Edited version of private advice

Authorisation Number: 1052327550438

Date of advice: 5 November 2024

Ruling

Subject: Foreign exchange gains and losses

Question 1

Will Forex realisation event 4 (FRE4) apply on the repayment of the mortgage?

Answer

Yes.

Question 2

If you sell the Country Z property in one year's time and a FRE4 gain is realised, should the gain be apportioned as private and domestic for the period of time you occupied the property as your residence so that only a portion of the gain is assessable?

Answer

Yes.

Question 3

If you sell the Country Z property in one year's time and a FRE4 loss is realised, should the loss be apportioned as private and domestic for the period of time you occupied the property as your residence so that only a portion of the loss is deductible?

Answer

Yes.

Question 4

If you sell the Country Z property in several years' time and a FRE4 gain is realised, should the gain be apportioned as private and domestic for the period of time you occupied the property as your residence so that only a portion of the gain is assessable?

Answer

Yes.

Question 5

If you sell the Country Z property in several years' time and a FRE4 loss is realised, should the gain be apportioned as private and domestic for the period of time you occupied the property as your residence so that only a portion of the loss is deductible?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a property in the Country Z.

You obtained a Country Z mortgage over the property at the same date the property was purchased.

The property was remortgaged a number of years after the initial purchase.

100% of the funds have been used on the Country Z property.

You used the Country Z property as your main residence until you moved to Australia.

You became a resident of Australia for taxation purposes upon moving to Australia.

You leased the Country Z property out when you left the Country Z to come to Australia.

You intend to sell the property.

You have lodged income tax returns in Australia declaring rental income and claimed a 100% deduction for the mortgage interest on the Country Z property.

You have continued to treat the Country Z property as your main residence and will do so for the period it will be rented up until 6 years has passed or another home (main residence) is purchased using Section 118-145 of the Income Tax Assessment Act 1997.

You will discharge the loan on the Country Z property at the same time the Country Z property is sold.

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 775-55

Income Tax Assessment Act 1997 section 775-105

Reasons for decision

Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the realisation of assets, rights (or part of rights) and obligations (or part of obligations) and explains how to calculate forex gains and losses that are attributable to currency exchange rate fluctuations.

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. They are realised when a forex realisation event (FRE) happens.

FRE 4 in section 775-55 of the ITAA 1997 occurs when a taxpayer ceases to have an obligation, or part of an obligation, to pay foreign currency; for example, when borrowings are repaid.

Subsections 775-15(1) and 775-30(1) of the ITAA 1997 respectively provide that any forex realisation gain or loss is included in the calculation of assessable income in the income year in which FRE 4 happens.

A forex realisation gain is made if the amount paid in respect of FRE 4 happening falls short of the proceeds of assuming the obligation and a forex realisation loss is made if the amount paid in respect of FRE 4 happening exceeds the proceeds of assuming the obligation, as determined at the tax recognition time.

The amount of forex realisation gain or loss is so much of the shortfall or 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 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.

However, subsections 775-15(2) and 775-30(2) of the ITAA 1997 respectively provide that a foreign realisation gain is only assessable, and a loss is only deductible to the extent that they are not gains or losses of a private or domestic nature.

In your case, your Country Z property is currently being used for income producing purposes and was previously used for private purposes as your residence.

Consequently, on the eventual repayment of your foreign loan, the periods the property was used for income producing purposes and private purposes will need to be apportioned. Any forex realisation gain will only be assessable to the extent the gain is attributable to the period of time the property was used as a rental property. Likewise, any forex realisation loss will only be deductible to the extent the loss is attributable to the period of time the property was used as a rental property.

When you repay your Country Z loan on your Country Z property you will cease to have an obligation to pay foreign currency and FRE4 in section 775-55 of the ITAA 1997 will occur.

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