ATO Interpretative Decision

ATO ID 2005/320

Income tax

Foreign exchange (forex) gains and losses: tax consequences of certain short-term forex realisation gains or losses
FOI status: may be released

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.

Status of this decision: Decision Current

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Do sections 775-70 or 775-75 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to forex realisation gains or losses made under derivative contracts used to hedge the cost of a depreciating asset acquired under a purchase agreement?

Decision

No. Sections 775-70 or 775-75 of the ITAA 1997 do not apply to forex realisation gains or losses made under derivative contracts used to hedge the cost of a depreciating asset acquired under a purchase agreement.

Facts

The taxpayer entered into a purchase agreement to acquire a depreciating asset that has a price denominated in a foreign currency.

In order to protect against the risk of adverse exchange rate fluctuations, and provide the foreign currency required to acquire the asset, the taxpayer entered into derivative contracts to hedge the Australian dollar (AUD) cost of the depreciating asset.

The cost of the depreciating asset was hedged from the time of entering into the purchase agreement, up to the time of final payment.

The taxpayer made forex realisation gains and forex realisation losses from hedging the acquisition cost of the depreciating asset.

Reasons for Decision

Subsections 775-70(1) and 775-75(1) of the ITAA 1997 provide exceptions to the general principle in sections 775-15 and 775-30 of the ITAA 1997 that forex realisation gains or losses are treated on revenue account.

One exception applies to certain forex realisation gains or losses that occur where an obligation to pay foreign currency was incurred in return for a taxpayer starting to hold a depreciating asset. The holder of a depreciating asset for these purposes is worked out under Division 40 of the ITAA 1997. Any forex realisation gains or losses made in these circumstances are applied against the asset's cost or opening adjustable value. This recognises that the forex realisation gain or loss is closely related to the character of the gain or loss made on the depreciating asset.

The derivative contracts entered into are used to hedge the acquisition cost of the depreciating asset. The right to receive the foreign currency at settlement under the contracts was acquired in return for the taxpayer agreeing to pay an amount of Australian currency. This is not a right which is relevant for the purposes of the short term rules in subsections 775-70(1) and 775-75(1) of the ITAA 1997. The forex realisation gains and losses under the derivative contracts will not be applied against the depreciating asset's cost or opening adjustable value. They will be brought to account as assessable income and allowable deductions under sections 775-15 and 775-30 of the ITAA 1997.

Amendment History

Date of Amendment	Part	Comment
1 September 2017	Disclaimer	Disclaimer added.
	Reasons for Decision	Updated 'sections' to 'subsections' in third paragraph

Date of decision: 11 November 2005

Year of income: Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   section 775-15
   section 775-30
   section 775-70
   subsection 775-70(1)
   section 775-75
   subsection 775-75(1)

Keywords
Assignment of rights & entitlements
Financial derivatives
Foreign exchange gains and losses
Forex realisation gain
Forex realisation loss
Hedging
Hold a depreciating asset

Siebel/TDMS Reference Number: 4759339; 1-5TZH4GU

Business Line: Private Groups and High Wealth Individuals

Date of publication: 25 November 2005
Date reviewed: 25 August 2017

ISSN: 1445-2782

history

	Date:	Version:
	11 November 2005	Original statement
You are here →	1 September 2017	Updated statement

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