The following foreign exchange (forex) information deals with the ordering rules which may apply where transactions denominated in a foreign currency give rise to multiple forex realisation events.
Under section 775-65 of the Income Tax Assessment Act 1997 (ITAA 1997), generally, only one of the five main forex realisation events is to be counted if multiple forex realisation events occur simultaneously.
The most common situations in which multiple forex realisation events occur is in relation to:
- options to buy or sell foreign currency for another foreign currency, and
- forward exchange contracts involving two foreign currencies.
Specific rules for particular forex events which occur in the case of options and forward contracts are outlined in subsections 775-65(1), (2) and (3) of the ITAA 1997.
When more than one of the five main forex realisation events occur simultaneously in respect of the same rights or obligations, but none of the specific rules for options and forward contracts apply, the 'residual rule' contained in subsection 775-65(4) of the ITAA 1997 applies. This residual rule prescribes that you are to apply the forex realisation event that is most appropriate and ignore any remaining events.
The following examples illustrate the application of the specific rules to:
- the holder of an option to buy a foreign currency for another foreign currency, and
- a taxpayer with a forward contract to purchase a foreign currency using another foreign currency.
AustCo, a resident company of Australia, purchases a call option over 1,000 US dollars (US$). This call option gives the holder a right to buy US$1,000 in three months time for 1,500 New Zealand dollars (NZ$).
At the end of the three months, AustCo decides to exercise the option.
When AustCo exercises the option, it disposes of NZ$1,500 for US$1,000 under the terms of the option.
At the time the option is exercised, the NZ$1,500 AustCo pays is equivalent to 1,000 Australian dollars (A$) (at that time, A$1.00 = NZ$1.50), and the US$1,000 it receives is equivalent to A$1,250 (A$1.00 = US$0.80).
The NZ$1,500 AustCo disposed of was acquired for A$1,200 some time earlier (when A$1.00 = NZ$1.25).
The following forex realisation events occur when AustCo exercises the option:
- Forex realisation event 1 occurs when AustCo disposes of NZ$1,500.
- The option held by AustCo is a right to receive foreign currency (namely US$), and when AustCo exercises this option and receives US$1,000 this right ceases and a forex realisation event 2 occurs.
- The option held by AustCo is also an obligation to pay foreign currency (namely NZ$) - contingent on it exercising the option - and when AustCo exercises this option and pays NZ$1,500 to the option writer, its obligation to do so ceases and a forex realisation event 4 occurs.
The forex realisation gain or loss made on each of these forex realisation events is summarised below.
Forex realisation event 1 (disposal of NZ$1,500 cash)
|
|
Exchange
rate
|
A$
value
|
Cost base of NZ$1,500
|
A$1.00 = NZ$1.25
|
$1,200.00
|
Capital proceeds - deemed to be the market value of the NZ$1,500 when disposed of under subsection 775-40(9) of the ITAA 1997
|
A$1.00 = NZ$1.50
|
$1,000.00
|
Forex realisation loss
|
|
$ 200.00
|
Forex realisation event 2 (ending of right to receive US$1,000 under the option contract)
|
|
Foreign currency amount
|
Exchange
rate
|
A$
value
|
Forex cost base
|
NZ$1,500
|
A$1.00 = NZ$1.50
|
$1,000.00
|
Amount received upon right ending
|
US$1,000
|
A$1.00 = US$0.80
|
$1,250.00
|
Forex realisation gain
|
|
|
$ 250.00
|
Forex realisation event 4 (ending of obligation to pay US$1,000 under the option contract)
|
|
Foreign currency amount
|
Exchange
rate
|
A$
value
|
Proceeds of assuming the obligation
|
US$1,000
|
A$1.00 = US$0.80
|
$1,250.00
|
Amount paid when obligation ceases
|
NZ$1,500
|
A$1.00 = NZ$1.50
|
$1,000.00
|
Forex realisation gain
|
|
|
$ 250.00
|
Under subsection 775-65(1) of the ITAA 1997, AustCo will ignore forex realisation event 4 in this transaction. It will, therefore, make a forex realisation loss of A$200 under forex realisation event 1 through the disposal of its NZ$1,500, and a forex realisation gain of A$250 under forex realisation event 2 through the exercise of its option.
The residual rule in subsection 775-65(4) of the ITAA 1997 has no operation as the specific rule in subsection 775-65(1) of the ITAA 1997 (relating to options to buy foreign currency) applies, and because the forex realisation event 1 happens to a right and/or obligation separate to that under the option contract to which the forex realisation event 2 happens.
AustCo, a resident company of Australia, acquires US$1,000 for A$2,000 (when A$1.00 = US$0.50).
AustCo then enters into a forward contract to sell the US$1,000 for 850 Euros in three months time (the settlement date).
Under the contract, AustCo sells its US$1,000 for 850 Euros on the settlement date. On this day, US$1,000 is equivalent to A$2,500 (A$1.00 = US$0.40), and 850 Euros is equivalent to $1,062.50 (A$1.00 = 0.80 Euro).
The following forex realisation events occur upon settlement of the forward contract:
- Forex realisation event 1 occurs when AustCo disposes of US$1,000.
- The forward contract held by AustCo is a right to receive foreign currency (namely Euros), and when AustCo receives 850 Euros under that contract, this right ceases and a forex realisation event 2 occurs.
- The forward contract held by AustCo is also an obligation to pay foreign currency (namely US$), and when AustCo pays US$1,000 under that contract this obligation ceases and a forex realisation event 4 occurs.
The forex realisation gain or loss made on each of these forex realisation events is summarised below.
Forex realisation event 1 (disposal of the US$1,000 cash)
|
|
Exchange
rate
|
A$
value
|
Cost base of US$1,000
|
A$1.00 = US$0.50
|
$2,000
|
Capital proceeds - deemed to be the market value of the US$1,000 when disposed of under subsection 775-40(9) of the ITAA 1997
|
A$1.00 = US$0.40
|
$2,500
|
Forex realisation gain
|
|
$ 500
|
Forex realisation event 2 (ending of right to receive 850 Euros under the forward contract)
|
|
Foreign currency amount
|
Exchange
rate
|
A$
value
|
Forex cost base
|
US$1,000
|
A$1 = US$0.40
|
$2,500.00
|
Amount received upon right ending
|
850 Euros
|
A$1 = 0.80 Euros
|
$1,062.50
|
Forex realisation loss
|
|
|
$1,437.50
|
Forex realisation event 4 (ending of obligation to pay US$1,000 under the forward contract)
|
|
Foreign currency amount
|
Exchange
rate
|
A$
value
|
Proceeds of assuming the obligation
|
850 Euros
|
A$1 = 0.80 Euros
|
$1,062.50
|
Amount paid when obligation ceases
|
US$1,000
|
A$1.00 = US$0.40
|
$2,500.00
|
Forex realisation loss
|
|
|
$1,437.50
|
Under subsection 775-65(3) of the ITAA 1997, AustCo will ignore forex realisation event 4 in this transaction. It will, therefore, make a forex realisation gain of A$500 under forex realisation event 1 through the disposal of its US$1,000, and a forex realisation loss of A$1,437.50 under forex realisation event 2 through the settlement of the forward contract.
The residual rule in subsection 775-65(4) of the ITAA 1997 has no operation as the specific rule in subsection 775-65(3) of the ITAA 1997 (relating to options to buy foreign currency) applies, and because the forex realisation event 1 happens to a right and/or obligation separate to that under the forward contract to which the forex realisation event 2 happens.
Last Modified: Friday, 31 March 2006