Income tax: foreign exchange: when calculating the amount of any gain or loss on disposal or redemption of a traditional security denominated in a foreign currency, should the amounts relevant to the calculation be translated (converted) into Australian dollars when each of the relevant events takes place?

Yes, provided that item 12 of subsection 960-50(6) of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply. [1]

On 21 January 2005 an Australian resident taxpayer acquires and pays for a 10 year United States (US) Treasury bond with a face value of US$40,000. The exchange rate on this day is A$1.00 = US$0.80. [2] The bond is subsequently disposed of on 15 July 2005 for its face value (that is US$40,000). Payment is also received on 15 July. The exchange rate on this day is A$1.00 = US$0.64. The US Treasury bond is a traditional security, and the acquisition and disposal is not a business transaction .

Subsection 960-50(6), item 11, of the ITAA 1997 requires that the payment made for the traditional security be translated at the exchange rate prevailing at the time of payment, 21 January 2005. The cost is A$50,000 (US$40,000/0.80) .

Item 11 also requires the amount received on disposal of the bond to be translated into Australian currency at the exchange rate prevailing at the time of receipt, 15 July 2005. The amount received is A$62, 500 (US$40,000/0.64) .

Applying the translation rules in subsections 960-50(4) and 960-50(6) of the ITAA 1997, a difference of A$12,500 arises . [3]