Commonwealth: New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003 (Cth)

New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003 Act No. 133 of 2003 as amended This compilation was prepared on 19 August 2010 taking into account amendments up to Act No. 75 of 2010 The text of any of those amendments not in force on that date is appended in the Notes section The operation of amendments that have been incorporated may be affected by application provisions that are set out in the Notes section Prepared by the Office of Legislative Drafting and Publishing, Attorney‑General's Department, Canberra Contents 1 Short title [see Note 1] 2 Commencement [see Note 1] 3 Schedule(s) Schedule 1—Removal of taxing point on conversion or exchange of traditional securities Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Schedule 2—Convertible interests Income Tax Assessment Act 1997 Schedule 3—Rights Income Tax Assessment Act 1997 Schedule 4—Foreign currency Part 1—Amendments Financial Corporations (Transfer of Assets and Liabilities) Act 1993 Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Taxation Administration Act 1953 Part 2—Transitional provisions Notes An Act to amend the law relating to taxation, and for related purposes 1 Short title [see Note 1] This Act may be cited as the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003. 2 Commencement [see Note 1] This Act commences on the day on which it receives the Royal Assent. 3 Schedule(s) Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—Removal of taxing point on conversion or exchange of traditional securities Income Tax Assessment Act 1936 1 Subsection 26BB(1) Insert: connected entity has the same meaning as in the Income Tax Assessment Act 1997. 2 At the end of section 26BB Add: (4) Subsection (2) does not apply to a gain on the disposal or redemption of a traditional security if: (a) the disposal or redemption occurs because the traditional security is converted into ordinary shares in a company that is: (i) the issuer of the traditional security; or (ii) a connected entity of the issuer of the traditional security; and (b) the traditional security was issued on the basis that it will or may convert into ordinary shares in: (i) the issuer of the traditional security; or (ii) the connected entity. (5) Subsection (2) does not apply to a gain on the disposal or redemption of a traditional security if: (a) the disposal or redemption is in exchange for ordinary shares in a company that is neither: (i) the issuer of the traditional security; nor (ii) a connected entity of the issuer of the traditional security; and (b) in the case of a disposal—the disposal is to: (i) the issuer of the traditional security; or (ii) a connected entity of the issuer of the traditional security; and (c) the traditional security was issued on the basis that it will or may be: (i) disposed of to the issuer of the traditional security or to the connected entity; or (ii) redeemed; in exchange for ordinary shares in the company. 3 After subsection 70B(2A) Insert: (2B) A deduction is not allowable under subsection (2) for a loss on the disposal or redemption of a traditional security if: (a) the disposal or redemption occurs because the traditional security is converted into ordinary shares in a company that is: (i) the issuer of the traditional security; or (ii) a connected entity of the issuer of the traditional security; and (b) the traditional security was issued on the basis that it will or may convert into ordinary shares in: (i) the issuer of the traditional security; or (ii) the connected entity. (2C) A deduction is not allowable under subsection (2) for a loss on the disposal or redemption of a traditional security if: (a) the disposal or redemption is in exchange for ordinary shares in a company that is neither: (i) the issuer of the traditional security; nor (ii) a connected entity of the issuer of the traditional security; and (b) in the case of a disposal—the disposal is to: (i) the issuer of the traditional security; or (ii) a connected entity of the issuer of the traditional security; and (c) the traditional security was issued on the basis that it will or may be: (i) disposed of to the issuer of the traditional security or to the connected entity; or (ii) redeemed; in