ATO Interpretative Decision

ATO ID 2003/126 (Withdrawn)

International tax

Foreign Currency Exchange Gains and Losses - Non-resident repays whole or part of foreign currency loan
FOI status: may be released
  • This ATO ID is withdrawn from the database following the decision of the Full Federal Court in Commissioner of Taxation v Messenger Press Pty Ltd [2013] FCAFC 77. Refer to the Decision Impact Statement published on 19 September 2013 in relation to that decision.
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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does a non-resident taxpayer derive currency exchange gains or incur currency exchange losses under Division 3B of the Income Tax Assessment Act 1936 (ITAA 1936) when the whole or part of a foreign currency loan is repaid and both the principal and the repayments are in the same currency?

Decision

No. The taxpayer does not derive currency exchange gains nor incurs currency exchange losses under Division 3B of the ITAA 1936.

Facts

The taxpayer is a resident of a foreign country and owns an income producing rental property in Australia.

The taxpayer is not carrying on a business of buying and selling rental properties.

To purchase this property the taxpayer obtained finance from a wholly owned subsidiary of an Australian bank for an Australian dollar amount. The loan was then converted from Australian dollars to the currency of the foreign country and interest and loan repayments were denominated in that foreign currency.

Reasons for Decision

Subsection 82U(1) of the ITAA 1936 states that Division 3B of the ITAA 1936 applies in relation to gains and losses only to the extent to which they are of a capital nature.

As the taxpayer is not carrying on the business of buying and selling rental properties, the repayments of principal will be of a capital nature and therefore subject to Division 3B of the ITAA 1936.

Currency exchange gains made by a taxpayer under an eligible contract will be included in assessable income under section 82Y of the ITAA 1936 and currency exchange losses incurred by a taxpayer under an eligible contract will be deductible under subsection 82Z(1) of the ITAA 1936.

An eligible contract is defined in subsection 82V(1) of the ITAA 1936 to include, 'a contract entered into by the taxpayer on or after the commencing day, other than a hedging contract'.

The contract entered into by the taxpayer was a loan contract and not a hedging contract and therefore is considered to be an eligible contract for the purposes of sections 82Y and 82Z of the ITAA 1936.

For either section 82Y or section 82Z of the ITAA 1936 to apply when the whole or part of a loan is repaid, there is still a prerequisite that a currency exchange gain or loss is realised in that income year.

Subsection 82V(1) of the ITAA 1936 defines currency exchange gains and losses as gains and losses to the extent that they are attributable to currency exchange fluctuations. In Federal Commissioner of Taxation v. Energy Resources of Australia (1996) 185 CLR 66; 96 ATC 4536; (1996) 33 ATR 52 the High Court commented that under a contract there needs to be a currency conversion before a gain or loss will be recognised for the purposes of Division 3B of the ITAA 1936.

The taxpayer's obligations under the loan contract are in a single currency. Consequently, any currency exchange fluctuations between the Australian and foreign currencies will not impact on the taxpayer's repayments under the contract and no foreign exchange gain or loss will arise under Division 3B of the ITAA 1936.

Date of decision:  26 November 2002

Year of income:  Year ended 30 June 1997 Year ended 30 June 1998 Year ended 30 June 1999 Year ended 30 June 2000 Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1936
   Division 3B
   subsection 82U(1)
   subsection 82V(1)
   section 82Y
   section 82Z
   subsection 82Z(1)

Case References:
Federal Commissioner of Taxation v. Energy Resources of Australia Ltd
   (1996) 185 CLR 66
   96 ATC 4536
   (1996) 33 ATR 52

Keywords
Foreign exchange transactions

Business Line:  Public Groups and International

Date of publication:  15 March 2003

ISSN: 1445-2782

history
  Date: Version:
  26 November 2002 Original statement
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