Foreign exchange (forex): the facilities roll-over election

The ordinary operation of the forex measures is that all tax-relevant foreign currency amounts are converted to Australian currency.

To raise finance, a taxpayer may issue securities under a facility agreement. In these circumstances, taxpayers will often treat the securities in a similar way to loans. If these securities are denominated in a foreign currency, the forex measures will apply.

Therefore, the forex gain or loss realised on the face value of each security issued under a facility (when the obligation to pay the face value of the security is discharged) is brought to tax.

The facilities roll-over election allows the issuer of certain securities (that is, the borrower) under certain facility agreements to defer the realisation of gains or losses where the obligation to pay the face value of each such security is discharged by issuing a new security under the facility agreement. Broadly, the effect is to tax the electing issuer as if it had borrowed by means of a term loan.

An election must be in writing, is irrevocable, and continues to apply until the facility agreement ends.

The facilities roll-over election is only available in respect of certain facilities agreements, namely those where:

• the taxpayer has the right to issue eligible securities under the agreement
• another entity or entities must acquire the securities, and
• the effect of the agreement is that during its term, the taxpayer is able to obtain finance in a particular foreign currency up to the amount specified in the agreement.

The roll-over provisions only apply where the facility agreement has a 'must acquire' aspect. If the eligible security is obtained through a 'best endeavours' tender then the security is not treated as analogous to a term loan.

An 'eligible security' can be either a bill of exchange or a promissory note that is:

• non-interest bearing
• issued at a discount
• denominated in a foreign currency, and
• for a fixed term.

Typically, a bill of exchange will have the features of:

• being an unconditional order in writing
• being addressed by one person to another (and signed by the person giving it), and
• requiring the drawee (the person to whom it is addressed) to pay a specified sum of money on demand or at a particular time.

Typically, a promissory note will have the features of:

• being an unconditional promise in writing
• being made by one person to another (and signed by the person making the promise)
• engaging the maker of the promise to pay a specified sum of money on demand or at a particular time (this is usually fixed), and
• being typically issued for 90, 120 or 180 days.

A facilities roll-over election must be made within 90 days of the first eligible security being issued under the facility agreement, or within 90 days of the applicable commencement date. However, taxpayers with an applicable commencement date of 1 July 2003 could also make the election between 17 December 2003 and 16 January 2004.

If an election is made within 90 days of the first eligible security being issued under the facility agreement, the election is taken to have been in effect from immediately before that security is issued.

If an election is not made within 90 days of the first eligible security being issued under the facility agreement, but is made within 90 days of the applicable commencement date or between 17 December 2003 and 16 January 2004 (whichever is later), the election takes effect from the applicable commencement date.

Making a facilities roll-over election

A facilities roll-over election must be made in writing and should be kept with the taxpayer's tax records.

The election should not be sent to the Tax Office.

There is no prescribed form for the making of a facilities roll-over election, but it should include:

• the name and tax file number of the taxpayer making the election
• a statement that under section 775-195 of the Income Tax Assessment Act 1997 the taxpayer chooses roll-over relief for a specified facility agreement
• details of the specified facility agreement (sufficient details to identify, or a copy of the agreement)
• the signature of the person making the election, and
• the date the election was made.

Example:

This choice is made under section 775-195 of the Income Tax Assessment Act 1997.

I, Joe Taxpayer, choose to have roll-over relief apply to the attached facility agreement.

Joe Taxpayer

18 December 2003