Taxation Determination
TD 2006/32
Income tax: where there is a disposal of foreign currency or a right to receive foreign currency and forex realisation event 1 happens, is the amount attributable to a currency exchange rate effect determined by subtracting the non-forex component of the capital gain (or loss) from the overall capital gain (or loss)?
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FOI status:
may be released
This Ruling provides you with the following level of protection:
This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. |
Ruling
1. Yes. The non-forex component of the capital gain (or loss) is the foreign currency amount received on disposal less the foreign currency cost of acquisition, translated into Australian currency using the exchange rate applicable at the time of the disposal.
Example 1
2. An entity acquires the right to receive foreign currency for US$100 when the exchange rate is A$1.00 = US$0.80. The entity disposes of the right six months later when its value is US$110. The exchange rate at the time of disposal is A$1.00 = US$0.60.
3. Assume that this particular right to receive foreign currency is not a 'traditional security' for the purposes of sections 26BB and 70B of the Income Tax Assessment Act 1936 (ITAA 1936).
4. Forex realisation event 1 (FRE 1) happens when the entity disposes of the right to receive foreign currency (paragraphs 775-40(1)(b) and 775-40(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)).
Overall capital gain
5. The capital gain from the disposal of the right is determined by translating each receipt or payment (element) at the exchange rate applicable at the time of each transaction or event (subsection 960-50(6) item 5 of the ITAA 1997).
capital gain = (US$110/0.60) less (US$100/0.80)
= A$183.33 - A$125
= A$58.33
Non-forex component of the capital gain
6. The non-forex component of the capital gain is calculated by determining the US currency value of the net gain from the disposal and translating this amount into Australian currency at the exchange rate applicable at the time of disposal.
Non-forex component of the capital gain = (US$110 - US$100)/0.60
= A$16.67
Amount attributable to a currency exchange rate effect
7. The forex realisation gain is the amount of the capital gain which is attributable to a currency exchange rate effect. The amount is calculated by taking the overall capital gain less the non-forex component of the capital gain.
Forex realisation gain = A$58.33 less A$16.67
= A$41.66
8. The amount of the capital gain which is attributable to a currency exchange rate effect is A$41.66 and is included in the entity's assessable income under subsection 775-15(1) of the ITAA 1997.
9. The non-forex component of the capital gain amount is subject to the capital gains tax provisions in the ITAA 1997.
Example 2
10. An entity acquires a right to receive foreign currency for US$100 when the exchange rate is A$1.00 = US$0.60. The entity disposes of the right six months later when its value is US$90. The exchange rate at the time of disposal is A$1.00 = US$0.80.
11. Assume that this particular right to receive foreign currency is not a 'traditional security' for the purposes of sections 26BB and 70B of the ITAA 1936.
12. FRE 1 happens when the entity disposes of the right to receive foreign currency (paragraphs 775-40(1)(b) and 775-40(3)(b) of the ITAA 1997).
Overall capital loss
13. The capital loss from the disposal of the right is determined by translating each receipt or payment (element) at the exchange rate applicable at the time of each transaction or event (subsection 960-50(6) item 5 of the ITAA 1997).
Overall capital loss = (US$90/0.80) less (US$100/0.60)
= A$112.50 - A$166.67
= A$54.17 loss
Non-forex component of the capital loss
14. The non-forex component of the capital loss is calculated by determining the US currency value of the net gain from the disposal of the right and translating this amount into Australian currency at the exchange rate applicable at the time of disposal.
Non-forex component of the capital loss = (US$90 - US$100)/0.80
= A$12.50 loss
Amount attributable to a currency exchange rate effect
15. The forex realisation loss is the amount of the capital loss which is attributable to a currency exchange rate effect. This amount is calculated by taking the overall capital loss less the non-forex component of the capital loss.
Forex realisation loss = A$54.17(loss) less A$12.50 (loss)
= A$41.67 loss
16. The amount of the capital loss attributable to a currency exchange rate effect is A$41.67 and is an allowable deduction to the entity under subsection 775-30(1) of the ITAA 1997.
17. The non-forex component of the capital loss is subject to the capital gains tax provisions in the ITAA 1997.
Date of effect
18. This Determination applies to years of income commencing both before and after its date of issue. However, the Determination does not apply to taxpayers to the extent that if conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination.
Commissioner of Taxation
10 May 2006
Appendix 1 - Explanation
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This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.
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Explanation
19. FRE 1 is capital gains tax (CGT) event A1 which happens when an entity disposes of foreign currency, or a right, or part of a right to receive foreign currency (subsection 775-40(1) of the ITAA 1997).
20. Where FRE 1 happens, the entity makes a forex realisation gain if there is a capital gain from the event and some or all of that capital gain is attributable to a currency exchange rate effect. The amount of the forex realisation gain is that part of the capital gain which is attributable to a currency exchange rate effect (subsection 775-40(4) of the ITAA 1997).
21. No forex realisation gain will arise where there is a capital loss from CGT event A1 happening (subsection 775-40(4) of the ITAA 1997). In these circumstances the entire capital loss will be brought to account under the capital gains tax provisions in the ITAA 1997.
22. An entity will make a forex realisation loss from FRE 1 where there is a capital loss from the event and some or all of that capital loss is attributable to a currency exchange rate effect (subsection 775-40(6) of the ITAA 1997). The amount of the forex realisation loss is that part of the capital loss which is attributable to a currency exchange rate effect (subsection 775-40(6)).
23. No forex realisation loss will arise where there is a capital gain from CGT event A1 happening (subsection 775-40(6) of the ITAA 1997). In these circumstances the entire capital gain will be brought to account under the capital gains tax provisions in the ITAA 1997.
24. The amount attributable to a currency exchange rate effect can be determined by the following formula:
Amount attributable to a currency exchange rate effect = overall capital gain (or capital loss) less the non-forex component of the capital gain (or loss)
where:
Non-forex component of the capital gain (or loss) = foreign currency amount received on disposal less foreign currency cost of acquisition, translated to Australian currency using the exchange rate at the time of disposal of the right
25. This method of calculating the non-forex component of the capital gain or loss using the exchange rate at the time of disposal ensures greater consistency with the policy of recognising forex realisation gains or losses on realisation. The purpose of the core forex realisation framework in Division 775 of the ITAA 1997 is to ensure that economic gains or losses arising from currency exchange rate effects are brought to account for income tax purposes when realised. Any economic gain or loss not arising from the currency exchange rate effect arises only on realisation of the asset, that is, when the entity disposes of the foreign currency or right to receive foreign currency. The non-forex component of the capital gain (or loss) should therefore be calculated using the exchange rate at the time of disposal.
26. The non-forex component of the capital gain (or loss) could arise for a variety of reasons including a movement in interest rates or a change in the credit rating of the issuer of the right to receive foreign currency.
Previously issued as Draft TD 2006/D5
References
ATO references:
NO 2005/16364
Subject References:
currency exchang erate
foreign currency translation
foreign currency translation
forex realisation event - currency exchange rate
foreign currency translation
foreign exchange gains and losses
forex realisation event
Legislative References:
TAA 1953
ITAA 1936 26BB
ITAA 1936 70B
ITAA 1997 Div 775
ITAA 1997 775-15(1)
ITAA 1997 775-30(1)
ITAA 1997 775-40(1)
ITAA 1997 775-40(1)(b)
ITAA 1997 775-40(3)(b)
ITAA 1997 775-40(4)
ITAA 1997 775-40(6)
ITAA 1997 960-50(6)