Foreign exchange (forex): disposal price of CGT asset denominated in foreign currency

An investor disposes of foreign shares.

Example

Eleanor acquired shares in January 2003. She disposes of her US shares for US$1,200 on 1 July 2005 when the exchange rate is A$1.00 = US$0.50.

Eleanor receives payment on settlement on 1 August 2005 when the exchange rate is A$1.00 = US$0.60.

Eleanor has not previously made an election out of the 12 month rule; therefore, the 12 month rule will apply.

When will the foreign exchange realisation gain or loss arise?

Eleanor will make a forex realisation loss of A$400 when she receives payment on 1 August 2005.

What are the consequences of any forex realisation gain or loss?

As Eleanor receives payment within 12 months of disposal of the shares, the forex realisation loss will be a capital loss for the purposes of the CGT provisions.

The 12 month rule, as it applies to the above facts, requires that any forex realisation gain or loss on the disposal of the capital assets be dealt with under the CGT provisions because the time between that disposal and the due time for payment is not more than 12 months.

Most taxpayers had a choice to elect out of the 12 month rule by 16 January 2004. The effect of this election is that forex realisation gains will be included in assessable income and forex realisation losses will be allowable as a deduction. Eleanor has not previously made an election out of the 12 month rule.

If the disposal proceeds became due for payment within 12 months of the disposal of the shares, any forex realisation gain or loss is not treated as assessable income or an allowable deduction. Rather, it is dealt with under the CGT provisions.

Eleanor disposes of the shares on 1 July 2005. She receives the disposal proceeds on 1 August 2005. As the period between disposal of the shares and receipt of the payment is less than 12 months, the forex realisation loss of A$400 is not an allowable deduction. Rather, it is a capital loss - subsection 775-75(1) Item 1 and section 104-265 CGT event K11.

More information

For more information, visit Foreign exchange (forex).

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