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Edited version of private ruling
Authorisation Number: 1011749036092
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Ruling
Subject: Foreign loss - forex
Question 1
Are the foreign exchange losses calculated on the maturity of your term deposits deductible in terms of section 775-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer: Yes
This ruling applies for the following period
1 July 2009 to 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You are a resident of Australia.
You invested in a foreign term deposit in December 2008.
The investment matured in December 2009 and interest was paid.
You made a forex loss.
Upon maturity the amount was rolled over with additional funds added.
The investment matured on June 2010 and interest was paid.
You calculated making a forex loss
Relevant legislative provisions
Section 775-30 of the Income Tax Assessment Act 1997
Subsection 775-30(2) of the Income Tax Assessment Act 1997
Paragraph 775-30(2)(a) of the Income Tax Assessment Act 1997
Section 775-35 of the Income Tax Assessment Act 1997
Section 775-40 of the Income Tax Assessment Act 1997
Section 775-60 of the Income Tax Assessment Act 1997
Section 960-50 of the Income Tax Assessment Act 1997
Section 960-80 of the Income Tax Assessment Act 1997
Reasons for decision
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 happens.
There are five forex realisation events listed between sections 775-40 and 775-60 of the Income Tax Assessment Act 1997 (ITAA 1997).
Forex realisation event 2 happens when you cease to have a right to receive foreign currency and the right was created or acquired in return for your paying an amount of Australian
Exemptions
There are certain circumstances in which a taxpayer cannot deduct a Forex realisation loss arising from a Forex realisation event (subsection 775-30(2) of the ITAA 1997):
(1) It is private or domestic in nature (paragraph 775-30(2)(a) of the ITAA 1997).You have opened an interest bearing account so the loss is not of a private or domestic nature
(2) It is made in gaining or producing exempt or non-assessable non-exempt income (section 775-35 of the ITAA 1997). You are deriving interest income which is assessable.
In your case:
Your term deposit was opened in December 2008. It was opened with an intension to earn interest hence it is not private and domestic in nature.
Forex realisation event 2 happens when you cease to have a right to receive foreign currency and the right was created or acquired in return for your paying an amount of Australian or foreign currency.
This is the situation which occurs when a foreign currency term deposit matures. When you make the deposit in a foreign currency you create an obligation on the bank to pay back to you that amount of foreign currency. That right to receive foreign currency ceases when you are repaid at the maturity of the term deposit.
Consequently, any forex realisation losses made at the maturity of the term deposit are deductible from your assessable income.
Note
Calculations are not checked as part of the private binding ruling process
Currency exchange rate effect
Only gains and losses attributable to a currency exchange rate effect are assessable or deductible under the Forex Provisions. The definition is relevant to most of the Forex realisation events.
A currency exchange rate effect can be: any currency exchange rate fluctuation worked out using the translation rules in sections 960-50 or s 960-80 of the ITAA 1997, which are fluctuations in actual currency exchange rates.