On 29 Oct 2021, the AAT decided that Interest earned on a foreign bank account was assessable as the taxpayer was an Australian resident (and this was published on 2.11.21). This is unremarkable but the facts were complicated by ‘exchange’ date/rate issues (on the interest receipts) and exchange rate losses on the loan balances.
The facts were these.
- At all relevant times the taxpayer was an Australian resident.
- In 2011, he transferred $180,000 from his Australian bank account to an account with an Iranian bank, hoping to benefit from higher interest rates on offer in Iran.
- The bank periodically credited interest to the taxpayer’s account.
- However, because declines in the AUD/Iranian Rials exchange rate adversely affected the value of his funds, the taxpayer transferred them back to his Australian bank account in October 2018.
- The taxpayer failed to include in his Australian income tax returns the interest credited to his account at the Iranian bank.
- However, following an audit, the ATO issued assessments that treated the interest as assessable.
The AAT confirmed the assessments as interest derived by an Australian resident is assessable, wherever the source of the interest. However the AAT ordered that: ‘The objection decision is varied by reducing the interest included in the applicant’s assessable income for the 2016, 2017 and 2018 income years to the amounts of $14,357, $14,015 and $12,193 respectively.’ These were the years in which the assessments were raised for interest receipts. The reductions were agreed to, by the ATO (on being given further information), to recognise a lower exchange rate, on the interest receipts.
Extract from decision
1. The applicant, Mr Dezfoolian, is an Australian resident. In 2011, he transferred $180,000 from his Australian bank account to an account with Maskan Bank in Iran, with the hope of benefitting from higher interest rates on offer in Iran.
2. Maskan Bank periodically credited interest to Mr Dezfoolian’s account which was designated in Iranian Rials (‘IRR’). Unfortunately for Mr Dezfoolian, declines in the AUD/IRR exchange rate adversely affected the value of his funds. Mr Dezfoolian withdrew most of the funds in his IRR account on 21 October 2018, converting them to Australian dollars which he transferred to his Australian bank account.
3. Taking the view that he had made losses because of the decline in the value of his funds due to the exchange rate, Mr Dezfoolian did not include the interest credited to his account at Maskan Bank in his Australian income tax returns. He also claimed capital losses and carried forward losses relating to the decline in the value of his investment.
4. The Commissioner of Taxation issued assessments treating the interest credited to Mr Dezfoolian’s account as part of Mr Dezfoolian’s assessable income. The Commissioner also assessed administrative penalties in respect of the income years after Mr Dezfoolian removed the funds from Maskan Bank; that is, in respect of the years ended 30 June 2019 and 2020.
DECISIONS UNDER REVIEW
5. Mr Dezfoolian objected to the income tax and penalty assessments. The Commissioner disallowed the objections. Mr Dezfoolian has applied for review of the objection decisions.
6. The objection decisions before the Tribunal for review relate to:
(a) Primary tax assessments – for the years ended 30 June 2016, 2017 and 2018;
(b) Penalty assessments – relating to the years ended 30 June 2019 and 30 June 2020.
There’s a non-tax lesson here. For those old enough to remember, this sounds like Australians, who deposited money in Swiss bank accounts, to get higher interest rates. The loans were unhedged (because the return would no longer be attractive – of course). The exchange rate moved against the Australian lenders and they made huge capital losses (many suing their Australian banks, for ‘letting them’ lend unhedged). The lesson is, interest rates that are higher, in a foreign country, are higher, to reflect the exchange rate risk.
(Dezfoolian v CofT [2021] AATA 3991, AAT, Olding SM, 29 October 2021.) [LTN 212, 3/1/21]
[Tax Month – November 2021 – Previous 2021] 3.11.21