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Ruling

Subject: Foreign exchange losses

Question

Can you claim the loss that arose as a result of converting foreign currency to Australian Dollars?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

21 June 2010

Relevant facts and circumstances

You exchanged AUD into foreign currency in order to invest in a managed fund run by an Australian resident.

Delays in gaining regulatory approval extended the anticipated start date out by 18 months.

Due to issues with the broker and the scheme's sponsors inability to solve some issues you were forced to return your funds to Australia.

The amount of money returned to Australia was less than the original amount converted due to the exchange rate at the time. This led to a loss.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 775-30,

Income Tax Assessment Act 1997 Section 775-45 and

Income Tax Assessment Act 1997 Section 775-105.

Reasons for decision

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that has a credit balance will result in the occurrence of FRE2 in relation to the amount of the foreign currency withdrawn. In this circumstance there will be a cessation of the right to receive the foreign currency that has been withdrawn from the bank with which the account is held.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.

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 a forex realisation loss from the transfer of foreign funds into Australian dollars, the loss made at the time of conversion will be considered a forex loss. As such, any loss should be declared at Item at Item D15 of the Tax return for Individuals (supplementary section) Other deductions.