If, at the time that the CGT event happens in relation to the indirect Australian real property interest, the sole or predominant currency in which you keep your accounts is a currency other than Australian currency, you must use the applicable functional currency to work out the amount of any capital gain or capital loss Subsection 960-61(2) of the ITAA 1997 covers this.
There are 2 steps to work out a capital gain or capital loss.
Different exchange rates apply to the translation of amounts that are elements in the calculation of capital gain or loss.
The exchange rate to be used when translating amounts will be either the rate at the time the costs are incurred, or the rate at the time of the CGT event.
These amounts are translated into your functional currency at the exchange rate applicable at the time the costs are incurred.
These amounts are translated into the applicable functional currency at the exchange rate applicable at the time of the CGT event.
This amount is translated into the Australian currency at the exchange rate applicable at the time of CGT event.
This example shows how foreign residents need to use the functional currency rules to calculate capital gains and losses on the disposal of an indirect Australian real property interest.
Example 6: CGT and the disposal of property
On 20 March 2006, Foreign Co (incorporated in Singapore) acquired all 120,000,000 issued shares in Aus Property Co for A$2.20 per share.
On 21 April 2006, Foreign Co incurred incidental costs amounting to A$850,000.
On 15 September 2009, Foreign Co disposed all its shares in Aus Co for A$3.50 per share. Foreign Co used Singapore dollars to keep their accounts at the time of disposal.
The shares in Aus Co are indirect Australian real property interests and the exchange rate was:
- $S1.1922 at the time of acquisition
- $S1.1934 at the time the incidental costs were incurred
- $S1.2538 at the time of disposal.
The capital gain or capital loss on disposal of those shares is calculated as follows:
Step 1: Work out the capital proceeds from the CGT event
Proceeds on disposal
15/9/2009 120,000,000 × A$3.50 = A$420,000,000
Translate into applicable functional currency
15/9/2009 A$420,000,000 × S$1.2538 = S$526,596,000
Total capital proceeds S$526,596,000
This step is covered in the following provisions of the ITAA 1997:
- Item 6(a) ss.960-80(1) Para 960-80(4)(a)
- ss.960-80(6) Item 5 ss.960-50(6).
Step 2: Work out the cost base of the CGT asset
1st element – money paid to acquire the shares
20/3/2006 120,000,000 × A$2.20 = A$264,000,000
Translate into applicable functional currency
20/3/2006 A$264,000,000 @ S$1.1922 = S$314,740,800
2nd element – incidental costs of acquiring the shares
21/4/2006 A$850,000
Translate into applicable functional currency
21/4/2006 A$850,000 × S$1.1934 = S$1,014,390
Total cost base (1st and 2nd elements) S$315,755,190
This step is covered in the following provisions of the ITAA 1997:
Item 6(a) ss.960-80(1) Para 960-80(4)(a)
ss.960-80(6)
Item 5 ss.960-50(6)
Step 3: Calculate capital gain
Subtract cost base from capital proceeds
S$526,596,000 – S$315,755,190 = S$210,840,810
Capital gain in applicable functional currency S$210,840,810
This step is covered in the following provisions of the ITAA 1997
- Item 6(b) ss.960-80(1)
- Para 960-80(4)(b).
Step 4: Convert into Australian currency
Translate amount of capital gain into Australian currency
15/9/2009 S$210,840,810 = A$168,161,437
S$1.2538
Capital gain in Australian currency is A$168,161,437
This step is covered in the following provisions of the ITAA 1997:
- Item 6(b) ss.960-80(1)
- Item 5 ss.960-50(6).
End of example