attributable to a currency exchange rate effect, in relation to the account during that time, are disregarded. Forex realisation event 8 happens if there is a positive or negative retranslation amount for the account for the retranslation period.

The rules governing forex realisation event 8 are discussed below. Election for low value qualifying forex accounts A taxpayer may elect that subdivision D apply to the taxpayer s low value qualifying forex account or accounts. The purpose of the election is to enable a taxpayer to disregard any forex gains or losses in relation to the account and, more importantly, to avoid the compliance costs of calculating them.

A forex gain or loss from forex realisation event 2 or 4, and any capital gain or loss from CGT event C1 or C2 that is attributable to a currency exchange rate effect, is disregarded if the event happens in relation to the taxpayer s qualifying forex account that passes the limited balance test at the time of the event. If it was intended that the gains and losses be disregarded for all income tax purposes, a provision that they be disregarded for the purposes of the Act would have been more appropriate.

The question whether a bank account has the primary purpose of facilitating transactions will depend on the taxpayer s principal purpose for opening it and the manner in which it is operated for the taxpayer s business purposes. It seems that a savings or other interest bearing account is not by that fact alone precluded from having a primary purpose of facilitating transactions and that the primary purpose of a bank account in a particular case will turn on the relevant facts and circumstances.

The election only extends to accounts maintained with a bank or similar institution and is not available for group or other inter corporate foreign currency accounts for facilitating transactions. An election must be in writing and it continues in effect in relation to a particular account until the taxpayer ceases to hold the account, the account ceases to be a qualifying forex account, the election is varied by removing the account or the election is withdrawn. Accounts may be added or removed by written variation of the election and an election may be withdrawn or made afresh in relation to any or all of the same accounts.

ITAA 97 s 4. A has made a subdivision D election covering both accounts. A s income year runs from 1 July to 30 June. On 28 June A incurs a deductible expense of euros that is AUD at the time the debt is incurred. A has made a further forex gain from forex realisation event 4 in relation to the euro credit card account. A accounts for his assessable income on an accruals basis. When a qualifying forex account starts to pass the limited balance test, forex realisation event 2 happens notionally to any credit balances and forex realisation event 4 happens notionally to any debit balances.

The amount of the forex gain or loss is so much of the capital gain as is attributable to the currency exchange rate effect. In a particular case it would not include any part of the capital gain or loss that is attributable to a premium or fluctuations in the gold or other intrinsic value of the foreign currency tokens or their numismatic value.

That part, if any, of the capital gain or loss that is not attributable to a currency exchange rate effect, is taken into account in working out whether the taxpayer has a net capital gain or net capital loss for the purposes of Part of ITAA The amount of a forex gain or loss from FRE 1 is not affected by the provisions in Part of ITAA 97 for working out a taxpayer s net capital gain or loss such as those relating to deductions for current or carried forward capital losses, the general 50 per cent discount for discount capital gains in Division of ITAA 97 and the provisions requiring taxpayers to disregard or quarantine certain capital gains and losses.

These provisions are, however, relevant to the assessability or deductibility of forex gains and losses from FRE 1 that are private or domestic. Capital gains that are assessable forex gains from FRE 1 under section 1 and capital losses that are deductible forex losses from FRE 1 under section 1 , are only assessable or deductible under those provisions.

There are no provisions in Part that require a taxpayer to disregard a forex loss from FRE 1 when working out a net capital gain or loss for the year in which the FRE 1 occurred. The effect of Division , however, is that forex losses from FRE 1 are on revenue account and so they are not a component of the taxpayer s net position for the purposes of the capital gains provisions. In developed monetary systems the unit of account is an abstraction that is represented tangibly by fungible coins and banknotes in the amounts of the unit to which they are marked, and intangibly by legally enforceable rights, or choses in action, to specified amounts of the currency, such as the debt constituted by a credit balance in bank.

Both representations constitute personal property and so they are transferable or disposable. A CGT Section 3 and note 1 to section 2 , which list examples of CGT assets, refer to foreign currency and contractual rights and the definition of FRE 1 refers to a disposal of foreign currency or of a right, or part of a right, to receive foreign currency. So foreign currency, as used in these provisions, means foreign currency notes and coins and does not include a contractual right to foreign money.

CGT event A1 happens to a CGT asset and technically each coin or note is an asset whereas an asset that is a right to foreign currency is, of necessity, a right to a specific amount of that currency. Where a taxpayer disposes of an amount of foreign currency by paying more than one coin or note the question arises as to whether each monetary token is an asset for the purpose of CGT event A1 or whether, because they are fungible, the tokens are collectively a single asset for that purpose.

