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Ruling

Subject: Foreign exchange gains or losses

Question

Are the foreign exchange gains / losses made on withdrawal of funds from your foreign currency account in respect of your financial instrument trading assessable / deductible?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

01 July 2010

Relevant facts and circumstances

You had two foreign currency accounts (FCA) with a bank -one in Country One Dollars (COD) and the other in Country Two Dollars (CTD).

You deposited Australian dollars (AUD) into your COD FCA. You transferred the funds back into Australian dollars and realised a loss on the transaction.

You deposited AUD into a CTD FCA. You transferred the funds back into AUD and realised a gain on the transaction.

You deposited AUD into the CTD FCA. You transferred the funds back into AUD and realised a loss on the transaction.

You trade in financial instruments such as shares/CFD's and warrants and consider the use of these FCA's as a normal risk management activity of the trading.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 775-15,

Income Tax Assessment Act 1997 Section 775-30,

Income Tax Assessment Act 1997 Section 775-40,

Income Tax Assessment Act 1997 Section 775-45,

Income Tax Assessment Act 1997 Section 775-60 and

Income Tax Assessment Act 1997 Section 775-105.

Reasons for decision

Summary

Foreign exchange gains/losses made on the withdrawal of funds from your foreign currency account are assessable/deductible.

Detailed reasoning

Forex gains or losses from 1July 2003 are covered by Division 775 of the Income Tax Assessment Act 1997(ITAA 1997).

The general principle is that foreign currency gains or losses have a revenue character rather than a capital nature. Foreign currency gains or losses are assessable or deductible when they are realised if they occur as result of a forex realisation event (FRE). They are realised when a forex realisation event (FRE) happens.

There are five forex realisation events listed between sections 775-40 and 775-60 of the ITAA 1997. A withdrawal from a foreign currency denominated bank account that has a credit balance will result in the occurrence of FRE2 in relation to the amount of the foreign currency withdrawn. In this circumstance there will be a cessation of the right to receive the foreign currency that has been withdrawn from the bank with which the account is held.

You would make a forex realisation gain if the foreign currency at the time of the withdrawal was worth more Australian dollars than it was worth when the deposit was made. You would make a forex realisation loss if the foreign currency at time of withdrawal was worth fewer Australian dollars than it was worth when the deposit was made. Forex gains are deductible if they occur as a result of a forex event (Division 775 of the ITAA 1997).

The forex realisation loss is the amount of the loss which is attributable to a currency exchange rate effect. The amount of the loss attributable to a currency exchange rate effect is an allowable deduction to the entity under subsection 775-30(1) of the ITAA 1997. An entity will make a forex realisation loss from FRE2 where there is a loss from the event and some or all of that loss is attributable to a currency exchange rate effect (subsection 775-45(4)) and will make a forex realisation gain where there is a gain from the event and some or all of that gain is attributable to currency exchange rate effect.

In your situation, you made both a forex realisation gain and forex realisation losses from the transfer of foreign funds into Australian dollars, all of the gains or losses made at the time of conversion will be considered a forex realisation gain or loss. As such, any gain should be declared at Item 24 of the Tax return for individuals (supplementary section) - Other income and any loss should be recorded at Item D15 of the Tax return for Individuals (supplementary section) Other deductions.

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