exchange for ordinary shares in the company. Income Tax Assessment Act 1997 4 Section 109‑55 (after table item 11) Insert: 11A You acquire shares in a company in exchange for the disposal of an exchangeable interest, and the disposal of the exchangeable interest was to: when the disposal of the exchangeable interest happened section 130‑105 (a) the issuer of the exchangeable interest; or (b) a connected entity of the issuer of the exchangeable interest 11B You acquire shares in a company in exchange for the redemption of an exchangeable interest when the redemption of the exchangeable interest happened section 130‑105 5 After section 112‑75 Insert: 112‑77 Exchangeable interests Exchangeable interests Item In this situation: Element affected: See section: 1 You acquire shares in a company in exchange for the disposal of an exchangeable interest, and the disposal of the exchangeable interest was to: First element of cost base and reduced cost base 130‑105 (a) the issuer of the exchangeable interest; or (b) a connected entity of the issuer of the exchangeable interest 2 You acquire shares in a company in exchange for the redemption of an exchangeable interest First element of cost base and reduced cost base 130‑105 6 Paragraph 122‑25(4)(a) Omit "option or", substitute "option,". 7 Paragraph 122‑25(4)(a) Omit "; and", substitute "or *exchangeable interest; and". 8 At the end of paragraph 122‑25(4)(b) Add "or in exchange for the disposal or redemption of the exchangeable interest". 9 Paragraph 122‑135(4)(a) Omit "option or", substitute "option,". 10 Paragraph 122‑135(4)(a) Omit "; and", substitute "or *exchangeable interest; and". 11 At the end of paragraph 122‑135(4)(b) Add "or in exchange for the disposal or redemption of the exchangeable interest". 12 Paragraph 126‑50(3)(a) After "134", insert ", or an *exchangeable interest". 13 At the end of paragraph 126‑50(3)(b) Add "or in exchange for the disposal or redemption of the exchangeable interest". 14 Section 130‑1 Repeal the section, substitute: 130‑1 What this Division is about This Division sets out the rules for these kinds of investments: • bonus shares and units; and • rights; and • convertible interests; and • shares acquired under an employee share scheme; and • exchangeable interests. Most are about modifying the cost base and reduced cost base of a CGT asset. 15 After section 130‑90 Insert: Subdivision 130‑E—Exchangeable interests Table of sections 130‑100 Exchangeable interest 130‑105 Shares acquired in exchange for the disposal or redemption of an exchangeable interest 130‑100 Exchangeable interest An exchangeable interest is a *traditional security that: (a) was issued on the basis that it will or may be: (i) disposed of to the issuer of the traditional security or to a *connected entity of the issuer of the traditional security; or (ii) redeemed; in exchange for *shares in a company that is neither: (iii) the issuer of the traditional security; nor (iv) a connected entity of the issuer of the traditional security; and (b) was issued on or after 1 July 2001. 130‑105 Shares acquired in exchange for the disposal or redemption of an exchangeable interest Cost base and reduced cost base (1) The table has effect: Exchange of an exchangeable interest Item In this situation: The rules about cost base and reduced cost base are modified in this way... 1 You *acquire shares in a company in exchange for the disposal of an *exchangeable interest, and the disposal of the exchangeable interest was to: The first element of the *cost base of the shares is the sum of: (a) the issuer of the exchangeable interest; or (a) the cost base of the exchangeable interest at the time of the disposal; and (b) a *connected entity of the issuer of the exchangeable interest. (b) any amount paid for the exchange, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added under subsection (2). The first element of their *reduced cost base is worked out similarly. 