ATO Interpretative Decision

ATO ID 2006/291 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database following the decision of the Full Federal Court in Commissioner of Taxation v Messenger Press Pty Ltd [2013] FCAFC 77.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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Issue

Can there be a currency exchange gain or loss for the purposes of Division 3B of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) when a taxpayer disposes of an income-producing security that was acquired by the taxpayer before it became a resident for Australian tax purposes, and the security was denominated in the currency of the taxpayer's former country of residence?

Decision

No. There will not be a currency exchange gain or loss for the purposes of Division 3B of Part III of the ITAA 1936 when a taxpayer disposes of an income-producing security that was acquired by the taxpayer before it became a resident for Australian tax purposes, and the security was denominated in the currency of the taxpayer's former country of residence.

Facts

In 2000, a United States (US) taxation resident paid US dollars to acquire an income-producing security that was denominated in US dollars.

Since February 2002 the party has been a resident of Australia for Australian taxation purposes.

The security was repaid in US dollars in March 2005.

The security was held on capital account.

The taxpayer did not make a transitional election under section 775-150 of the Income Tax Assessment Act 1997 (ITAA 1997).

Reasons for Decision

Under the New Business Tax System (Taxation of Financial Arrangements) Act (No.1) 2003, Division 3B of Part III of the ITAA 1936 (Division 3B) was repealed, but continues to apply in relation to an eligible contract entered into before 1 July 2003, unless a transitional election is made under section 775-150 of the ITAA 1997.

The taxpayer did not make a transitional election under section 775-150 of the ITAA 1997.

Division 3B applies to certain currency exchange gains made and losses incurred of a capital nature under eligible contracts (sections 82U, 82Y and 82Z of the ITAA 1936). A currency exchange gain or loss is a gain or loss to the extent to which it is attributable to currency exchange rate fluctuations (section 82V of the ITAA 1936).

In FC of T v. Energy Resources of Australia Ltd (1996) 185 CLR 66; 96 ATC 4536; (1996) 33 ATR 52, (Energy Resources) an Australian taxpayer issued and retired promissory notes that were denominated in US dollars. One of the issues before the High Court was whether there was a gain or loss to the taxpayer on issuing and returning the notes that was attributable to currency exchange rate fluctuations.

In relation to the application of sections 25 and 51 of the ITAA 1936, the High Court found as follows (at CLR 79; ATC 4542; ATR 58-59):

Where a taxpayer borrows money on capital account in US dollars and repays the loan in US dollars, it makes no revenue profit or loss from the borrowing even though the exchange rate may be different at each date.

And later, in relation to the application of Division 3B of the ITAA 1936, the High Court held (at CLR 81; ATC 4543; ATR 52 at 6):

... for the reasons that we have already given, the taxpayer made no currency exchange gain or loss. The unit of account and the unit of payment under the contract or contracts involved in this case were US dollars. The taxpayer made no gain or loss under those contracts that was "attributable to currency exchange rate fluctuations".

In Victoria Co Ltd v. Deputy Commissioner of Taxation 2000 ATC 4755; (2000) 46 ATR 119 (Victoria Co) Lee J said, (at ATC 4579; ATR 123):

In Energy Resources the High Court pointed out that there was nothing in the Act which required notional conversions to be made of a transaction in foreign currency made by a taxpayer, where the transaction was on capital, and not revenue account. Thus the Act did not apply to a hypothetical or notional capital loss or gain for a taxpayer that resulted from a fluctuation in a currency exchange rate.

The reasons for the decisions in those cases are relevant to the instant matter - the taxpayer here has not made a currency exchange gain or loss.

In Victoria Co Lee J also said, (at ATC 4762; ATR 127):

Division 3B is concerned with the outcome of a contract and events under a contract that establish that a currency exchange gain or loss has occurred and has been realised.

And further, (at ATC 4763; ATR 127):

Division 3B is concerned with the currency exchange gain or loss that arises under an "eligible contract" namely, the net position after receipt and repayment of the loan by currency exchange.

In order to calculate an amount of a currency exchange gain or loss for the purposes of Division 3B, the net position of foreign currency exchange rate fluctuations is measured between two points in time - the time the taxpayer entered into the eligible contract and the time repayment was made under that contract.

In this instance, there is no net position that can be calculated. There was no exposure to any foreign currency exchange rate fluctuations when the contract was entered into. At that time, the taxpayer was a resident of the US and the security was denominated in US dollars.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1936
   section 25
   section 51
   Division 3B
   section 82U
   section 82V
   section 82Y
   section 82Z

Case References:
Victoria Co Ltd v. Deputy Commissioner of Taxation
   2000 ATC 4755
   (2000) 46 ATR 119

Related ATO Interpretative Decisions
ATO ID 2003/126
ATO ID 2006/64

Keywords
Currency exchange rate
Foreign currency rights
Foreign exchange losses
Foreign exchange transactions
Eligible contract

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  27 October 2006

ISSN: 1445-2782