Tips and traps:

The Australian income tax law and your offshoreaccounts

This alert summarises some of the key tips and traps concerning the
way in which the Australian income tax law applies to bring to account
foreign exchange gains and losses from your offshore accounts.
It also touches briefly on some of the more common considerations
facing individuals with foreign currencydealings.

Foreign exchange
gains and losses:
The Australian statutory environment
The Australian income tax law sets out a statutory
framework for the recognition of foreign exchange gains
or losses. The rules have applied since 1 July 2003 and
are relevant to individuals who hold offshore accounts
opened on or after this date or non-Australian dollar
denominated accounts or loans in Australia.
Broadly speaking, the rules will recognise foreign
exchange gains or losses on the happening of
forexrealisation events, although some exemptions can
apply. Foreign exchange gains and losses are calculated
by reference to the change in the Australian dollar value
of the various rights and obligations that are the subject
of the various forex realisation events. Examples of
forex realisation events would be where a taxpayer
pays interest or principal on a loan denominated in a
foreign currency, or withdraws an amount from a foreign
currency bank account.
Gains and losses, subject to certain exceptions, are
considered to be revenue in nature and give rise to
assessable income or a deduction, respectively.

Who typically holds offshore accounts?

In our experience, Australian resident individuals
(forincome tax purposes) returning to Australia after a
period of overseas employment and foreign nationals
(who are not temporary residents for income tax
purposes) are likely to hold offshore accounts and, as
such, to be within the scope of the foreign exchange
gains and losses rules.
I hold an offshore account: How will these rules
affect me?
Where you hold an offshore account that was opened
on or after 1 July 2003, any deposits to and withdrawals
from that account may give rise to a foreign exchange
gain or loss. Depending on the nature of the offshore
account and your status as an Australian resident, you
may have been required to bring to account gains and
losses from that time onwards.
Fortunately, the foreign exchange gains and losses rules
provide for certain exclusions (some mandatory, others
optional) which may result in your being able to disregard
gains and losses where certain circumstances are present.

These exclusions include:

Gains and losses of a private or domestic nature
such gains and losses are not brought to account as
assessable income or deductions, respectively.

The characterisation of gains or losses as private

or domestic in nature may not always be clear and
apportionment may be required. For example, a
foreign exchange gain or loss arising on an offshore
account into which the proceeds of the sale of a
private residence are deposited may not be of a
private or domestic nature where the account was
opened for the purpose of obtaining a greater return.

The limited balance election this election allows

taxpayers to disregard certain foreign exchange gains
and losses on certain low-balance foreign currency
transactional accounts (e.g. credit card accounts
and those that facilitate transactions referred to as
qualifying forex accounts). A limited balance election
must be made in writing, and should be kept with
the relevant taxpayers tax records (the Government
has announced an intention to change the law such
that an individual taxpayer may not need to make an
election in order to obtain the benefit of the limited
balance rules, however, no detail has been provided
to date other than to confirm the change will have
retrospective effect from 1 July 2003).

In order to be able to disregard gains and losses under

the election, the limited balance test must be passed.
The limited balance test applies to all of the accounts
for which an election has specifically been made.
Thetest is passed at a particular time if each of the
total credit balances and the total debit balances, of
all qualifying forex accounts for which an election is in
force, is not more than the foreign currency equivalent
range of -AUD250,000 to +AUD250,000.

While only a single limited balance election is able to

be made, it is possible for an individual to have such
an election in place in relation to a particular qualifying
forex account (or accounts) notwithstanding the fact
they may hold other offshore accounts with balances
that generally exceed AUD250,000.

However, when considering whether an election is

to apply to a particular account, it is important to be
aware of the likelihood that changes in the balance
of that account may result in the limited balance test
being failed.

As the limited balance election applies to accounts

held by you, it appears that for joint accounts, each
holder can make an election in respect of the one
account (i.e. the fact that one holder makes a limited
balance election in respect of the account should not
preclude the other holders from also making such an
election in respect of the same account).

In the context of an offshore account, the limited

balance election will have the practical effect of
disregarding foreign exchange gains and losses
attributable to withdrawals.

