Edited version of private advice

Authorisation Number: 1051860112977

Date of advice: 6 July 2021

Ruling

Subject: Foreign exchange loss

Question

Are you entitled to a deduction for a foreign exchange realisation loss made on refinancing your investment property loan from a foreign currency to Australian Dollars?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You refinanced for two investment properties.

The loan was in you and your spouse name; however, you are the legal owner of these two properties.

The loan was in foreign currency.

Due to your bank closing its international property loan facilities and office, you and your spouse refinanced with an Australian bank.

The new loan is in Australian Dollar.

The new loan has resulted in a realised foreign exchange loss.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 775-15

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 Section 775-75

Income Tax Assessment Act 1997 Section 775-95

Income Tax Assessment Act 1997 Section 775-105

Income Tax Assessment Act 1997 Subsection 960-50(6)

Reasons for decision

Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the realisation of assets, rights (or part of rights) and obligations (or part of obligations) and explains how to calculate forex gains and losses that are attributable to currency exchange rate fluctuations.

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.

FRE 4 occurs when a taxpayer ceases to have an obligation, or part of an obligation, to pay foreign currency; that is, when borrowings are repaid.

Subsections 775-15(1) and 775-30(1) of the ITAA 1997 respectively provide that any forex realisation gain or loss is included in the calculation of taxable income in the income year in which FRE 4 happens.

You and your spouse refinanced with a bank solely for two investment properties. The loan was in foreign currency. Due to the bank closing its international property loan facilities, you and your spouse refinanced with an Australian bank and the new loan is in Australian Dollars.

When you refinanced again with an Australian bank in Australian Dollars and settled your foreign currency loan, you ceased to have an obligation to pay foreign currency and FRE4 occurred.

A forex realisation loss is made under subsection 775-55(5) of the ITAA 1997 if the amount paid in respect of FRE 4 happening exceeds the proceeds of assuming obligation as determined at the tax recognition time. The amount paid in respect of FRE 4 happening is converted to AUD using the spot rate applicable on the date the payment is made (item 11 of the table in subsection 960-50(6) of the ITAA 1997).

The amount of forex realisation gain or loss is so much of the shortfall or excess that is attributable to a currency exchange rate effect. A currency exchange rate effect is defined in subsection 775-105(1) of the ITAA 1997. It is described as any exchange rate fluctuation or as the difference between an expressly or implicitly agreed currency exchange rate for a future time and the actual currency exchange rate at that time.

As you used the loan solely for your rental properties, you are entitled to a deduction on your forex realisation loss incurred due to exchange movements under section 775-30 of the ITAA 1997.