Private ruling: Foreign exchange loss
Date of advice: 8 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and Answer | Are you entitled to a deduction on your foreign exchange realisation loss made on converting a portion of your loan on your Australian rental property loan from Country A dollars to Australian dollars? | Yes

Relevant facts and circumstances: You are a non-resident of Australian for tax purposes. You bought a rental property in Australia as a non-resident. You took out a loan to buy the rental property. The sole purpose of the loan was to buy the rental property. The loan was split, 50% in Australian dollars and 50% in Country A currency. Subsequently you converted the Country A currency portion of the loan into Australian dollars and in the process made a foreign exchange loss.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 775 | Income Tax Assessment Act 1997 Subsection 775-15(1) | Income Tax Assessment Act 1997 Subsection 775-30(1) | Income Tax Assessment Act 1997 Paragraph 775-55(1)(a) | Income Tax Assessment Act 1997 Subparagraph 775-55(1)(b) | Income Tax Assessment Act 1997 Subsection 775-55(5) | Income Tax Assessment Act 1997 Subsection 775-105(1) | Income Tax Assessment Act 1997 Subsection 960-50(6)

Reasons for decision: Summary: Forex gains or losses from 1 July 2003 are covered by Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997). 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; that is, 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 took out a loan solely for the purpose of purchasing a rental property in Australia. The loan was split, 50% in Australian dollars and 50% in Country A currency. Subsequently you converted the Country A currency portion of the loan into Australian dollars. When you converted the portion of the loan in Country A currency into Australian dollars, you ceased to have an obligation or part of 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. You made a forex realisation loss. As you used the loan solely for the purpose of purchasing the rental property, you are entitled to a deduction on your forex realisation loss on converting the portion of your loan in Country A currency into Australian dollars.