Private ruling: Source of foreign exchange hedging gains
Date of advice: 15 September 2025
Published: 10 November 2025
Ruling period: XXX to XXX
Date scheme commenced: XXX

Ruling: Q1: Will foreign currency hedging gains arising from transactions entered into by XXXX, on behalf of Entity A, with XXXX, as the liquidity provider, on the basis of the terms of the arrangement between XXXX and XXXX, have an Australian source for the purposes of subparagraph 770-75(4)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: 1. Entity A seeks to manage foreign exchange risk by entering into hedging transactions. As part of this program, Entity A undertakes foreign exchange (FX) hedging on an overlay basis to hedge its currency exposure in relation to its portfolios of foreign assets. 2. XXXX is the primary hedge manager acting on behalf of Entity A. 3. XXXX uses a number of liquidity providers, including XXXX. 4. XXXX acts as Entity A's agent in forming all relevant FX hedging contracts with XXXX. 5. Entity A and XXXX have entered into an International Swaps and Derivatives Association agreement. 6. XXXX has its head office located in Australia (Australian office). 7. XXXX undertakes all its FX transactions at or through its Australian office and each trade is executed by a representative of XXXX who is located at XXXX's Australian office. 8. The parties communicate using a variety of media. Most trades are undertaken using a trading platform which contains an instant messaging function. From time to time, other electronic methods of communication may be used. 9. The trading platform used provides a view of the relevant financial information and the ability for XXXX and XXXX to communicate the details of the proposed trade, including parties to the contract, time of the contract and the offer and acceptance of the contract. 10. XXXX will request through the trading platform for an FX trade to be executed. XXXX (as Entity A's agent) accepts the margins being offered by XXXX both through accepting within the trading platform, and verbally accepting via the trading platform's instant messaging system. 11. XXXX, as the liquidity provider, through its Australian office performs all FX trades for XXXX based on instructions received from XXXX. There is no 'last look clause' in the trades executed between XXXX and XXXX. That is, neither the XX nor the rules governing the use of the trading platform contain a clause the effect of which allows XXXX to refuse to act on any instruction from XXXX.


Reasons for decision: Detailed Reasoning - In this Reasons for Decision, unless otherwise indicated, all legislative references are to the ITAA 1997.: Overview of Division 770 The rules relating to foreign income tax offsets (FITOs) are contained in Division 770. FITOs provide relief from double taxation that may arise where foreign tax is paid on an amount which is also taxable in Australia. The FITO rules allow a taxpayer to claim a FITO where they have paid foreign tax on amounts which are also included in their assessable income. The amount of the FITO will be the amount of foreign income tax paid, subject to the FITO limit worked out under section 770-75. The FITO limit essentially limits the offset to the amount of Australian tax otherwise payable on the net foreign income (or other amounts in respect of which a taxpayer has paid foreign income tax) included in assessable income. Therefore, determining the source of FX hedging transactions is essential in calculating the FITO limit. Source of FX hedging gains Taxation Ruling TR 2014/7 Income Tax: foreign currency hedging transactions - applying the foreign income tax offset limit under section 770-75 of the Income Tax Assessment Act 1997 (TR 2014/7) provides at paragraph 13: While the source of income will always depend on the particular facts and circumstances, for the transactions the subject of this Ruling, the place where each foreign currency hedging contract is formed is the most important element in determining the source of any resulting foreign currency hedging gain. In Appendix 1 to TR 2014/7 it is stated at paragraph 101: Absent express or implied terms to the contrary, a contract is formed where the communication of the acceptance is received. The trading platform is a dedicated channel evidencing the interactions and wishes of buyers and sellers undertaking an FX transaction and is used by XXXX and XXXX to execute FX trades. XXXX as the liquidity provider, through its Australian office provides FX rates to XXXX (as Entity A's agent) via the trading platform (although occasionally other electronic means of communication may be used instead of the trading platform), and acts as the offeror in making an offer to XXXX. XXXX communicates its acceptance of the offer through accepting within the trading platform and verbally via the instant messaging system. Section 14B of the Electronic Transactions Act 1999 (ET Act 1999)provides the circumstances in which, for the purposes of a Commonwealth law, where electronic communications are deemed to have taken place: (1) For the purposes of a law of the Commonwealth, unless otherwise agreed between the originator and the addressee of an electronic communication: (a) the electronic communication is taken to have been dispatched at the place where the originator has its place of business; and (b) the electronic communication is taken to have been received at the place where the addressee has its place of business. (2) For the purposes of the application of subsection (1) to an electronic communication: (a) a party's place of business is assumed to be the location indicated by that party, unless another party demonstrates that the party making the indication does not have a place of business at that location; and (b) if a party has not indicated a place of business and has only one place of business, it is to be assumed that that place is the party's place of business; and (c) if a party has not indicated a place of business and has more than one place of business, the place of business is that which has the closest relationship to the underlying transaction, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the transaction; and (d) if a party has not indicated a place of business and has more than one place of business, but paragraph (c) does not apply--it is to be assumed that the party's principal place of business is the party's only place of business; and (e) if a party is a natural person and does not have a place of business--it is to be assumed that the party's place of business is the place of the party's habitual residence. (3) A location is not a place of business merely because that is: (a) where equipment and technology supporting an information system used by a party are located; or (b) where the information system may be accessed by other parties. (4) The sole fact that a party makes use of a domain name or email address connected to a specific country does not create a presumption that its place of business is located in that country. When XXXX (as Entity A's agent) communicates to XXXX, electronically, its acceptance of an trade, XXXX receives the communication from XXXX through its Australian office. In accordance with paragraph 14B(1)(b) of the ET Act 1999 an electronic communication is taken to be received for an trade at the addressee's place of business, being XXXX's Australian office. Therefore, when XXXX accepts, on behalf of Entity A, FX trade offers made by XXXX through its Australian office that acceptance is taken to be received by XXXX's Australian office. Since the acceptance of FX trades takes place at XXXX's Australian office then in accordance with TR 2014/7 the formation of the FX hedging contract is considered to be in Australia. Therefore, any foreign currency gains from transactions entered into by XXXX, on behalf of Entity A, with XXXX through its Australian office, as the liquidity provider, on the basis of the terms of the arrangement between XXXX and XXXX, have an Australian source for the purposes of subparagraph 770-75(4)(a)(ii).

This ruling applies for the following period: | Relevant legislative provision: Income Tax Assessment Act 1997 subparagraph 770-75(4)(a)(ii)