2 You *acquire shares in a company in exchange for the redemption of an *exchangeable interest. The first element of the *cost base of the shares is the sum of: (a) the cost base of the exchangeable interest at the time of the redemption; and (b) any amount paid for the exchange, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added under subsection (2). The first element of their *reduced cost base is worked out similarly. (2) An amount is to be added under this subsection if a *capital gain on the disposal or redemption of the exchangeable interest has been reduced under section 118‑20. This is so even though a capital gain that is made on the disposal or redemption of the exchangeable interest is disregarded under subsection (4). The amount to be added is the amount of the reduction. (3) The payment for the exchange can include giving property (see section 103‑5). Other CGT consequences (4) The table has effect: Exchange of an exchangeable interest Item In this situation: This is the result: 1 You *acquire shares in a company in exchange for the disposal of an *exchangeable interest, and the disposal of the exchangeable interest was to: (a) you are taken to have acquired the shares when the disposal of the exchangeable interest happened; and (a) the issuer of the exchangeable interest; or (b) a *capital gain or *capital loss you make from the disposal of the exchangeable interest is disregarded. (b) a *connected entity of the issuer of the exchangeable interest. 2 You *acquire shares in a company in exchange for the redemption of an *exchangeable interest. (a) you are taken to have acquired the shares when the redemption of the exchangeable interest happened; and (b) a *capital gain or *capital loss you make from the redemption of the exchangeable interest is disregarded. Application (5) This section applies to the disposal or redemption of an *exchangeable interest on or after 1 July 2001. 16 Subsection 995‑1(1) Insert: exchangeable interest has the meaning given by section 130‑100. 17 Application of amendments (1) The amendments of sections 26BB and 70B of the Income Tax Assessment Act 1936 made by this Schedule apply to the disposal or redemption of a traditional security if the traditional security was issued after 7.30 pm, by legal time in the Australian Capital Territory, on 14 May 2002. (2) The amendments of sections 122‑25, 122‑135 and 126‑50 of the Income Tax Assessment Act 1997 made by this Schedule apply to the disposal or redemption of an exchangeable interest on or after 1 July 2001. Schedule 2—Convertible interests Income Tax Assessment Act 1997 1 Paragraph 122‑25(4)(a) Omit "*convertible note", substitute "*convertible interest". 2 Paragraph 122‑25(4)(b) Omit "convertible note", substitute "convertible interest". 3 Paragraph 122‑135(4)(a) Omit "*convertible note", substitute "*convertible interest". 4 Paragraph 122‑135(4)(b) Omit "convertible note", substitute "convertible interest". 5 Paragraph 126‑50(3)(a) Omit "*convertible note", substitute "*convertible interest". 6 Paragraph 126‑50(3)(b) Omit "convertible note", substitute "convertible interest". 7 Subsection 130‑60(1) (table) Repeal the table, substitute: Conversion of a convertible interest Item In this situation: The modification is... 1 You *acquire *shares or units in a unit trust by converting a *convertible interest that is a *traditional security. The first element of the *cost base of the shares or units is the sum of: (a) the cost base of the convertible interest at the time of conversion; and (b) any amount paid to convert the convertible interest, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added under subsection (1A). The first element of their *reduced cost base is worked out similarly. 2 You *acquire *shares (except shares acquired under an *employee share scheme) by converting a *convertible interest that is not a *traditional security. The first element of the *cost base of the shares is the sum of: (a) the cost base of the convertible interest at the time of conversion; and (b) any amount paid to convert the convertible interest, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added under subsection (1A). The first element of their *reduced cost base is worked out similarly. 3 You *acquire units in a unit trust by converting a *convertible interest (except one that is a *traditional security) that was issued by the trustee of the unit trust after 28 January 1988. The first element of the *cost base of the units is the sum of: (a) the cost base of the convertible interest at the time of conversion; and (b) any amount paid to convert the convertible interest, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added under subsection (1A). The first element of their *reduced cost base is worked out similarly. 