ATO ID 2004/857: Application of the foreign exchange (forex) provisions to a loan entered into before 1 July 2003
Date of decision: 15 September 2004
Year of income: Year ending 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Is a forex realisation gain or loss made under forex realisation event 4 upon repayment of the principal under a foreign currency denominated loan that was entered into before 1 July 2003 taken into account for the purposes of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. A forex realisation gain or loss made under forex realisation event 4 upon the repayment of a foreign currency denominated loan entered into before 1 July 2003 will be disregarded for the purposes of Division 775 pursuant to subsection 775-165(4) of the ITAA 1997. A gain or loss may however be taken into account under other provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

Facts
The taxpayer took out a loan in UK pounds in January 1997 to fund the purchase of the taxpayer's principal residence. In July 2004 the taxpayer repaid the loan by way of full repayment of the foreign currency principal outstanding on the loan. There was no extension or variation made to the loan contract between the taxpayer's 'applicable commencement date' as defined in section 775-155 of the ITAA 1997 and the time the loan was repaid. At the time of repayment, the taxpayer made a forex realisation loss under forex realisation event 4. The taxpayer's income year commences on 1 July 2003. The taxpayer did not make a transitional election under section 775-150 of the ITAA 1997.

Reasons for decision
Summary: Forex realisation event 4 happens when a taxpayer ceases to have an obligation, or part of an obligation, to pay foreign currency. For forex realisation event 4 to happen the relevant obligation must cease and the obligation must fall within one of the categories listed in paragraph 775-55(1)(b) of the ITAA 1997. In this particular case, the obligation falls within subparagraph 775-55(1)(b)(ix) - an obligation incurred in return for receiving an amount of foreign currency (that is, the principal amount of the loan). When the taxpayer redeemed the loan, that obligation ceased by way of payment. On redemption the taxpayer made a forex realisation loss as a result of forex realisation event 4 happening. Subsection 775-165(4) of the ITAA 1997 operates to disregard forex losses (or gains) made as a result of forex realisation event 3 or 4 happening to an obligation or part of an obligation if: In this case the taxpayer's applicable commencement date was 1 July 2003. The obligation to repay the principal was incurred in January 1997, by way of entering into the loan agreement. Therefore, the obligation to pay foreign currency was incurred prior to the taxpayer's applicable commencement date of 1 July 2003. Additionally, the taxpayer had not made an election under section 775-150 of the ITAA 1997 to have Division 775 apply to their foreign currency denominated transactions that were in existence at 1 July 2003. As such, the forex realisation loss made by the taxpayer under forex realisation event 4 will be disregarded for the purposes of Division 775 under subsection 775-165(4) of the ITAA 1997. Note however that a loss may be deductible under other provisions of the ITAA 1936 or the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 775-55 subparagraph 775-55(1)(b)(ix) section 775-150 section 775-155 subsection 775-165(4)
Subject references: Foreign exchange gains and losses Applicable commencement date Foreign currency obligations