Private ruling: FOREX
Date of advice: 5 October 2018
Published: November 2018
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are the foreign exchange realisation losses made on conversion of your foreign currency loans for your investment properties in Australia deductible to you? | A1: Yes.

Relevant facts and circumstances: You own multiple investment properties. A number of these properties were funded through multicurrency loans through your bank. The loans are interest only loans. The loans were originally opened in Australian Dollars (AUD) and then converted to Currency X at a later date. Your bank no longer offers multicurrency loan facilities and in the 20xx financial year your loans were converted back to AUD. The exchange rate has dropped since each loan was converted to Currency X resulting in your owing loan amount being larger in AUD than when it was originally converted.

Relevant legislative provisions: Division 775 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: The FOREX rules are contained within Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997). This division outlines which events constitute a FOREX realisation event and which event will apply based on the transaction that is taking place. In your circumstances the conversion of an AUD denominated loan to Currency X created an obligation for you to pay a foreign currency, so the conversion of that loan from Currency X back to AUD at a later date would result in the ending of that obligation to pay a foreign currency. This results in the triggering of FOREX realisation event 4 (section 775-55 of the ITAA 1997) as the obligation to pay a foreign currency has ended and as such there is a possible FOREX gain or loss in relation to this event depending on the exchange rates at the time. You have provided that the exchange rate from AUD to Currency X dropped between the date the loans were converted to Currency X and then converted back to AUD. The result of this is a FOREX loss as your loan in AUD is now larger than it was when it was initially converted to Currency X. You are entitled to claim a deduction for this loss. Note: The FOREX realisation event 4 gains or losses are calculated by comparing: ● the amount the taxpayer repays, translated into Australian currency at the exchange rate applicable at the time of repayment or conversion (pursuant to subsection 960-50(6) item 11 of the ITAA 1997), and ● the amount of that part of the borrowings repaid, translated into Australian currency at the exchange rate applicable at the time when the foreign currency borrowed was received by the taxpayer (pursuant to section 775-95, subsection 775-55(7) item 8(a) and subsection 960-50(6) item 11 of the ITAA 1997).