Under the forex provisions (Division 775 of the ITAA 1997), forex gains and losses are generally brought to account as assessable income or allowable deductions, when realised. This covers both foreign currency denominated arrangements and, broadly, arrangements to be cash-settled in Australian currency with reference to a currency exchange rate. Some forex gains and losses of a private or domestic nature, or in relation to exempt income or non-assessable non-exempt income, are not brought to account under the forex provisions.
If a forex gain or loss is brought to account under the forex provisions and under another provision of the tax law (apart from the TOFA rules), it is assessable or deductible only under the forex provisions.
Generally, where the TOFA rules apply to the foreign exchange gains and losses of a fund then those gains and losses will be brought to account under the TOFA rules instead of the forex provisions.
In general, forex gains and losses will not be assessable or deductible under these provisions if they arise from certain acquisitions or disposals of capital assets, or acquisitions of depreciating assets, and the time between the acquisition or disposal and payment is no more than 12 months. Instead, any forex gain or loss is usually matched with or integrated into the tax treatment of the underlying asset.
The general translation rule requires all tax relevant amounts to be expressed in Australian currency regardless of whether there is an actual conversion of that foreign currency into Australian dollars.
The tax consequences of gains or losses on existing foreign currency assets, rights and obligations that were acquired or assumed before the commencement date (1 July 2003 but this may be later) are generally to be determined under the law as it was before these provisions came into effect, unless:
- the fund has made a transitional election that brings these gains and losses within the forex provisions
- there is an extension of an existing loan (for example, an extension by new contract or a variation to an existing contract) that brings the arrangement within these provisions.