8 After subsection 130‑60(1A) Insert: (1B) The payment to convert the convertible interest can include giving property (see section 103‑5). 9 Application of amendments The amendments made by this Schedule apply to the conversion of a convertible interest on or after 1 July 2001. Schedule 3—Rights Income Tax Assessment Act 1997 1 Subsection 130‑40(6) (table) Repeal the table, substitute: Modifications on exercise of rights Item In this situation: The modification is... 1 You exercise rights issued to you to *acquire the *shares, units or options. The first element of your *cost base for the shares, units or options is the sum of: (a) the cost base of the rights at the time of exercise; and (b) any amount paid to exercise the rights, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added under subsection (6A). The first element of their *reduced cost base is worked out similarly. 2 You exercise rights you *acquired from another entity to acquire the *shares, units or options. The first element of your *cost base for the shares, units or options is the sum of: (a) the cost base of the rights at the time of exercise; and (b) any amount paid to exercise the rights, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added under subsection (6A). The first element of their *reduced cost base is worked out similarly. 3 You exercise rights issued to you to *acquire the *shares, units or options, and you acquired the original shares or *convertible interests, or the original units or convertible interests, before 20 September 1985. The first element of your *cost base for the shares, units or options is the sum of: (a) the *market value of the rights when they were exercised; and (b) any amount paid to exercise the rights, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added under subsection (6A). The first element of their *reduced cost base is worked out similarly. 2 Application of amendment The amendment made by this Schedule applies to the exercise of a right on or after 1 July 2001. Schedule 4—Foreign currency Part 1—Amendments Financial Corporations (Transfer of Assets and Liabilities) Act 1993 1 Paragraph 15(1)(a) Omit ", 82Y". 2 Paragraph 15(1)(a) Omit "or 15‑15", substitute ", 15‑15 or 775‑15". 3 Paragraph 15(1)(b) Omit ", 82Z". 4 Paragraph 15(1)(b) After "8‑1", insert "or 775‑30". 5 Paragraph 15(3)(a) Omit "or 82Y". 6 Paragraph 15(3)(a) Omit "or 15‑15", substitute ", 15‑15 or 775‑15". 7 Paragraph 15(3)(b) Omit "or 82Z". 8 Paragraph 15(3)(b) After "8‑1", insert "or 775‑30". 9 At the end of section 15 Add: Note: For transitional provisions about former sections 82Y and 82Z of the Income Tax Assessment Act 1936, see Part 2 of Schedule 4 to the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003. 10 Paragraph 16(1)(a) Omit "or 82Y". 11 Paragraph 16(1)(a) After "6‑5", insert "or 775‑15". 12 Paragraph 16(1)(b) Omit "or 82Z". 13 Paragraph 16(1)(b) After "8‑1", insert "or 775‑30". 14 Subsection 16(2) Omit "or 82Y". 15 Subsection 16(2) After "6‑5", insert "or 775‑15". 16 Paragraph 16(3)(a) Omit "or 82Y". 17 Paragraph 16(3)(a) After "6‑5", insert "or 775‑15". 18 Paragraph 16(3)(b) Omit "or 82Z". 19 Paragraph 16(3)(b) After "8‑1", insert "or 775‑30". 20 At the end of section 16 Add: Note: For transitional provisions about former sections 82Y and 82Z of the Income Tax Assessment Act 1936, see Part 2 of Schedule 4 to the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003. Income Tax Assessment Act 1936 21 Section 20 Repeal the section. 22 Division 3B of Part III Repeal the Division. 23 Subsection 102AAW(1) Omit "20,". 24 Section 102AAX Repeal the section. 25 Subsection 170(10) Omit ", 82SA(2) or 82Z(3) or (4)", substitute "or 82SA(2)". 26 Subparagraph 177C(2)(a)(i) Omit "or 170‑B", substitute ", 170‑B or 960‑D". 27 Subparagraph 177C(2)(b)(i) After "this Act", insert "or the Income Tax Assessment Act 1997, except one under Subdivision 960‑D of the Income Tax Assessment Act 1997". 28 Subparagraph 177C(2)(c)(i) Omit "or 170‑B", substitute ", 170‑B or 960‑D". 29 Paragraph 389(a) Omit "20,". 30 Section 391 Repeal the section. 