House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)

Chapter 10 Foreign Exchange Gains and Losses

Clauses: 30 and 63

Overview

Ensures that a deduction for a foreign exchange loss of a capital nature on a contract will be reduced by a gain on an underlying, hedging, or other contract if that gain is not included in assessable income.

Foreign Exchange Gains and Losses

Summary of the proposed amendments

10.1 The amendments will ensure that a deduction for a foreign exchange (forex) loss of a capital nature on a contract will be reduced by a gain on an underlying, hedging, or other contract if that gain is not included in assessable income.

Background to the legislation

10.2 In broad terms, the provisions of Division 3B apply to foreign exchange gains made and losses incurred on capital account on contracts entered into after 18 February 1986. They require such gains and losses, when realised, to be brought to account for tax purposes on a contract by contract basis.

Division 3B includes section 82Z.

What is the effect of current subsection 82Z(3)?

10.3 Subsection 82Z(3) provides that a deduction claimable by a taxpayer for a foreign exchange loss of a capital nature on a contract, called the "primary contract", will be reduced in certain circumstances. These are where:

•

foreign exchange gains have been made by the taxpayer or an associate on a hedging or other contract that would not have been entered into but for the primary contract; and

•

those gains are not included in the assessable income of the taxpayer or of an associate of the taxpayer.

10.4 For example, a forex loss incurred by a resident company on a contract will be reduced by a gain made by its offshore associate on a hedge contract where that gain is not included in assessable income.

10.5 The loss will also be reduced where an unrelated party enters into that hedging or other contract. In this case the loss will be reduced by the lesser of:

•

the amount paid, or the value of any compensation provided, by the unrelated party to the taxpayer or an associate; and

•

the amount of the gain on the hedging or other contract that is not included in assessable income.

Explanation of the proposed amendments

The need for change

10.6 Subsection 82Z(3) provides that a foreign exchange loss on a "primary" contract can be reduced by a gain on a hedging or other contract if the conditions set out in that subsection are satisfied.

10.7 However, a taxpayer may incur a foreign exchange loss on the hedging or other contract while an associate or an unrelated party may derive a gain from the primary contract. In this case, there is no corresponding provision to reduce the deduction for that loss by the amount of any gain on the primary contract.

What do the amendments do?

10.8 The amendments correct this anomaly. They omit the references in subsection 82Z(3) to the primary contract and the hedging or other contract. These references are replaced by references to the "loss contract" and the "gain contract". [Clause 30]

10.9 The effect of the amendment is to enable a deduction for a foreign exchange loss on a contract to be reduced whether that contract is the underlying or primary contract or a hedging or other related contract.

Commencement date

10.10 These amendments will apply to any foreign exchange loss incurred on or after the date of introduction of this Bill.

Clauses involved in the proposed amendments

Clause 30: substitutes:

(i)

the word "loss" for "primary" in paragraph 82Z(3)(a); and

(ii)

new paragraphs 82Z(3)(b) and (ba) for old paragraph 82Z(3)(b).

Clause 63(10): provides that the amendments made to section 82Z will apply to currency exchange losses incurred on or after the date of introduction of this Bill.