An investor disposes of foreign shares and elects not to have the 12 month rule apply.
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This fact sheet does not discuss the capital gains tax consequences of the disposal of the shares.
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Eleanor enters into a contract on 1 July 2005 to dispose of her USA shares for US$1,200 in an off-market transaction when the exchange rate is A$1.00 = US$0.50.
She receives payment on settlement on 1 August 2005 when the exchange rate is A$1.00 = US$0.60.
Eleanor has previously elected under section 775-80, within the stipulated time of the foreign exchange (forex) measures commencing, not to have the 12 month rule apply to relevant transactions denominated in foreign currency.
Eleanor will make a forex realisation loss of A$400 when she receives payment on 1 August 2005.
When Eleanor is paid foreign currency on 1 August 2005, forex realisation event 2 occurs. At this time, Eleanor ceases to have the right to receive foreign currency (subsections 775-45(1)(a) & (2)).
Eleanor acquires the right to receive the US$1,200 foreign currency in return for the disposal of her USA shares. On disposal of those shares, a realisation event occurs in relation to a CGT asset Eleanor owns (subparagraph 775-45(1)(b)(iv)).
Any forex realisation gain or loss on the cessation of Eleanor's right to receive foreign currency is determined by any difference between the Australian dollar value of the amount she receives when the event happens and the forex cost base of her right to receive foreign currency, calculated at the tax recognition time (subsections 775-45(3) and (4)). Generally, the tax recognition time for disposal by contract of a CGT asset is when the disposal contract is entered into, and not when the contract is completed.
Any differences in the amounts due to a currency exchange rate effect will result in a forex realisation gain or loss (section 775-105 and paragraph 775-45(3)(b) and (4)(b)).
The amount Eleanor receives as a result of the event happening is A$2,000 (US$1,200/0.6) (subsection 960-50(6) Item 11).
The tax recognition time for the purposes of calculating the forex cost base is when Eleanor enters into the contract to dispose of the shares. This occured on 1 July 2005 (subsection 775-45(7) Item 6).
The forex cost base of Eleanor's right to receive foreign currency is the market value of her USA shares, being the non-cash benefit she provides for that right (paragraph 775-85(b)(i)). The market value of the USA shares on 1 July 2005 is the price at which the shares were sold (US$1,200). The forex cost base of Eleanor's right calculated at the tax recognition time is therefore A$2,400 (US$1,200/0.50) (subsection 960-50(6) Item 5).
The difference between the amount Eleanor receives when the event happens and the forex cost base of her right to receive foreign currency is A$400 (A$2,400 - A$2,000). As this amount arises solely as a result of a currency exchange rate effect, the difference represents a forex realisation loss (subsection 775-45(4)).
As Eleanor had previously elected under section 775-80 for the 12 month rule not to apply, she may deduct the A$400 forex loss from her assessable income.
For more information on the 12 month rule, refer to the fact sheet Foreign exchange (forex) - the 12 month rule.
Last Modified: Tuesday, 13 July 2004