Issue
Where an overall assessable gain arises on the acquisition and disposal of a bond denominated in foreign currency, but relevant exchange rates move adversely over the relevant period, is a forex realisation loss realised under subsection 775-40(6) of the Income Tax Assessment Act (ITAA) 1997 (ITAA 1997)?
Decision
No. As there is no overall loss, there is no forex realisation loss allowable as a deduction under subsection 775-40(6) of the ITAA 1997.
Facts
In the 2003-04 income year, an Australian resident entity purchases a United States (US) denominated bond for its face value of USD10,000. The exchange rate at this time is AUD1 = USD0.65.
Six months later the entity sells the bond for USD 11,000. The exchange rate at this time is AUD1.00 = USD0.70.
Reasons for Decision
The disposal of the US denominated bond by the entity constitutes forex realisation event 1 (FRE1) as there is a disposal of a right to receive foreign currency - that is, the right to receive the face value of the bond (paragraph 775-40(1)(b) of the ITAA 1997). The event occurs when the bond is disposed of (subsections 775-40(2) and 775-40(3) of the ITAA 1997).
A forex realisation loss arises if a capital loss arises from the event, and some or all of the capital loss is attributable to a currency exchange rate effect (subsection 775-40(6) of the ITAA 1997).
Where amounts are elements in the calculation of another amount, those elements are required to be translated into Australian currency first (subsection 960-50(4) of the ITAA 1997). In the facts under consideration, the amounts of the cost of acquisition and the proceeds of disposal are elements in the calculation of the amount of any gain or loss on disposal of the bond. Accordingly, those elements are to be translated first, at the exchange rate applicable at the time of each transaction or event (subsection 960-50(6) Item 5 of the ITAA 1997). The translated amounts are then compared to ascertain the amount of any gain or loss that is made on the disposal of the bond.
On the facts given, the Australian dollar cost of the bond is thus AUD15,385 and the entity receives AUD15,714 on disposal of the bond.
The Australian entity makes a gain of AUD329 on the disposal of the bond as the translated amount received on disposal (AUD15,714) exceeds the translated cost of the US bond (AUD15,385).
A gain will be a forex realisation gain to the extent that it is due to a currency exchange rate effect (subsection 775-40(4) and section 775-105 of the ITAA 1997).
No part of the gain of AUD329 results from a currency exchange rate effect.
While the currency exchange rate moved against the bond holder over the relevant holding period, no loss was realised on the disposal of the right to receive the face value of the bond. Therefore, there is no forex realisation loss on the disposal of the bond under subsection 775-40(6) of the ITAA 1997.