A CGT asset can be denominated in a foreign currency and foreign currency cash itself can be a CGT asset. Gains or losses that you make during the period that you hold such assets will generally be taxed as a capital gain or capital loss respectively. However, if dealings with foreign currency denominated assets give rise to rights to receive or obligations to pay foreign currency, the rights or obligations may be subject to the foreign exchange (forex) provisions when a right or obligation ceases. For example, if a contract you enter into to sell an overseas rental property is denominated in foreign currency, you will have a right to receive foreign currency (being the sale price of the rental property). The right ceases on payment of the foreign currency. Such rights and obligations will usually arise on the acquisition or disposal of a CGT asset.
A forex gain or loss commonly arises for the acquisition or disposal of a CGT asset denominated in foreign currency where there is a currency exchange rate fluctuation between the date you entered into the contract and the date of settlement of the contract (when payment occurs). Currency fluctuations between the date of acquisition and date of disposal of a CGT asset are taken into account when the cost base and capital proceeds are translated into Australian currency.
It may be that the gain or loss you make on the ending of rights for foreign currency, a disposal of foreign currency or a right to receive foreign currency is taxable under both CGT and the forex measures. Generally, to the extent that both the forex measures and CGT bring to account a forex gain or loss, the forex measures take precedence, such that the forex gain or loss is brought to account only under the forex provisions.
In addition, if the TOFA rules apply to you, your foreign exchange gains and losses may be brought to account under those TOFA rules instead of the forex measures. For more information about the TOFA rules, see Guide to the taxation of financial arrangements (TOFA) rules.
For more information, see Foreign exchange (forex): overview (NAT 8985).
Short-term foreign exchange gains and losses rules
Some short-term foreign exchange (forex) gains or losses, which arise under transactions for the acquisition or disposal of certain CGT assets, will be treated as capital gains or capital losses. In such cases, CGT events K10 or K11 will happen, which will result in the forex gain or loss being integrated into the tax treatment of the CGT asset, or matched to the character of the gain or loss that would arise from the disposal of the asset. For the short-term rules to apply, the due date for payment must be within 12 months of acquiring or disposing of the asset. For more information, see Foreign exchange (forex): the 12 month rule (NAT 9391).
Translating (converting) foreign currency denominated CGT assets to Australian dollars
For information on what exchange rates to use in translating foreign currency amounts into Australian currency, see Foreign exchange (forex): the general translation rule (NAT 9339)
Examples of the application of forex rules to CGT assets
For examples of the application of the forex rules to acquisitions and disposals of foreign currency denominated CGT assets, see:
- Foreign exchange (forex): acquisition of a CGT asset (NAT 10557)
- Foreign exchange (forex): acquisition of a CGT asset (election out of 12 month rule) (NAT 10625)
- Foreign exchange (forex): disposal of CGT asset denominated in foreign currency – incidental costs (election out of 12 month rule) (NAT 10627)
- Foreign exchange (forex): disposal price of CGT asset denominated in foreign currency (NAT 10628)
- Foreign exchange (forex): disposal price of CGT asset denominated in foreign currency (election out of 12 month rule) (NAT 10654)