ATO Interpretative Decision
ATO ID 2005/324
Income tax
Foreign exchange (forex) gains and losses: delivery of currency under a foreign currency spot contractFOI status: may be released
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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.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 forex realisation event 4 (FRE 4) happen under subsection 775-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when a taxpayer delivers foreign currency under a foreign currency spot contract (spot FX deal)?
Decision
Yes. FRE 4 will happen under subsection 775-55(1) of the ITAA 1997 when a taxpayer delivers foreign currency under a spot FX deal.
Facts
The taxpayer entered into a business transaction requiring it to pay United States dollars (USD) at a future date.
On 28 June 2005, the taxpayer entered into a spot FX deal to economically close out an earlier foreign exchange swap contract it had entered into as part of a hedging strategy to fix the Australian dollar (AUD) cost of the transaction.
Under the terms of the spot FX deal, the taxpayer contracted to sell USD 1,000,000 on 28 June 2005 for the agreed amount of AUD 1,300,898 with settlement of the transaction to take place on 30 June 2005.
The actual exchange rate on 30 June 2005 was AUD 1.00 = USD 0.7680, giving the USD received and paid an equivalent value of AUD 1,302,083.
On 30 June 2005, the taxpayer settled the spot FX deal by electronic transfer of the USD to the counterparty's bank account.
The taxpayer recognises gains and losses under spot FX deals in its accounting records.
Reasons for Decision
On entering into the spot FX deal, the taxpayer had an obligation to pay an amount of foreign currency incurred in return for acquiring a right to receive AUD.
Under subsection 775-55(1) of the ITAA 1997, FRE 4 happens if an entity ceases to have an obligation to pay foreign currency. Subsection 775-55(2) provides that FRE 4 happens when the entity ceases to have the obligation. The taxpayer ceased to have the obligation to pay foreign currency when it paid the USD on 30 June 2005 and received AUD 1,300,898 in exchange.
Subsection 775-55(5) of the ITAA 1997 provides that a forex realisation loss is made if the amount paid in respect of FRE 4 happening exceeds the proceeds of assuming the obligation at the tax recognition time. In this instance the proceeds of assuming the obligation under section 775-95 of the ITAA 1997 is the money the taxpayer received for incurring the obligation.
The taxpayer works out the Australian dollar value of the USD amount paid using the spot rate applicable on the date the USD amount is paid (item 11 of the table in subsection 960-50(6) of the ITAA 1997).
The 'tax recognition time' is essentially when an event occurs which creates tax consequences. Item 8 of subsection 775-55(7) of the ITAA 1997 provides that for an obligation incurred in return for acquiring a right to receive AUD, the tax recognition time is when the AUD is received.
The forex realisation loss is so much of the excess that is attributable to a currency exchange rate effect. A 'currency exchange rate' effect is defined in subsection 775-105(1) of the ITAA 1997. It is described as any currency exchange rate fluctuation or as the difference between an expressly or implicitly agreed currency exchange rate for a future time and the actual currency exchange rate at that time.
The taxpayer has made a forex realisation loss under subsection 775-55(5) of the ITAA 1997 of AUD 1,185. It is attributable to a currency exchange rate effect and is deductible from assessable income pursuant to subsection 775-30(1) of the ITAA 1997 in the income year in which FRE 4 happens being the year ended 30 June 2005.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 1 September 2017 | Disclaimer | Disclaimer added. |
| Issue | Inserted "Income Tax Assessment Act 1997 (ITAA 1997)". |
Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
subsection 775-30(1)
subsection 775-55(1)
subsection 775-55(2)
subsection 775-55(5)
subsection 775-55(7)
subsection 775-105(1)
subsection 960-50(6)
Keywords
Assuming an obligation
Currency exchange rate
Currency swaps
Disposal of foreign currency
Financial derivatives
Foreign currency
Foreign currency obligations
Foreign exchange gains and losses
Forex realisation event
Forex realisation loss
Hedging
Swaps
Tax recognition time
Date reviewed: 25 August 2017
ISSN: 1445-2782
| Date: | Version: | |
| 11 November 2005 | Original statement | |
| You are here | 1 September 2017 | Updated statement |