Edited version of private advice

Authorisation Number: 1052071731272

Date of advice: 19 December 2022

Ruling

Subject: Forex realisation event 4 - apportionment

Question 1

Are you entitled to a deduction for a foreign exchange realisation loss made on the refinancing of your foreign property loan?

Answer

Yes.

Question 2

Is the deduction apportioned on the basis that you cannot deduct a forex realisation loss to the extent that it is a loss of a private or domestic nature?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a residential property in a foreign country.

The property was mortgaged in favour of XXX for XXX.

You used the property as your main residence for a period of time until you leased it out.

You moved to Australia during the income year ended 30 June 20XX and became residents of Australia from the date you moved here.

You lodge Income Tax Returns in Australia where you declare the rental income and claim a deduction for the mortgage interest in your Income Tax Returns.

On XX November 20XX, you entered into a new loan over the property in favour of XXX. The loan amount was XXX.

You used the loan amount from XXX to discharge the loan amount that was owing to XXX being XXX.

The loan in favour of XXX 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

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; for example, 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 refinanced with XXX solely for your investment property in XXX. When you settled your loan with XXX, 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.

Pursuant to subsection 770-30(2) of the ITAA 1997, a foreign realisation gain or loss can only be claimed as a deduction to the extent that it is not a loss of a private or domestic nature.

Based on the foregoing, you are entitled to a deduction for your forex realisation loss incurred due to exchange movements under section 775-30 of the ITAA 1997, and the amount you are entitled to a deduction on is the portion of the loan that is attributable to the period of time that your property was used as a rental property.