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Ruling

Subject: Foreign exchange - losses multi currency

Question 1

Are the foreign exchange losses made on repayment or conversion of your foreign currency loan in respect of your Australian investment property, deductible in your Australian tax return?

Answer

Yes.

Question 2

Are the losses deductible in full in the income year that the relevant foreign exchange realisation event occurred?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

The scheme commences on:

1 August 2008

Relevant facts and circumstances

In the early 2000's you left Australia and became non residents.

You vacated your home, Property 1. The Property 1 was jointly owned by the spouse 1 and spouse 2.

The home was rented to tenants after you vacated the home and left Australia.

Property 1 mortgaged through an Australian Bank (AB) with a loan in Australian dollars (AUD).

Spouse 1 owned an investment property, Property 2. The property is tenanted.

Property was mortgaged through the AB with a loan in AUD.

You refinanced your combined loans with another financial institution (FI) interest only multicurrency loans in AUD.

The first multi currency loan was issued equivalent to AUD in Other Country dollars (OCD).

The first multicurrency loan was then converted from OCD to the AUD equivalent.

The second multicurrency loan was issued as AUD.

The second multicurrency loan was converted from AUD to OCD.

The second multicurrency loan was then converted from OCD to AUD.

The second multicurrency loan was again converted from AUD to OCD.

Finally, the second multicurrency loan was converted from OCD to AUD and this represents the loan balance at the end of the year.

Relevant legislative provisions

Income tax Assessment Act 1997 Division 775

Income tax Assessment Act 1997 Subsection 775-55(1)

Income tax Assessment Act 1997 Paragraph 775-55(1)(a)

Income tax Assessment Act 1997 Subparagraph 775-55(1)(b)(ix)

Income tax Assessment Act 1997 Subsection 775-55(2)

Income tax Assessment Act 1997 Subsection 775-55(3)

Income tax Assessment Act 1997 Subsection 775-55(5)

Income tax Assessment Act 1997 Subsection 775-55(6)

Income tax Assessment Act 1997 Section 775-95

Income tax Assessment Act 1997 Subsection 775-55(7)

Income tax Assessment Act 1997 Section 775-105

Reasons for decision

Question 1

Summary

Foreign exchange losses made on repayment or conversion of your foreign currency loan are deductible.

Detailed reasoning

Forex gains or losses from 1 July 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. They are realised when a Forex realisation event (FRE) happens.

Forex realisation event 4 (FRE 4) occurs when a taxpayer ceases to have an obligation, or part of an obligation to pay foreign currency - commonly when the foreign currency borrowing is repaid. The obligation, or part of the obligation, must cease, and be one of the following:

· obligations that represent an expense the taxpayer can deduct

· obligations that are an element in the calculation of a net assessable or deductible amount

· obligations that are incurred and (broadly speaking) form elements of the cost base of a capital gains tax (CGT) asset, or

· obligations incurred in return for receiving Australian or foreign currency, or the right to receive such currency.

Since the obligation to repay foreign currency was incurred in return for receiving an amount of foreign currency, FRE 4 will happen each time some or all of the foreign currency borrowings are repaid (paragraph 775-55(1)(a) and subparagraph 775-55(1)(b)(ix) of the ITAA 1997 apply. FRE 4 will happen at the time of each repayment or when the foreign currency loan is converted to AUD, pursuant to subsection 775-55(1) of the ITAA 1997.

In this case, you converted the AUD loan to an OCD loan, you constructively received foreign currency (OCD). In return for receipt of this foreign currency, you incurred an obligation to repay foreign currency to the financier. When you repaid this foreign currency borrowing with an AUD loan, your obligation to pay the foreign currency to the financier ceased to the extent of that repayment or conversion.

Whether a FRE 4 arises on a repayment by the taxpayer, of some or all of the borrowings give rise to a forex realisation gain (under subsection 775-55(3) of the ITAA 1997) or a forex realisation loss (under subsection 775-55(5)), requires a comparison to be made between:

(a) the amount the taxpayer repays, translated into Australian currency at the exchange rate applicable at the time of repayment (pursuant to subsection 960-50(6) item 11 of the ITAA 1997),

and

(b) the amount of that part of the borrowings repaid, translated into Australian currency at the exchange rate applicable at the time when the foreign currency borrowed was received by the taxpayer (pursuant to section 775-95, subsection 775-55(7) item 8(a) and subsection 960-50(6) item 11 of the ITAA 1997).

Where the amount in paragraph (a) above is smaller than the amount in paragraph (b) above, so much of that shortfall that is attributable to a currency exchange rate effect (as defined in section 775-105 of the ITAA 1997), is a forex realisation gain of the taxpayer (pursuant to subsection 775-55(3) of the ITAA 1997). Conversely, if the amount in (a) is larger than the amount in (b) so much of the excess attributable to the exchange rate effect is a forex realisation loss of the taxpayer (pursuant to sub section 775-55(5) of the ITAA 1997.

Your first multi currency loan was issued in OCD, you converted your OCD loan to the AUD equivalent. The second multicurrency loan was issued for AUD, over the next few months this loan was converted to OCD and AUD several times.

The extent that the OCD loan amounts translated into AUD at the exchange rate applicable at the time of repayment, exceed the OCD loans taken out exceed the AUD at the exchange rate applicable when the OCD loans were received, is attributable to a currency exchange rate effect (as defined in section 775-105 of the ITAA 1997), is a forex realisation loss to you under subsection 775-55(5) of the ITAA 1997.

To determine the link or nexus between forex realisation losses or gains that arise on a complete or partial repayment of the foreign currency loan borrowings, it is necessary to consider the purpose for, or use to which, you put these borrowings. That is, whether they are 'made in gaining or producing assessable income'. This is because you only incurred the obligation in relation to which forex realisation losses or gains arose (the obligation to repay the borrowings) in return for receiving the amount of those borrowings.

Since the loan was in respect of your investment properties one of which was rented since acquisition and the other has since been rented, the forex gains or losses that arose when you ceased to have an obligation to pay foreign currency, are incomes and outgoings from gaining or producing your assessable income.

Therefore, you are entitled to a deduction in your Australian tax return if you made forex realisation losses on repayment or conversion of the foreign currency loans (OCD) for your Australian investment properties. The forex loss is deductible to you pursuant to subsection 775-55(5) of the ITAA 1997.

Question 2

Detailed reasoning

The forex gains or losses that arose from the FRE 4 event are assessable or deductible in the income year the forex realisation event occurred - that is when the obligation or part of the obligation, to pay foreign currency ceased.

Note:

The FRE4 gains or losses are calculated by comparing

· the amount the taxpayer repays translated into Australian currency at the exchange rate applicable at the time of repayment or conversion (pursuant to subsection 960-50(6) item 11 of the ITAA 1997,

and

· the amount of that part of the borrowings repaid, translated into Australian currency at the exchange rate applicable at the time when the foreign currency borrowed was received by the taxpayer (pursuant to section 775-95, subsection 775-55(7) item 8(a) and subsection 960-50(6) item 11 of the ITAA 1997.