An investor disposes of foreign shares.
|
This fact sheet does not discuss the capital gains tax (CGT) consequences of the disposal of the shares.
|
Eleanor acquires USA shares on 1 July 2004 and disposes of them for US$1,200 on 28 July 2005, when the exchange rate is A$1.00 = US$0.50. On disposal of her shares, she incurs brokerage of US$30.
Eleanor receives payment (after deducting brokerage) at settlement on 1 August 2005 when the exchange rate is A$1.00 = US$0.60. Eleanor elects not to have the 12 month rule apply.
Eleanor will make a forex realisation loss of A$400 on receipt of payment, on 1 August 2005.
Refer to the fact sheet Foreign exchange (forex) - disposal price of CGT asset denominated in foreign currency (election out of 12 month rule). This explains how the forex realisation loss of $400 on receipt of payment for the shares is calculated.
Eleanor will make a forex realisation gain of A$10 on 1 August 2005 when brokerage is paid.
When Eleanor uses the services of a broker to dispose of her shares, she incurs an obligation to pay the brokerage fees for the disposal. When she pays for the brokerage on 1 August 2005, forex realisation event 4 occurs. This is because when the payment is made, Eleanor ceases to have an obligation to pay foreign currency to the broker (US$30) and she incurs the obligation as part of the second element of the cost base of a CGT asset (subparagraph 775-55(1)(b)(v); paragraph 110-25(3)(b)).
Although Eleanor has not actually paid for the brokerage, she is taken to have paid for it as these amounts have been deducted from the sale proceeds of the shares and have been applied in satisfaction of her obligation to the broker (section 775-110).
Whether the transaction gives rise to a forex realisation gain or loss requires a comparison to be made (in Australian dollar value) between the amount Eleanor paid when the event happened and the proceeds of assuming the obligation calculated at the tax recognition time (subsections 775-55(3) and (5)). Any difference in the amounts due to a currency exchange rate effect will result in a forex realisation gain or loss (section 775-105 and paragraphs 775-55(3)(b) and (5)(b)).
The amount Eleanor paid when the event happened was A$50 (US$30/0.60) (subsection 960-50(6) Item 5).
The tax recognition time for the purposes of calculating the proceeds of assuming the obligation is when Eleanor incurred the obligation to pay the brokerage on 28 July 2005 (subsection 775-55(7) Item 10).
The proceeds of assuming the obligation to pay the brokerage is the market value of the brokerage service provided to Eleanor, being the market value of the non-cash benefit she acquired in return for incurring the obligation (paragraph 775-95(b)(i)).
The market value of the brokerage service provided to Eleanor on 28 July 2005 is the brokerage amount charged by the broker (US$30). The proceeds of Eleanor assuming the obligation to pay the brokerage calculated at the tax recognition time is therefore A$60 (US$30/0.50) (subsection 960-50(6) Item 5).
The difference is A$10 (A$60 - A$50). As this amount arises solely as a result of the currency exchange rate effect, the difference represents a forex realisation gain.
As Eleanor has elected under section 775-80 for the 12 month rule not to apply to her, she must include the A$10 forex realisation gain in 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