Taxation Determination TD 2006/32
Date of effect: 10 May 2006




Examples: Example 1: 2. An entity acquires the right to receive foreign currency for US$100 when the exchange rate is A$1.00 = US$0.80. The entity disposes of the right six months later when its value is US$110. The exchange rate at the time of disposal is A$1.00 = US$0.60. 3. Assume that this particular right to receive foreign currency is not a 'traditional security' for the purposes of sections 26BB and 70B of the Income Tax Assessment Act 1936 (ITAA 1936). 4. Forex realisation event 1 (FRE 1) happens when the entity disposes of the right to receive foreign currency (paragraphs 775-40(1)(b) and 775-40(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)). Overall capital gain 5. The capital gain from the disposal of the right is determined by translating each receipt or payment (element) at the exchange rate applicable at the time of each transaction or event (subsection 960-50(6) item 5 of the ITAA 1997). capital gain = (US$110/0.60) less (US$100/0.80) = A$183.33 - A$125 = A$58.33 Non-forex component of the capital gain 6. The non-forex component of the capital gain is calculated by determining the US currency value of the net gain from the disposal and translating this amount into Australian currency at the exchange rate applicable at the time of disposal. Non-forex component of the capital gain = (US$110 - US$100)/0.60 = A$16.67 Amount attributable to a currency exchange rate effect 7. The forex realisation gain is the amount of the capital gain which is attributable to a currency exchange rate effect. The amount is calculated by taking the overall capital gain less the non-forex component of the capital gain. Forex realisation gain = A$58.33 less A$16.67 = A$41.66 8. The amount of the capital gain which is attributable to a currency exchange rate effect is A$41.66 and is included in the entity's assessable income under subsection 775-15(1) of the ITAA 1997. 9. The non-forex component of the capital gain amount is subject to the capital gains tax provisions in the ITAA 1997. | Example 2: 10. An entity acquires a right to receive foreign currency for US$100 when the exchange rate is A$1.00 = US$0.60. The entity disposes of the right six months later when its value is US$90. The exchange rate at the time of disposal is A$1.00 = US$0.80. 11. Assume that this particular right to receive foreign currency is not a 'traditional security' for the purposes of sections 26BB and 70B of the ITAA 1936. 12. FRE 1 happens when the entity disposes of the right to receive foreign currency (paragraphs 775-40(1)(b) and 775-40(3)(b) of the ITAA 1997). Overall capital loss 13. The capital loss from the disposal of the right is determined by translating each receipt or payment (element) at the exchange rate applicable at the time of each transaction or event (subsection 960-50(6) item 5 of the ITAA 1997). Overall capital loss = (US$90/0.80) less (US$100/0.60) = A$112.50 - A$166.67 = A$54.17 loss Non-forex component of the capital loss 14. The non-forex component of the capital loss is calculated by determining the US currency value of the net gain from the disposal of the right and translating this amount into Australian currency at the exchange rate applicable at the time of disposal. Non-forex component of the capital loss = (US$90 - US$100)/0.80 = A$12.50 loss Amount attributable to a currency exchange rate effect 15. The forex realisation loss is the amount of the capital loss which is attributable to a currency exchange rate effect. This amount is calculated by taking the overall capital loss less the non-forex component of the capital loss. Forex realisation loss = A$54.17(loss) less A$12.50 (loss) = A$41.67 loss 16. The amount of the capital loss attributable to a currency exchange rate effect is A$41.67 and is an allowable deduction to the entity under subsection 775-30(1) of the ITAA 1997. 17. The non-forex component of the capital loss is subject to the capital gains tax provisions in the ITAA 1997. Date of effect 18. This Determination applies to years of income commencing both before and after its date of issue. However, the Determination does not apply to taxpayers to the extent that if conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination. Commissioner of Taxation 10 May 2006 Explanation 19. FRE 1 is capital gains tax (CGT) event A1 which happens when an entity disposes of foreign currency, or a right, or part of a right to receive foreign currency (subsection 775-40(1) of the ITAA 1997). 20. Where FRE 1 happens, the entity makes a forex realisation gain if there is a capital gain from the event and some or all of that capital gain is attributable to a currency exchange rate effect. The amount of the forex realisation gain is that part of the capital gain which is attributable to a currency exchange rate effect (subsection 775-40(4) of the ITAA 1997). 21. No forex realisation gain will arise where there is a capital loss from CGT event A1 happening (subsection 775-40(4) of the ITAA 1997). In these circumstances the entire capital loss will be brought to account under the capital gains tax provisions in the ITAA 1997. 22. An entity will make a forex realisation loss from FRE 1 where there is a capital loss from the event and some or all of that capital loss is attributable to a currency exchange rate effect (subsection 775-40(6) of the ITAA 1997). The amount of the forex realisation loss is that part of the capital loss which is attributable to a currency exchange rate effect (subsection 775-40(6)). 23. No forex realisation loss will arise where there is a capital gain from CGT event A1 happening (subsection 775-40(6) of the ITAA 1997). In these circumstances the entire capital gain will be brought to account under the capital gains tax provisions in the ITAA 1997. 24. The amount attributable to a currency exchange rate effect can be determined by the following formula: 25. This method of calculating the non-forex component of the capital gain or loss using the exchange rate at the time of disposal ensures greater consistency with the policy of recognising forex realisation gains or losses on realisation. The purpose of the core forex realisation framework in Division 775 of the ITAA 1997 is to ensure that economic gains or losses arising from currency exchange rate effects are brought to account for income tax purposes when realised. Any economic gain or loss not arising from the currency exchange rate effect arises only on realisation of the asset, that is, when the entity disposes of the foreign currency or right to receive foreign currency. The non-forex component of the capital gain (or loss) should therefore be calculated using the exchange rate at the time of disposal. 26. The non-forex component of the capital gain (or loss) could arise for a variety of reasons including a movement in interest rates or a change in the credit rating of the issuer of the right to receive foreign currency. Previously issued as Draft TD 2006/D5

