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Edited version of your written advice
Authorisation Number: 1051454967786
Date of advice: 20 November 2018
Ruling
Subject: Forex realisation event 4
Did forex realisation event 4 happen pursuant to section 775-55 of the Income Tax Assessment Act 1997 when the overseas currency loans were refinanced to Australian currency loans?
Answer
Yes.
Section 755-55 of the Income Tax Assessment Act 1997 (ITAA 1997) states that forex realisation event 4 occurs when an entity ceases to have an obligation to pay foreign currency. In your case you have ceased to have an obligation to pay foreign currency. You incurred the obligation in return for receiving an amount of Australian or foreign currency (per subparagraph 755-55(1)(b)(ix) of the ITAA 1997). Subsection 775-55(2) of the ITAA 1997 states: “The time of the event is when you cease to have the obligation or the part of the obligation.”
Therefore, the refinancing of the overseas currency loans back to Australian currency loans caused forex realisation event 4 to happen during the year ended 30 June 20XX.
Question 2
Are you entitled to a deduction based on your proportionate ownership in each property to which the loans relate?
Answer
Yes.
Subsection 775-55(5) of the ITAA 1997 states that you make a forex realisation loss if the amount you paid in respect of the event happening exceeds the proceeds (worked out at the tax recognition time) of assuming the obligation or part of the obligation and some or all of the excess is attributable to a currency exchange rate effect. The amount of the forex realisation loss is so much of the excess as is attributable to a currency exchange rate effect.
Section 775-30 of the ITAA 1997 provides a deduction for forex realisation losses. There are exceptions from the deduction being claimed including, where the loss is of a private or domestic nature (subsection 775-30(2) of the ITAA 1997), where it is made in the gaining or producing of exempt income or non-assessable non-exempt income (section 775-35 of the ITAA 1997), or on some short term forex realisation losses (section 775-75 of the ITAA 1997). In your case the forex realisation event loss is not disallowed by these provisions.
Therefore, the resulting losses incurred due to exchange movements are deductible to you under section 775-30 of the ITAA 1997 in proportion to your ownership interest in the properties to which the loans relate.
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You acquired an investment property as a tenant in common
You solely acquired another investment property
At all times the properties have been rented and/or available for rent
The acquisition of the properties were financed with interest only loan facilities in Australian currency
All of the loans were refinanced into an overseas currency using interest only loan facilities
The overseas currency loans were refinanced back to Australian currency loans during the financial year.
Due to exchange movements, losses were realised when the loans were converted.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 775-30
Income Tax Assessment Act 1997 Subsection 775-30(2)
Income Tax Assessment Act 1997 Section 775-35
Income Tax Assessment Act 1997 Subsection 755-55
Income Tax Assessment Act 1997 Subparagraph 755-55(1)(b)(ix)
Income Tax Assessment Act 1997 Subsection 775-55(2)
Income Tax Assessment Act 1997 Section 775-75