31 Subsection 57‑25(6) in Schedule 2D (table item 4) Before "Division 3B", insert "the former". 32 Subsection 57‑25(6) in Schedule 2D (table item 6) Before "subsection 82Z(1)", insert "the former". 33 Subsection 57‑25(6) in Schedule 2D (at the end of the table) Add: 7 Division 775 8 Subdivision 20‑A, so far as it applies to an amount that may be an assessable recoupment because a deduction has been allowed or is allowable under section 775‑30 34 After subsection 57‑25(6) in Schedule 2D Insert: (6A) For the purposes of the application of subsection (5) to the transition taxpayer, a provision covered by item 7 or 8 of the table in subsection (6) is taken to have commenced at the start of the taxpayer's applicable commencement date (within the meaning of Division 775 of the Income Tax Assessment Act 1997). Note: For applicable commencement date, see section 775‑155 of the Income Tax Assessment Act 1997. (6B) The rule in subsection (5) does not apply, and is taken never to have applied, to the transition taxpayer in relation to a provision covered by item 7 or 8 of the table in subsection (6) if the taxpayer makes an election under section 775‑150 of the Income Tax Assessment Act 1997. 35 Subsection 57‑30(4) in Schedule 2D (table item 1) Before "Division 3B", insert "the former". 36 Subsection 57‑30(4) in Schedule 2D (table item 2) Before "subsection 82Z(1)", insert "the former". 37 At the end of section 57‑30 in Schedule 2D Add: (5) A provision listed in subsection (6) only applies to a liability of the transition taxpayer at the transition time if the taxpayer first assumed the liability on or after the taxpayer's applicable commencement date (within the meaning of Division 775 of the Income Tax Assessment Act 1997). Note: For applicable commencement date, see section 775‑155 of the Income Tax Assessment Act 1997. (6) The provisions are listed in the table below. Provisions of the Income Tax Assessment Act 1997 are identified in normal text. Listed provisions Item Provision 1 Division 775 2 Subdivision 20‑A, so far as it applies to an amount that may be an assessable recoupment because a deduction has been allowed or is allowable under section 775‑30. (7) The rule in subsection (5) does not apply, and is taken never to have applied, to the transition taxpayer if the taxpayer makes an election under section 775‑150 of the Income Tax Assessment Act 1997. Income Tax Assessment Act 1997 38 Section 10‑5 (table item headed "foreign exchange") Omit "82Y", substitute "775‑15". 39 Section 12‑5 (table item headed "foreign exchange") Omit "82U to 82ZB", substitute "775‑30". 40 Section 12‑5 (table item headed "losses") Omit "82U to 82ZB", substitute "775‑30". 41 Subsection 20‑30(1) (at the end of the table) Add: 1.28 775‑30 forex realisation loss 42 Subsection 20‑30(2) (table item 2.16) Repeal the item. 43 Subsection 40‑35(1) Omit "Division 328", substitute "Divisions 328 and 775". 44 Paragraph 40‑75(2)(f) Omit "27‑90(3).", substitute "27‑90(3); or". 45 After paragraph 40‑75(2)(f) Insert: (g) for which there is a reduction in the asset's opening adjustable value under section 775‑70; or (h) for which there is an increase in the asset's opening adjustable value under section 775‑75. 46 Subsection 40‑85(2) (note) Repeal the note, substitute: Note: The opening adjustable value of a depreciating asset may be modified by one of these provisions: * Subdivision 27‑B; * subsection 40‑90(3); * subsection 40‑285(4); * paragraph 40‑365(5)(b); * section 775‑70; * section 775‑75. 47 Section 40‑175 (note) Repeal the note, substitute: Note: The cost of a depreciating asset may be modified by one of these provisions: * Subdivision 27‑B; * subsection 40‑90(2); * paragraph 40‑365(5)(a); * section 775‑70; * section 775‑75. 48 Section 103‑20 Repeal the section. 