• Forex realisation events

    Forex realisation event 1

    Forex realisation event 1 occurs when there is a disposal from one entity to another (that is, a change in the beneficial ownership happens - capital gains tax (CGT event) A1 – of foreign currency, or a right or part of a right to receive foreign currency.

    The time of the event is when the foreign currency, or the right or part of the right is disposed of.

    You make a foreign exchange (forex) realisation gain if you dispose of foreign currency, or a right or part of a right to receive foreign currency for more than you paid for it, to the extent that the gain is due to fluctuations in the value of the foreign currency. This will usually be when the proceeds on disposal of the foreign currency, measured in Australian dollars, are more than the cost of acquiring the foreign currency, measured in Australian dollars.

    You make a forex realisation loss if you dispose of foreign currency, or rights or parts of rights to foreign currency for less than you paid for them. This is to the extent that a loss is due to fluctuations in the value of the foreign currency.

    Forex realisation event 2

    Forex realisation event 2 occurs when you cease to have a right, or part of a right, to receive foreign currency. A right to receive foreign currency includes a right to receive an amount of Australian currency that is calculated by reference to an exchange rate. The term 'right' includes a right that is contingent upon something happening.

    The right, or part of a right, must cease, and be one of the following:

    • a right to receive income, or a right that represents ordinary income or statutory income – other than under the capital gains tax (CGT) provisions
    • a right created in return for ceasing to hold a depreciating asset
    • a right created or acquired for paying or agreeing to pay Australian or foreign currency
    • a right created in return for a realisation event happening for a CGT asset.

    If you cease to hold a right to receive foreign currency because you have disposed of that right to another entity, forex realisation event 2 does not apply, but forex realisation event 1 does.

    The event happens when you cease to have the right - commonly when a right to receive foreign currency is satisfied by the actual receipt of that currency.

    You make a forex realisation gain if the value of the foreign currency received when the event happens exceeds the amount you were entitled to receive, measured at the tax recognition time. This is to the extent that the gain is due to a currency exchange rate effect. The amount you are entitled to receive is called the 'forex cost base'.

    The values of the foreign exchange at the relevant times will, for most taxpayers, be measured in Australian dollars.

    The measures specify when the forex cost base is to be measured. The specified time when the forex cost base of a right is measured depends on the particular type of right. The classes of right used to specify the tax recognition time correspond to the classes of right to which forex realisation event 2 applies. For example, in the case of a right received which represents ordinary or statutory income, the tax recognition time is the time when the income first becomes assessable. In the case of ordinary income, that time is the time of derivation. For statutory income, that time is when the requirement first arises to include the statutory income in assessable income.

    You make a forex realisation loss to the extent that the value of the foreign currency you receive when the event happens is less than the amount you were entitled to receive, measured at the tax recognition time, because of a currency exchange rate effect. You can also make a loss if you have paid for an option entitling you to receive foreign currency, and that option is not exercised. The amount of the loss is the amount paid for the option.

    A currency exchange rate effect occurs when either currency exchange rates fluctuate, or when an agreed exchange rate differs from an actual exchange rate.

    Forex realisation event 3

    Forex realisation event 3 occurs when you cease to have an obligation, or part of an obligation, to receive foreign currency if the obligation was assumed in return for the creation or acquisition of a right to pay either foreign currency or Australian currency, or is an obligation under an option to sell foreign currency.

    An obligation to receive foreign currency includes an obligation to receive an amount of Australian currency that is calculated by reference to an exchange rate. The term 'obligation' includes an obligation that is contingent upon something happening.

    The event happens when you cease to have the obligation - commonly when an obligation to receive foreign currency is satisfied by the actual receipt of that currency.

    Broadly, you make a forex realisation gain to the extent that the value of the foreign currency bought exceeds the amounts expended to acquire it because of a currency exchange rate effect. Generally, the amounts expended to acquire the foreign currency are referred to as the net costs of assuming the obligation. In the case of an option issued by you that is not ultimately exercised, the gain is the amount you received for issuing the option.

    For most taxpayers, the values of the foreign exchange at the relevant times will be measured in Australian dollars.

    The net costs of assuming the obligation are, broadly speaking, any consideration you must provide to fulfil the obligation, less any consideration received for assuming the obligation that has not already been brought to account as assessable income.

    The value of the consideration to be provided by you to fulfil the obligation is measured at the time you receive an amount in satisfaction of the obligation.

