ATO ID 2006/123: Application of foreign exchange (forex) provisions to a facility agreement where the lender is under no obligation to rollover amount
Date of decision: 2 May 2006
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Does a forex realisation event 4 (FRE 4) happen when a lender rolls over a loan when it is under no obligation to do so?

Decision
Yes, forex realisation event 4 happens when a lender rolls over a loan when it is not under any obligation to do so.

Facts
Before its 'applicable commencement date' (ACD) under Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997), the taxpayer received a foreign currency loan pursuant to a loan facility agreement it had with a lender. The loan is due to be repaid after 90 days, on a date which falls after the taxpayer's ACD. According to the loan facility agreement, two days prior to the date a loan is due to be repaid the taxpayer may request that the loan be rolled-over, in which case the loan is deemed to be repaid on the day it is due, and immediately re-advanced to the taxpayer. However, the lender is not obliged to roll-over the loan. After the ACD, the taxpayer requests a roll-over in accordance with the loan facility agreement and the loan is rolled over as requested.

Reasons for decision
Summary: Section 775-15 of the ITAA 1997 provides that the assessable income for an income year of a taxpayer includes a forex realisation gain made as a result of a forex realisation event that happens during that income year. Similarly, section 775-30 of the ITAA 1997 provides that a forex realisation loss which results from a forex realisation event during the income year is deductible. Under section 775-55 of the ITAA 1997, FRE 4 happens when certain obligations to pay foreign currency cease, including obligations incurred in return for receiving an amount of foreign currency (paragraph 775-55(1)(b)(ix) of the ITAA 1997). The term 'obligation' was intended by Parliament to have its ordinary legal meaning: Explanatory Memorandum to the New Business Tax System (Taxation of Financial Arrangements) Bill (No.1) 2003 (Cth) (which introduced Division 775 into the ITAA 1997) at paragraph 2.108. This meaning includes an obligation imposed by a contract and implies that an obligation to pay foreign currency may be discharged by a further agreement between parties to the contract which imposed the obligation. The express exemption for facility agreements in section 775-195 of the ITAA 1997 suggests that an FRE 4 occurs when an individual liability under an eligible security is 'rolled over', and is consistent with the view that the roll-over of a loan discharges an existing obligation and creates a new obligation for the purposes of section 775-55 of the ITAA 1997. While some members of the High Court in KD Morris & Sons Pty Ltd (in liquidation) v. Bank of Queensland (1980) 146 CLR 165 and the Full Federal Court in Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25; 1994 ATC 4923; (1994) 29 ATR 553 regarded the repayment and re-advance of a security by way of roll-over as merely a continuation of an existing obligation, in both cases the judges concerned formed their views based on the legally binding obligation which was imposed on the financier in question to roll-over securities: (1979-1980) 146 CLR 165 at 175; (1994) 54 FCR 25 at 72 respectively. If a lender rolls over a loan when it is under no obligation to do so, a FRE 4 occurs and the borrower incurs a new obligation to pay foreign currency for the purposes of section 775-55 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 775-55 section 775-15 section 775-30 section 775-55 section 775-195
Case references: K D Morris & Sons Pty Ltd (in liq) v. Bank of Queensland Ltd (1980) 30 ALR 321 [1980] CLC 40-648 (1980) 146 CLR 165 (1980) 54 ALJR 424 (1980) 5 ACLR 144
Related ATO interpretative decisions: ATO ID 2006/124 | ATO ID 2004/857
Other references: Explanatory Memorandum to the New Business Tax System (Taxation of Financial Arrangements) Bill (No.1) 2003
Subject references: Foreign exchange gains and losses Forex realisation event Facility agreement