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What exchange rate is used to calculate the cost of contributions to a foreign life policy (FLP) for the purposes of paragraph 515(2)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) when the contribution was not paid in Australian currency?

The rate to be used is the spot rate that applied on the day the contribution was made.

The taxpayer is a natural person and an Australian resident for tax purposes. The taxpayer took out a FLP when they were not an Australian resident and made contributions to the policy in foreign currency for the period they were not an Australian resident.

The policy is a FLP within the meaning of section 482 of the ITAA 1936 and the taxpayer's interest is an interest in the FLP within the meaning of subsection 483(3) of the ITAA 1936.

Section 515 of the ITAA 1936 provides an exemption that applies to exclude a taxpayer from attributing income that would otherwise be assessable under the Foreign Investment Fund (FIF) rules contained in Part XI of the ITAA 1936. That exemption applies where the taxpayer is a natural person and the value of the taxpayer's (and any associates) interests in FIFs and FLPs is $50,000 or less.

Section 515 of the ITAA 1936 requires several conditions to be fulfilled before the exemption applies: (a) firstly, the taxpayer must be a natural person not acting in the capacity of a trustee, (b) secondly, the taxpayer must have an interest in a FIF or FLP at the end of a notional accounting period of the FIF or FLP.

Subsection 515(2) of the ITAA 1936 sets out what the value is at the end of the year of the relevant interests for the purposes of paragraph 515(1)(b). The value at the end of the year is the greater of: (a) the cost incurred by the person in acquiring the interest in the FIF or FLP, as the case may be, or (b) the market value of the interest in the FIF or of the FLP, as the case may be, at the end of the year of income.

Paragraph 515(2)(a) of the ITAA 1936 looks to the actual 'cost incurred' in acquiring the interest. In terms of a FLP, this would include the cost of contributions. If this payment was made in a currency other than Australian currency, this will need to be converted into Australian currency. The conversion rate to be used is the spot rate that applied on the day the payment was made.

Note that by reason of paragraph 960-50(10)(d) of the Income Tax Assessment Act 1997 , the conversion rules contained in section 960-50 do not apply to Part XI of the ITAA 1936.