Capital Gains Tax: foreign currency converted into Australian currency at time of the transaction

Can a capital gain or capital loss arising from a CGT event in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) be worked out in a foreign currency and converted to Australian currency at the time of the event if a transaction relevant to the event involved a foreign currency?

No. A capital gain or capital loss cannot be worked out in a foreign currency and converted to Australian currency.

Section 103-20 of the ITAA 1997 requires a foreign currency conversion to be made for each transaction relevant to the calculation of a capital gain or capital loss at the time of the transaction (for example, on the acquisition, improvement or disposal of a CGT asset). The provision does not permit a single conversion of the resulting gain or loss.

An Australian resident acquired shares in a Hong Kong company in the 1999-2000 income year.

Each share cost Hong Kong Dollars (HKD) 100. As at the acquisition date, this converted to Australian Dollars (AUD) 20.

The shares were disposed of in the 2002-03 income year.

The sale proceeds for each share were HKD150. As at the sale date, this converted to AUD28.30.

Section 103-20 of the ITAA 1997 says that if a transaction or event involving an amount of money or the market value of other property is to be taken into account under the capital gains tax provisions in Part 3-1 or 3-3 of the ITAA 1997, and the money or value is in a foreign currency, the amount or value is converted into the equivalent amount of Australian currency at the time of the transaction or event.

This means foreign currency must be converted to Australian currency at the time of each transaction or event. That is, amounts relevant to the calculation of a capital gain or capital loss (such as an amount included in an element of the cost base of an asset and capital proceeds) must be expressed in Australian currency before making the final gain or loss calculation.

Therefore, the taxpayer does not calculate their capital gain in Hong Kong dollars and then convert it to Australian dollars (that is, HKD50 ÷ 5.3 = AUD9.40). Rather, they must calculate their capital gain by converting their acquisition cost and capital proceeds into Australian dollars at the acquisition and sale times respectively. Accordingly, a capital gain of AUD8.30 (that is, AUD28.30 - AUD20) will arise at the time of the disposal of each share. Note: The New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003 repealed section 103-20 of the ITAA 1997 and replaced it with a similar translation rule that applies generally for the purposes of the Income Tax Assessment Act 1936 and the ITAA 1997. The rule is now contained in item 5 of the table in subsection 960-50(6) of the ITAA 1997. This provision applies to transactions or events that happen on or after 1 July 2003.