ATO Interpretative Decision
ATO ID 2005/318
Income tax
Foreign exchange (forex) gains and losses: effect on holder of lapsed foreign currency denominated call optionFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is a forex realisation loss made under subsection 775-45(5) of the Income Tax Assessment Act 1997 (ITAA 1997) when a foreign currency denominated call option a taxpayer has acquired lapses?
Decision
Yes. A forex realisation loss is made under subsection 775-45(5) of the ITAA 1997 when a foreign currency denominated call option a taxpayer has acquired lapses.
Facts
The taxpayer entered into a business transaction requiring it to pay United States dollars (USD) at a future date.
As part of a hedging strategy to protect against adverse movements in the Australian dollar (AUD)/USD exchange rates, the taxpayer acquired a twelve month USD call option which gave it the right, but not the obligation, to buy a predetermined amount of USD in exchange for a predetermined amount of AUD.
The taxpayer paid a premium of AUD 75,000 on acquiring the option.
The USD call option had an expiry date of 31 May 2005.
Due to unfavourable movements in exchange rates, the taxpayer did not exercise its rights under the option. The rights and obligations under the option continued to subsist until the option lapsed on 31 May 2005.
Reasons for Decision
On purchasing the option, the taxpayer acquired a right to receive an amount of foreign currency in return for it agreeing to pay AUD. Subsection 775-135(2) of the ITAA 1997 provides that a 'right to receive foreign currency' includes a right subject to a contingency.
Under subsection 775-45(1) of the ITAA 1997, forex realisation event 2 (FRE 2) happens if an entity ceases to have a right to receive foreign currency. Subsection 775-45(2) of the ITAA 1997 provides that FRE 2 happens when an entity ceases to have the right. The taxpayer ceased to have the right to receive foreign currency when the option lapsed.
The taxpayer made a forex realisation loss under subsection 775-45(5) of the ITAA 1997 as the option expired without having been exercised and, immediately before FRE 2 happened, the taxpayer was capable of exercising the option.
The forex realisation loss is the AUD 75,000 paid by the taxpayer in respect of acquiring the option (the premium paid). The taxpayer is entitled to claim a deduction under subsection 775-30(1) of the ITAA 1997 for this loss in the income year ending 30 June 2005.
Date of decision: 11 November 2005Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
subsection 775-30(1)
subsection 775-45(1)
subsection 775-45(2)
subsection 775-45(5)
subsection 775-135(2)
ATO ID 2005/319
Keywords
Call options
Financial derivatives
Foreign currency
Foreign currency rights
Foreign exchange gains and losses
Forex realisation event
Forex realisation loss
Hedging
Date reviewed: 4 September 2017
ISSN: 1445-2782
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