Issue
Should a loss resulting from the disposal or redemption of a traditional security denominated in a foreign currency, be determined in that foreign currency and then translated into Australian dollars at the exchange rate prevailing on the date of the disposal?
Decision
Yes. A loss 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 of disposal.
Facts
On 21 December 1992 an Australian resident taxpayer purchased a 10 year United States of America (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 taxpayer holding the US Treasury bond disposed of the bond on a secondary bond market for USD44,000. 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 is a traditional security.
The purchase of the bond is not a business transaction.
Reasons for Decision
Subsection 70B(2) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the amount of any loss arising on the disposal or redemption of a traditional security is allowable as a deduction to the taxpayer in the year in which the disposal or redemption takes place. A loss in this context is the difference between the cost of acquisition and the consideration on disposal or redemption, where the former exceeds the latter.
Where a traditional security that is held is denominated in a foreign currency the gain or loss arising on disposal must be translated into Australian dollars. Section 70B of the ITAA 1936 allows the taxpayer to claim a deduction equal to the loss on disposal.
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 subsection 20(1) of the ITAA 1936. This subsection requires income derived and expenses incurred to be expressed in Australian currency.
Paragraph 20(3)(a) of the ITAA 1936 requires 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.
While subsection 20(3) of the ITAA 1936 is silent as to the exchange rate to apply to expenses, paragraph 84 of Taxation Ruling IT2498 states the following: Having regard to the practical effect and purpose of section 20 of the Assessment Act, it is considered to carry with it the implication and requirement that where expenses denominated in foreign currency are claimed as allowable deductions in earning foreign income, the translation of those expenses is to be made at the appropriate rates of exchange prescribed for the translation of the particular foreign income.
A loss of USD5,700 results from the disposal of the security as this is the extent to which the proceeds received on disposal are less than the cost of acquisition (USD44,000 - USD49,700).
The expense is incurred on the date of disposal. In this case the date of disposal of the traditional security is 15 July 1999, and the exchange rate on this date is AUD1.00 = USD0.65. Therefore, the amount that the taxpayer may include as an allowable deduction, expressed in Australian dollars, is AUD8,769 (USD5,700/0.65).