Private ruling: Foreign exchange gains and losses
Date of advice: 4 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 January 2015

Ruling: Q1: Are the foreign exchange gains and losses from your investment loans taken into account in calculating your taxable income? | A1: Yes

Relevant facts and circumstances: Your country of birth is Country X. You and your spouse migrated to Australia on a permanent residency visa in the year ended 30 June 2015. You became Australian residents for tax purposes in the year ended 30 June 2015. Prior to moving to Australia, you and your spouse made investment loans in Country X. These investments constituted loans receivable made to a Country X trust. The loan commenced in the year ended 30 June 2015. The loans are denominated in foreign currency. Under the initial loan agreement, no interest accrued and the loan was repayable by equal instalments over a period of 15 years. Under the new loan agreement from 1 July 2016, interest is charged and the loan is repayable over five years. You and your spouse are the trustees of the trust. There is a foreign company as the independent trustee. You and your spouse are beneficiaries of the trust and receive income distributions and interest. New advancements have been made to the trust. The loans are repaid in foreign currency and transferred to Australian dollars from your foreign bank account. You did not make any elections.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 775

Reasons for decision: Summary: Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997) contains rules under which foreign currency gains and losses are brought to account when they have been 'realised’. This is the case even if the monetary elements of the transaction are not converted to Australian dollars. Subsection 775-15(1) and 775-30(1) of the ITAA 1997 states that forex gains or losses are assessable or deductible if your assessable income for an income year includes a forex realisation gain or loss you make as a result of a forex realisation event that happens during that year. Subsection 775-15(2) and 775-30(2) of the ITAA 1997 provides for exemptions to the deduction if: (a) it is a loss of private or domestic nature (b) it is not covered by an item in the table. The table includes a forex realisation event 2. A forex realisation event 2 is considered at section 775-45 of the ITAA 1997. Forex realisation event 2 occurs when you cease to have a right, or part of a right to receive foreign currency. This includes when a right to receive the foreign currency is satisfied by the actual receipt of that currency. You make a forex realisation loss to the extent that the value of the foreign currency you receive when the event happens is less than the amount you were entitled to receive, measured at the tax recognition time, because of a currency exchange rate effect. You make a forex realisation gain if the value of the foreign currency received when the event happens exceeds the amount you were entitled to receive. This is due to fluctuations in the exchange rates when the Australian dollar value originally loaned to the forex account is less than the Australian dollar value measured at the time on repayment of the loan. Section 775-85 of the ITAA 1997 outlines that the forex cost base of a right to receive foreign currency is the money you paid into the loan account, not the date you became an Australian resident. The repayment of loans must be applied to the outstanding amount using a consistent method. Foreign exchange profits and losses are applied on a first-in-first-out basis. In your case, the forex realisation event 2 occurred upon repayment of the principle on the original loan. The loss is not of a private and domestic nature as the purpose of the forex account (loan account) is for investment purposes. Therefore, the foreign currency gains and losses realised on the forex investment loans is assessable or deductible in your individual income tax return. To calculate the value the gain or loss, the value of the original loan in Australian dollars compared with the value of the amount repaid on the date the event occurred is taken into account by using the translation (conversion) rules and the first-in-first-out basis.