The limited balance election is a compliance costsaving measure and as such, it may be particularly
advantageous for individuals with offshore accounts
as, consistent with its intention, it is a legitimate
measure allowing gains and losses on accounts within
its scope to be disregarded.

While not an exclusionary measure, a taxpayer may elect

to use the retranslation method to bring to account
foreign exchange gains and losses arising in respect
of their qualifying forex accounts on an annual basis.
For many taxpayers, the retranslation method will be
simpler to use to calculate gains or losses than the
(firstin first out) FIFO ordering rule that otherwise applies
to transactional accounts. However, retranslation may
bring to account gains or losses that would otherwise
beunrealised.

Example:
Withdrawal from foreign currency bank account
The following example illustrates a common scenario that may arise where an
Australian-resident individual returns to Australia after a period of overseasemployment.
Geoff is an engineer who returns to Australia on
1July 2012 after several years of working in France.
While overseas, Geoff opened a bank account
denominated in euros into which he deposited part
of his monthly salary (also denominated in euros).
Hispurpose for opening the account is to earn
interest and also to fund the acquisition of shares.
This purpose does not change at any time.
For the period during which the account is open
through to the day on which Geoff returns home
1is equal to AUD1.15.
On 31 December 2012, Geoff withdraws the balance
of his overseas account, which is 1,000. At this time,
1 is equal to AUD1.25.

Subject to the application of proposed (but, as

yet, unenacted) changes to the current rules to
disregard foreign exchange gains or losses to the
extent they are attributable to a period before
commencing residency, Geoff makes a gain of
AUD100 (withdrawal of AUD1,250 less deposits of
AUD1,150). The gain constitutes assessable income
because it is not of a private or domestic nature.
Accordingly, Geoff will be subject to tax on this
amount and he must disclose it in his income tax
return for the year ended 30 June 2013.
Assuming Geoff holds no other offshore accounts,
if he had made a limited balance election, he would
have been able to disregard the gain because its
balance is less than AUD250,000 and it is used for
the purpose of facilitating transactions
(i.e. the acquisition of shares).

Other foreignexchange
gainsandlosses issues
It is important that taxpayers consider the income
tax implications of all their foreign currency dealings.
For individuals leaving Australia to work overseas, or
returning to Australia, a common transaction for which
the foreign exchange gains and losses rules must be
considered, in addition to the broader income tax law, is
the sale of property overseas. Further, as highlighted in
the example above, it is also necessary to consider what
implications, if any, there are for an individual becoming
an Australian resident.
The nature of these and other issues relating to the
operation of the foreign exchange gains and losses
rules are quite complex and we recommend that you
discuss with your adviser the tax implications of any
foreign currency dealings you have carried out or are
contemplating entering into.

What should I do now?

Check your arrangements to consider whether
or not the above information is relevant to you.
If you do hold an offshore account that you
think might be in need of a foreign exchange
gain or loss check-up, please do not hesitate to
contact one of our specialists listed below.
We are more than happy to help you identify
any issues relating to your offshore accounts,
and where necessary, to assist you in dealing
with the Australian Taxation Office, as required.

Sydney

Robert Basker
Partner - Tax

Stephen Coakley
Partner - Tax

Kathy Saveski
Partner - Tax

Tel: +61 2 9322 7551

email: rbasker@deloitte.com.au

Tel: +61 2 9322 7814

email: scoakley@deloitte.com.au

Tel: +61 2 9322 5722

email: ksaveski@deloitte.com.au

Melbourne

Sarah Lane
Partner - Tax

Paul Rubinstein
Partner - Tax

Tel: +61 3 9671 7081

email: salane@deloitte.com.au

Tel: +61 3 9671 7603

email: prubinstein@deloitte.com.au

Brisbane

Perth

Shelley Nolan
Partner - Tax

George Kyriakacis
Partner - Tax

Tel: +61 7 3308 7232

email: shnolan@deloitte.com.au

Tel: +61 8 9365 7112

email: gkyriakacis@deloitte.com.au

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