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Ruling
Subject: Foreign exchange losses
Question and answer:
Are you entitled to claim a deduction for foreign exchange losses under foreign exchange realisation event 1?
No.
This ruling applies for the following period:
Year ended 30 June 2010
Year ended 30 June 2011
The scheme commenced on:
1 July 2009
Relevant facts and circumstances
You are retired and aged over 65.
Your superannuation is paid monthly from a foreign country.
It is not transferrable to another country and is paid in foreign currency into your foreign bank account.
The exchange rate to Australian (AU)$ has diminished considerably over the last two years due to the increasing strength of the Australian dollar.
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 775-45
Income Tax Assessment Act 1997 Section 775-55
Income Tax Assessment Act 1997 Section 775-75
Income Tax Assessment Act 1997 Section 775-105
Reasons for decision
Division 775 of the ITAA 1997 - Foreign currency gains and losses
The general principle of Division 775 of the ITAA 1997 is that foreign currency gains are included in your assessable income and foreign currency losses are deductible against your assessable income. These gains and losses are referred to as forex realisation gains and forex realisation losses.
You may experience forex realisation gains and losses whenever a forex realisation event occurs. There are 5 main types of forex realisation events:
1. forex realisation event 1 (FRE 1) happens if you dispose of foreign currency, or a right to receive foreign currency, to another entity;
2. forex realisation event 2 (FRE 2) happens if you cease to have a right to receive foreign currency (otherwise than because you disposed of the right to another entity);
3. forex realisation event 3 (FRE 3) happens if you cease to have an obligation to receive foreign currency;
4. forex realisation event 4 (FRE 4) happens if you cease to have an obligation to pay foreign currency; and
5. forex realisation event 5 (FRE 5) happens if you cease to have a right to pay foreign currency.
It is important to note that a forex realisation event must occur before a forex gain or loss can be realised.
Forex realisation event 1
A gain or loss arises from FRE 1 if a capital gain or loss arises from the event and some or all of the capital gain or loss is attributable to a "currency exchange rate effect". The amount of the gain or loss is so much of the capital gain or loss as is attributable to the currency exchange rate effect.
For example:
On 9 December, Three Ducks Farming Pty Ltd purchased a tractor for US$7,600 when AU$1 = US$0.76.
On 15 December, it pays US$7,600 to the vendor when AU$1 = US$0.79.
Over the period between purchasing and paying for the tractor, there is a currency exchange rate fluctuation and Three Ducks Farming makes a gain of AU$380 ($10,000 - $9,620). This is because it only has to pay $9,620 rather than $10,000 to discharge the liability due to an increase in the value of the Australian dollar.
How does this apply to your foreign pension?
The exchange rate of the foreign currency as compared to the AU$ has diminished considerably over the last two years. This means that an amount that was paid in foreign currency and then converted to AU$ two years ago would be worth more in AU$ than if the same amount was converted today.
In your case this exchange rate fluctuation has resulted in a 'notional loss', as the value of your pension in AU$ is less than it was two years ago. However, as a forex realisation event (as detailed above) has not occurred due to the exchange rate fluctuation, you are not entitled to claim a deduction for a FRE 1 in relation to your foreign pension.