Appendix: 19. FRE 1 is capital gains tax (CGT) event A1 which happens when an entity disposes of foreign currency, or a right, or part of a right to receive foreign currency (subsection 775-40(1) of the ITAA 1997). 20. Where FRE 1 happens, the entity makes a forex realisation gain if there is a capital gain from the event and some or all of that capital gain is attributable to a currency exchange rate effect. The amount of the forex realisation gain is that part of the capital gain which is attributable to a currency exchange rate effect (subsection 775-40(4) of the ITAA 1997). 21. No forex realisation gain will arise where there is a capital loss from CGT event A1 happening (subsection 775-40(4) of the ITAA 1997). In these circumstances the entire capital loss will be brought to account under the capital gains tax provisions in the ITAA 1997. 22. An entity will make a forex realisation loss from FRE 1 where there is a capital loss from the event and some or all of that capital loss is attributable to a currency exchange rate effect (subsection 775-40(6) of the ITAA 1997). The amount of the forex realisation loss is that part of the capital loss which is attributable to a currency exchange rate effect (subsection 775-40(6)). 23. No forex realisation loss will arise where there is a capital gain from CGT event A1 happening (subsection 775-40(6) of the ITAA 1997). In these circumstances the entire capital gain will be brought to account under the capital gains tax provisions in the ITAA 1997. 24. The amount attributable to a currency exchange rate effect can be determined by the following formula: 25. This method of calculating the non-forex component of the capital gain or loss using the exchange rate at the time of disposal ensures greater consistency with the policy of recognising forex realisation gains or losses on realisation. The purpose of the core forex realisation framework in Division 775 of the ITAA 1997 is to ensure that economic gains or losses arising from currency exchange rate effects are brought to account for income tax purposes when realised. Any economic gain or loss not arising from the currency exchange rate effect arises only on realisation of the asset, that is, when the entity disposes of the foreign currency or right to receive foreign currency. The non-forex component of the capital gain (or loss) should therefore be calculated using the exchange rate at the time of disposal. 26. The non-forex component of the capital gain (or loss) could arise for a variety of reasons including a movement in interest rates or a change in the credit rating of the issuer of the right to receive foreign currency. Previously issued as Draft TD 2006/D5


Ruling: 1. Yes. The non-forex component of the capital gain (or loss) is the foreign currency amount received on disposal less the foreign currency cost of acquisition, translated into Australian currency using the exchange rate applicable at the time of the disposal. | Amount attributable to a currency exchange rate effect = overall capital gain (or capital loss) less the non-forex component of the capital gain (or loss) | Non-forex component of the capital gain (or loss) = foreign currency amount received on disposal less foreign currency cost of acquisition, translated to Australian currency using the exchange rate at the time of disposal of the right


Legislative references: TAA 1953 ITAA 1936 26BB ITAA 1936 70B ITAA 1997 Div 775 ITAA 1997 775-15(1) ITAA 1997 775-30(1) ITAA 1997 775-40(1) ITAA 1997 775-40(1)(b) ITAA 1997 775-40(3)(b) ITAA 1997 775-40(4) ITAA 1997 775-40(6) ITAA 1997 960-50(6)
Subject references: currency exchang erate foreign currency translation foreign currency translation forex realisation event - currency exchange rate foreign currency translation foreign exchange gains and losses forex realisation event