ATO Interpretative Decision

ATO ID 2006/106

Income Tax

• This ATO ID does not take account of the effect of Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 that implements Stages 3 and 4 of the reforms to the taxation of financial arrangements (TOFA 3 and 4).
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Will an ADI (authorised deposit-taking institution) make a forex gain or loss if the Australian dollar equivalent (ADE) of an amount of foreign currency actually received or paid in one income year differs from the amount it derived or incurred under sections 6-5 and 8-1 respectively of the Income Tax Assessment Act 1997 (ITAA 1997) in an earlier income year?

Decision

Yes. An ADI will make a forex gain or loss if the ADE of an amount of foreign currency actually received or paid in one income year differs from the amount it derived or incurred under sections 6-5 and 8-1 respectively of the ITAA 1997 in an earlier income year.

Facts

The taxpayer is an ADI as defined in section 995-1 of the ITAA 1997.

The taxpayer derives amounts of assessable income denominated in foreign currency. Some of these amounts will be received in the same income year in which they are derived. The remainder will be received in a later income year.

The taxpayer incurs a number of foreign currency denominated deductible expenses. Some of these will be paid in the same income year in which they are incurred. The remainder will be paid in a later income year.

The taxpayer adopts an accruals (earnings) basis of accounting and includes in or deducts from its assessable income the above amounts as and when they are derived or incurred.

There is a fluctuation in the relevant exchange rates between the time each amount is derived or incurred and when they are received or paid by the taxpayer.

Reasons for Decision

Section 775-170 of the ITAA 1997 specifically exempts an ADI from the operation of Division 775 of the ITAA 1997. Therefore, any forex gains or losses arising under these transactions will be assessable under section 6-5 or deductible under section 8-1 of the ITAA 1997.

The taxpayer will make a forex gain or loss if there is a variation in exchange rates resulting in the ADE of the amount paid in foreign currency differing from the amount which it incurred in an earlier income year under section 8-1 of the ITAA 1997 (International Nickel Australia Ltd v. Federal Commissioner of Taxation (1977) 137 CLR 347; 77 ATC 4383; (1977) 7 ATR 739 (International Nickel).

The taxpayer will make a forex gain or loss if there is a variation in the exchange rates resulting in the ADE of the amount received in foreign currency differing from the amount which it derived in an earlier income year under section 6-5 of the ITAA 1997. In International Nickel at 137 CLR 371; 77 ATC 4397; 7 ATR 755 Murphy J said:

The correct approach is this. Where assessable income or allowable expenditure is subject to an exchange variation occurring in the same year in which the income or expenditure is taken into account, the income or expenditure is adjusted to reflect the actual income or expenditure. If variation occurs in a later year then if the sum already taken into account is assessable income, any increase caused by exchange variation is assessable income and any decrease is allowable expenditure.

If the ADE of the amount paid is more than the ADE of the amount deducted in the earlier income year, the difference is deductible under section 8-1 of the ITAA 1997. If the ADE of the amount paid is less than the ADE of the amount deducted in the earlier income year, the difference is included in assessable income under section 6-5 of the ITAA 1997.

Conversely, if the ADE of the amount received is more than the ADE of the amount derived in the earlier income year, the difference will be included in assessable income under section 6-5 of the ITAA 1997. If the ADE of the amount received is less than the ADE of the amount derived in the earlier income year, the difference will be deductible under section 8-1 of the ITAA 1997.

If the foreign currency amount is derived and received or incurred and paid by the taxpayer in the same income year, it is the ADE of the amount actually received or paid which is assessable under section 6-5 or deductible under section 8-1 respectively of the ITAA 1997 (International Nickel). Therefore, no foreign exchange gain or loss will arise in these circumstances.

Year of income:  Year ended 30 September 2006 Year ending 30 September 2007

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   section 8-1
   Division 775
   section 775-170
   subsection 995-1(1)

Case References:
International Nickel Australia Ltd. v. Federal Commissioner of Taxation
   (1977) 137 CLR 347
   77 ATC 4383
   (1977) 7 ATR 739

Related ATO Interpretative Decisions
ATO ID 2006/104

Keywords
Accruals basis accounting
Currency exchange rate
Deductions & expenses
Financial institutions
Foreign currency
Foreign exchange gains and losses
Income

Business Line:  Finance and Investment Centre of Expertise

Date of publication:  13 April 2006

ISSN: 1445-2782