Issue
Is a forex realisation gain 'statutory income' as defined in section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) if the gain is made by a taxpayer under section 775-55 of the ITAA 1997 upon making a foreign currency payment for acquiring trading stock?
Decision
No. A forex realisation gain is not statutory income as defined in section 6-10 of the ITAA 1997 if the gain is made by a taxpayer under section 775-55 of the ITAA 1997 upon making a foreign currency payment on the acquisition of trading stock.
Facts
A taxpayer acquires trading stock for USD100 when the exchange rate is AUD1.00 = USD0.60 (when the USD100 has an Australian dollar value of AUD166.67), and the stock is on hand from that time. The taxpayer pays the USD100 a month later when AUD1.00 = USD0.80 (when the USD100 has an Australian dollar value of AUD125).
The taxpayer makes a forex realisation gain of AUD41.67 under forex realisation event 4 (pursuant to subsection 775-55(3) of the ITAA 1997).
Reasons for Decision
The payment for trading stock results in a forex realisation gain of AUD41.67. It is assessable to the taxpayer pursuant to section 775-15 of the ITAA 1997.
However, irrespective of Division 775 of the ITAA 1997, such a foreign exchange gain would be assessable as income according to ordinary concepts under section 6-5 of the ITAA 1997 (see, for example, Texas Co (Australasia) Ltd v. Federal Commissioner of Taxation (1940) 63 CLR 382; (1940) 5 ATD 298; (1940) 2 AITR 4; International Nickel (Australia) Ltd v. Federal Commissioner of Taxation (1977) 137 CLR 347; 77 ATC 4383; (1977) 7 ATR 739).
While the enactment of Division 775 of the ITAA 1997 has changed the provision under which such a gain is assessed, it has not changed the character of that gain as ordinary income.
Section 6-5 of the ITAA 1997 indicates that ordinary income is income according to ordinary concepts. Further, by operation of subsection 6-10(2) of the ITAA 1997, amounts that are statutory income are not ordinary income.
The note to subsection 6-10(2) of the ITAA 1997 states that: Many provisions in the summary list in section 10-5 [List of provisions about assessable income] contain rules about ordinary income. These rules do not change its character as ordinary income.
Therefore any rules applying to the items listed in section 10-5 of the ITAA 1997 do not change the character of an amount that is ordinary income. The characterisation of the amount as ordinary income remains, regardless of whether the ITAA 1997 or the Income Tax Assessment Act 1936 also contains specific provisions dealing with that type of income.
Moreover, subsection 6-25(1) of the ITAA 1997 suggests that an amount may be both ordinary income and included in assessable income by 'provisions about assessable income'. Forex realisation gains that are 'ordinary income' but are included in assessable income by Division 775 of the ITAA 1997 would seem to fall within this description.
Accordingly, the forex realisation gain made on payment for the taxpayer's trading stock is an item of ordinary income and is not statutory income.