49 Section 104‑5 (after table item relating to CGT event K9) Insert: K10 You make a forex realisation gain covered by item 1 of the table in subsection 775‑70(1) when the forex realisation event happens the forex realisation gain no capital loss [See section 104‑260] K11 You make a forex realisation loss covered by item 1 of the table in subsection 775‑75(1) when the forex realisation event happens no capital gain the forex realisation loss [See section 104‑265] 50 After section 104‑255 Insert: 104‑260 Certain short‑term forex realisation gains: CGT event K10 (1) CGT event K10 happens if: (a) you make a *forex realisation gain as a result of forex realisation event 2; and (b) item 1 of the table in subsection 775‑70(1) applies. (2) The time of the event is when the forex realisation event happens. (3) You make a capital gain equal to the *forex realisation gain. Note: You cannot make a capital loss under CGT event K10. However, if you make a forex realisation loss covered by item 1 of the table in subsection 775‑75(1), you will make a capital loss under CGT event K11 (see section 104‑265). 104‑265 Certain short‑term forex realisation losses: CGT event K11 (1) CGT event K11 happens if: (a) you make a *forex realisation loss as a result of forex realisation event 2; and (b) item 1 of the table in subsection 775‑75(1) applies. (2) The time of the event is when the forex realisation event happens. (3) You make a capital loss equal to the *forex realisation loss. Note: You cannot make a capital gain under CGT event K11. However, if you make a forex realisation gain covered by item 1 of the table in subsection 775‑70(1), you will make a capital gain under CGT event K10 (see section 104‑260). 51 Section 110‑10 (after table item relating to CGT event K9) Insert: K10 You make a forex realisation gain covered by item 1 of the table in subsection 775‑70(1) 104‑260 K11 You make a forex realisation loss covered by item 1 of the table in subsection 775‑75(1) 104‑265 52 Section 112‑97 (at the end of the table) Add: 25 You make a forex realisation gain as a result of forex realisation event 4, and: total cost base and reduced cost base section 775‑70 (a) you incurred the obligation to pay foreign currency: (i) in return for the acquisition of a CGT asset; or (ii) as the second, third, fourth or fifth element of the cost base of a CGT asset; and (b) the foreign currency became due for payment within 12 months after the time when: (i) in the case of the acquisition of a CGT asset—you acquired the CGT asset; or (ii) in the case of the second, third, fourth or fifth element of the cost base of a CGT asset—you incurred the relevant expenditure 26 You make a forex realisation loss as a result of forex realisation event 4, and: total cost base and reduced cost base section 775‑75 (a) you incurred the obligation to pay foreign currency: (i) in return for the acquisition of a CGT asset; or (ii) as the second, third, fourth or fifth element of the cost base of a CGT asset; and (b) the foreign currency became due for payment within 12 months after the time when: (i) in the case of the acquisition of a CGT asset—you acquired the CGT asset; or (ii) in the case of the second, third, fourth or fifth element of the cost base of a CGT asset—you incurred the relevant expenditure 27 You acquire foreign currency as a result of forex realisation event 2 first element of cost base and reduced cost base section 775‑125 53 Section 115‑5 (note) Omit "and 115‑45", substitute ", 115‑45 and 775‑70". 54 At the end of subsection 115‑25(3) Add: (i) *CGT event K10. 55 At the end of section 134‑1 Add: (6) This Division does not apply to: (a) an option to the extent that the option binds the grantor to *dispose of *foreign currency; or (b) an option to the extent that the option binds the grantor to *acquire *foreign currency. 56 Section 136‑10 (after table item relating to CGT event K8) Insert: K10 You make a forex realisation gain covered by item 1 of the table in subsection 775‑70(1) the CGT asset mentioned in that item 1 to 9 K11 You make a forex realisation loss covered by item 1 of the table in subsection 775‑75(1) the CGT asset mentioned in that item 1 to 9 57 Section 376‑60 Repeal the section. 