    Broadly, you make a forex realisation loss to the extent that the value of the foreign currency bought is less than the amount expended to acquire it because of a currency exchange rate effect. The amounts expended (the net costs of assuming the obligation) are calculated as for forex realisation gains.

    A currency exchange rate effect occurs when either currency exchange rates fluctuate, or when an agreed exchange rate differs from an actual exchange rate.

    Forex realisation event 4

    Forex realisation event 4 occurs when you cease to have an obligation, or part of an obligation, to pay foreign currency. An obligation to pay foreign currency includes an obligation to pay an amount of Australian currency that is calculated by reference to an exchange rate. The term 'obligation' includes an obligation that is contingent upon something happening.

    The obligation, or part of the obligation, must cease and be one of the following:

    • an obligation that is an expense or outgoing you can deduct
    • an obligation that is an element in the calculation of a net assessable or deductible amount
    • an obligation that is (broadly speaking) an element of the cost base of a capital gains tax (CGT) asset
    • an obligation incurred for certain depreciating assets, or a project amount, under the capital allowances regime
    • an obligation incurred in return for receiving Australian or foreign currency, or the right to receive such currency
    • an obligation under an option to buy foreign currency.

    The event happens when you cease to have the obligation, or part of the obligation - commonly when you actually make the payment of foreign currency.

    You make a forex realisation gain if the amount paid to meet the obligation is less than the proceeds of assuming the obligation, measured at the tax recognition time. This is to the extent that the gain is due to a currency exchange rate effect. You also make a forex realisation gain if you receive a payment in return for granting another party an option obliging them to sell foreign currency, and that option is not exercised.

    The proceeds of assuming the obligation are, broadly, the consideration you are entitled to receive in return for incurring the obligation, less any amounts already brought to account as assessable income.

    The measures specify when the proceeds of assuming the obligation are to be measured. The specified time when the proceeds of assuming the obligation are to be measured depends on the particular type of obligation. For example, if the obligation relates to an expense that is deductible, the tax recognition time is when the expense is incurred.

    For most taxpayers, the values of the foreign exchange at the relevant times will be measured in Australian dollars.

    You make a forex realisation loss if the amount paid to satisfy the obligation is more than the proceeds of assuming the obligation, measured at the tax recognition time. This is to the extent that the loss is due to a currency exchange rate effect.

    A currency exchange rate effect occurs either when currency exchange rates fluctuate, or when an agreed exchange rate differs from an actual exchange rate.

    Forex realisation event 5

    Forex realisation event 5 occurs when you cease to have a right or part of a right to pay foreign currency, and the right is created or acquired in return for assuming specified types of obligations for either foreign currency or Australian currency, or is a right under an option to sell foreign currency.

    A right to pay foreign currency includes a right to pay an amount of Australian currency that is calculated by reference to an exchange rate. The term 'right' includes a right that is contingent upon something happening.

    The event happens when you cease to have the right, or part of the right - commonly when the right is exercised by paying the foreign currency.

    Broadly, you will make a forex realisation gain to the extent that the value of the foreign currency paid under the right is less than the value of the amount you are entitled to receive in satisfaction of the right because of a 'currency exchange rate effect'. Generally, the amount you are entitled to receive in satisfaction of the right is called the 'forex entitlement base'.

    For most taxpayers, the values of the foreign exchange at the relevant times will be measured in Australian dollars.

    The forex entitlement base is, broadly, any consideration you are entitled to receive in satisfaction of the right, less any consideration provided to acquire the right that has not already given rise to an allowable deduction.

    The value of the consideration you are entitled to receive in satisfaction of the right is measured at the time you pay an amount in satisfaction of the right.

    Broadly, you will make a forex realisation loss to the extent that the value of the foreign currency paid under the right is greater than the value of the amount you are entitled to receive in satisfaction of the right because of a currency exchange rate effect. In the case of an option bought by you that is not exercised, the loss is the amount paid to acquire the option.

    A currency exchange rate effect occurs either when currency exchange rates fluctuate, or when an agreed exchange rate differs from an actual exchange rate.

    Forex realisation event ordering rules

    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.

    Multiple forex realisation events

    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
    • 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
    • a taxpayer with a forward contract to purchase a foreign currency using another foreign currency.

    Example 1: holder of an option to buy a foreign currency for 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).

    End of example

    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.

    Example 2: forward contract to purchase a foreign currency using another foreign currency

    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).

    End of example

    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: 01 Mar 2016QC 17064