ATO ID 2006/104: Foreign exchange (forex) gains and losses: operation of Division 775 where the head company of a consolidated group is an ADI
Date of decision: 29 March 2006
Year of income: Year ended 30 September 2006
Business line: Finance and Investment Centre of Expertise

Issue
Is a consolidated group exempt from the operation of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) where the head company of the consolidated group is an ADI (authorised deposit-taking institution)?

Decision
Yes. Division 775 of the ITAA 1997 will not apply to a consolidated group where the head company of the consolidated group is an ADI.

Facts
The taxpayer is an ADI as defined in subsection 995-1(1) of the ITAA 1997 and the head company of a consolidated group.

Reasons for decision
Summary: Generally Division 775 of the ITAA 1997 applies to forex realisation gains and losses made by taxpayers in relation to transactions entered into after 1 July 2003. However, section 775-170 of the ITAA 1997 exempts forex realisation gains and losses made by ADIs from the operation of Division 775 of the ITAA 1997. Under the consolidation regime, when a consolidated group is formed, the group is treated as a single entity for income tax purposes under section 701-1 of the ITAA 1997. This means that, on joining a consolidated group, the subsidiary members lose their individual income tax identities and are treated as parts of the head company of the consolidated group (rather than as separate entities) for the purposes of determining the head company's income tax liability or loss. Where a consolidated group exists and the head company is an ADI, the exemption under section 775-170 of the ITAA 1997 applies to that taxpayer. In this case, the head company is the taxpayer for considering the application of the exemption. Accordingly, Division 775 of the ITAA 1997 will not apply to the consolidated group as the head company is an ADI.

Legislative references: Income Tax Assessment Act 1997 Division 775 section 701-1 section 775-170 subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2006/106
Subject references: Consolidated group Consolidation Financial institutions Foreign exchange gains and losses Single entity Single entity rule