Foreign denominated traditional security

Should a gain resulting from the disposal or redemption of a traditional security denominated in a foreign currency and remitted to Australia, be determined in that foreign currency and then translated into Australian dollars?

Yes. A gain resulting from the disposal or redemption of a traditional security denominated in a foreign currency should be determined in that foreign currency and then translated into Australian dollars. The applicable exchange rate to be used is that prevailing on the date the income is remitted to Australia.

On 21 December 1992 an Australian resident taxpayer purchased a United States (US) treasury bond for an issue price of USD49,700. The exchange rate on this day was AUD1.00 = USD0.70.

On 15 July 1999 the US Treasury bond was disposed of for USD50,000. The disposal proceeds were remitted to the taxpayer, in Australia, on the day of disposal. The exchange rate on this day was AUD1.00 = USD0.65.

The US Treasury bond purchased by the taxpayer was not capital indexed and did not bear deferred interest.

The US Treasury bond is a traditional security.

The purchase of the bond is not a business transaction.

Subsection 26BB(2) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the amount of any gain derived on the disposal or redemption of a traditional security is included in the taxpayer's assessable income. Although the term 'gain' is not defined, the general conception of a gain is the difference between the cost of acquisition and the consideration on disposal or redemption.

Taxation Ruling TR 96/14 explains at subparagraph 4(ix) that a gain resulting from the disposal or redemption of a traditional security should be calculated as the difference between the consideration for the acquisition of the security plus any relevant cost associated with the acquisition or disposal, and the consideration received on the disposal of the security.

Where a traditional security is held in a foreign currency the gain or loss arising on disposal will need to be translated into Australian dollars. The law does not contain a specific conversion rule allowing amounts relevant to the calculation of a gain or loss to be translated into Australian currency. The operation of section 26BB of the ITAA 1936 requires the gain on the disposal to be included in assessable income.

The general conversion rule of subsection 20(1) of the ITAA 1936 relates to the conversion into Australian dollars of amounts of income or expenses, rather than to conversion of amounts that may be relevant to the calculation of income or deductions. In the absence of a specific conversion rule (such as section 103-20 of the Income Tax Assessment Act 1997 ), which would allow amounts relevant to the calculation of income to be translated, it is necessary to determine the gain or loss and then apply the conversion rule contained in subsection 20(1) of the ITAA 1936. This subsection requires income derived and expenses incurred to be expressed in Australian currency.

The gain or loss on the security discussed in the facts would therefore require a comparison between the disposal proceeds and the acquisition cost (USD50,000 - USD49,700 = USD300). As the disposal proceeds exceed the acquisition cost, the difference of USD300 represents a gain and will need to be included in assessable income.

As stated above, subsection 20(1) of the ITAA 1936 states that amounts of assessable income must be expressed in Australian currency. Paragraph 20(3)(a) of the ITAA 1936 explains that where the whole of the amount of income is remitted to Australia in the relevant year, the applicable exchange rate is the rate prevailing on the day the income is remitted. In the facts provided, the day the income is remitted is the date of disposal. In this case the date of remittance of the gain to Australia is 15 July 1999, and the exchange rate on this date is AUD1.00 = USD0.65. Therefore, the amount required to be included in assessable income expressed in Australian dollars is AUD462 (USD300/0.65)