The latter approach accords with the commercial effect of the transaction and it eliminates an otherwise unwarranted distinction between foreign currency and a right to receive foreign currency, which is clearly a single asset. So cost base thresholds, such as that in relation to capital gains from personal use assets, would apply to the aggregate cost of the amount of the foreign currency paid and not to the cost of each token.

If the transaction were split to avoid this outcome, the Commissioner of Taxation may determine to set it aside for income tax purposes pursuant to the general anti-avoidance provisions of Part IVA of ITAA FRE 1 applies to a taxpayer s foreign currency or a right to such currency on a first- in first- out basis 66 unless the taxpayer has made an election that the cost of part of the amount or fund at a particular time be determined on a weighted average basis as prescribed by regulation 1 to 6.

It includes a right to receive an amount calculated by reference to a currency exchange rate effect even if that amount is not an amount of foreign currency and, to avoid doubt, it includes a right to receive foreign currency where the right is subject to a contingency. So it is not possible to avoid FRE 1 by disposing of a right to receive an Australian dollar amount that is calculated as an amount of foreign currency at a prevailing or current rate of exchange.

In relation to a contingent right to receive foreign currency, a question arises as to whether a share in a company is a right to receive foreign currency where it includes a right to foreign dividends or foreign capital. It is technically arguable that a share, which is an indivisible bundle of rights, is an asset quite distinct from a constituent right to participate in profits and capital especially if the share includes other rights such as the right to vote. That position is weaker where the share consists exclusively of rights to foreign dividends or capital or both.

The disposal of a share is to be distinguished from the right that accrues to a shareholder This provision accords with the presumption in relation to current bank accounts affirmed in Devaynes v Noble, Clayton s case 1 Mer ; 35 ER Clearly a debt that is a right to a foreign dividend is a right to an amount of foreign currency for the purposes of FRE 1.

Similar issues arise in relation to CGT assets that are units, or other beneficial interests, in trust estates that consist wholly or partially of foreign currency or rights to foreign currency, or that are partnership interests in partnership assets that are foreign currency or rights to receive foreign currency. A right to receive foreign currency may be a debt, such as the debt owed by a banker in relation to foreign currency on deposit or a debt in respect of dividends or wages, or some other contractual right such as an option to acquire foreign currency.

FRE 1 will happen where the taxpayer ceases to hold beneficially, as in the case where the foreign currency, or the right to receive it, is the subject of a declaration of trust for the benefit of another entity or in any other case where the taxpayer continues to hold those assets but as trustee only. FRE 1 will also happen where a taxpayer makes a donation of foreign currency or of a right, or part of a right, to receive foreign currency.

FRE 1 happens where a taxpayer deposits foreign coins or banknotes into a bank account denominated in that currency because, on deposit, the taxpayer has disposed of the coins and notes to the banker for a right to receive an equivalent amount of the foreign currency.

The same cannot be said of a withdrawal in foreign coins and notes from a bank account because the beneficial title to the right to receive them is extinguished by the withdrawal rather than transferred to another entity. ITAA 97 ss 1 , 2 a.

Taxpayers are required to use this subsection to work out whether they have disposed of foreign currency or a right, or part of a right, to receive foreign currency: s 2. A cheque drawn payable to the drawee for an amount of foreign currency does not amount to a disposal of the right to receive that amount of the foreign currency by the drawer when the cheque is honoured, because the ownership of the right does not change.

The drawer ceases to hold the right when it is extinguished by a valid debit entry to the relevant account. CGT event A1 does not happen if the foreign currency, or right to the foreign currency, was disposed of to provide or redeem a security or because it vested in a trustee under the Bankruptcy Act Cth or in a liquidator of a company. In the case where the asset disposed of is the right, or part of the right, to receive an amount of foreign currency, the event will happen when the ownership of the right, or part of the right, changes.

The time at which the ownership of the right changes will depend on the nature of the right. If it is a debt other than a debt owed by a banker to a customer, a change of ownership will occur when the taxpayer legally assigns the right to another entity. If the right that is to be disposed of is contained in a negotiable instrument, such as a bill of exchange, promissory note or cheque that has been issued, endorsed or transferred to the taxpayer, the ownership of the right will change when the taxpayer transfers or negotiates the instrument to another entity by indorsement if required and delivery so that the transferee is the holder of the instrument.

Where the taxpayer holds foreign currency in a bank account, the right, or part of the right, to receive it will be disposed of when the taxpayer issues a valid instruction, such as that in a cheque, to the payee requiring the banker to pay all or some of it to another entity. The fact that the transfer is subject to a condition such as the availability of funds to cover the full amount of the cheque, is immaterial. So FRE 1 does not happen when a taxpayer draws and issues a cheque payable to drawee because the transaction does not produce a change in ownership of the right to receive the foreign currency in the amount of the cheque.

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