58 After Part 4‑5 (heading) (before the link note) Insert: [The next Division is Division 775] Division 775—Foreign currency gains and losses Table of Subdivisions Guide to Division 775 775‑A Objects of this Division 775‑B Realisation of forex gains or losses 775‑C Roll‑over relief for facility agreements 775‑D Qualifying forex accounts that pass the limited balance test 775‑E Retranslation for qualifying forex accounts Guide to Division 775 775‑5 What this Division is about Your assessable income includes a forex realisation gain you make as a result of a forex realisation event. You can deduct a forex realisation loss that you make as a result of a forex realisation event. There are 5 main types of forex realisation events: (a) forex realisation event 1 happens if you dispose of foreign currency, or a right to receive foreign currency, to another entity; (b) forex realisation event 2 happens if you cease to have a right to receive foreign currency (otherwise than because you disposed of the right to another entity); (c) forex realisation event 3 happens if you cease to have an obligation to receive foreign currency; (d) forex realisation event 4 happens if you cease to have an obligation to pay foreign currency; (e) forex realisation event 5 happens if you cease to have a right to pay foreign currency. There are special rules for certain short‑term forex realisation gains and losses. You may choose roll‑over relief for certain facility agreements. You may elect to receive concessional tax treatment for a qualifying forex account that passes the limited balance test. You may choose retranslation for a qualifying forex account. Subdivision 775‑A—Objects of this Division Table of sections 775‑10 Objects of this Division 775‑10 Objects of this Division The objects of this Division are as follows: (a) to recognise *foreign currency gains and losses for income tax purposes; (b) to quantify those gains and losses by reference to the change in the Australian dollar value of rights and obligations; (c) to treat certain foreign currency denominated financing facilities that are the economic equivalent of a loan as if the relevant facility were a loan; (d) to reduce compliance costs by not requiring the recognition of certain low‑value foreign currency gains and losses that involve substantial calculations. Subdivision 775‑B—Realisation of forex gains or losses Table of sections 775‑15 Forex realisation gains are assessable 775‑20 Certain forex realisation gains are exempt income 775‑25 Certain forex realisation gains are non‑assessable non‑exempt income 775‑30 Forex realisation losses are deductible 775‑35 Certain forex realisation losses are disregarded 775‑40 Disposal of foreign currency or right to receive foreign currency—forex realisation event 1 775‑45 Ceasing to have a right to receive foreign currency—forex realisation event 2 775‑50 Ceasing to have an obligation to receive foreign currency—forex realisation event 3 775‑55 Ceasing to have an obligation to pay foreign currency—forex realisation event 4 775‑60 Ceasing to have a right to pay foreign currency—forex realisation event 5 775‑65 Only one forex realisation event to be counted 775‑70 Tax consequences of certain short‑term forex realisation gains 775‑75 Tax consequences of certain short‑term forex realisation losses 775‑80 You may choose not to have sections 775‑70 and 775‑75 apply to you 775‑85 Forex cost base of a right to receive foreign currency 775‑90 Forex entitlement base of a right to pay foreign currency 775‑95 Proceeds of assuming an obligation to pay foreign currency 775‑100 Net costs of assuming an obligation to receive foreign currency 775‑105 Currency exchange rate effect 775‑110 Constructive receipts and payments 775‑115 Economic set‑off to be treated as legal set‑off 775‑120 Non‑arm's length transactions 775‑125 CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3 775‑130 Certain deductions not allowable 775‑135 Right to receive or pay foreign currency 775‑140 Obligation to pay or receive foreign currency 775‑145 Application of forex realisation events to currency and fungible rights and obligations 775‑150 Transitional election 775‑155 Applicable commencement date 775‑160 Exception—event happens before the applicable commencement date 775‑165 Exception—currency or right acquired, or obligation incurred, before the applicable commencement date 775‑170 Exemption for ADIs and non‑ADI financial institutions 775‑175 Application to things happening before commencement 775‑15 Forex realisation gains are assessable Basic rule (1) Your assessable income for an income year includes a *forex realisation gain you make as a result of a *forex realisation event that happens during that year. Exceptions (2) However, your assessable income does not include a *forex realisation gain to the extent that it: (a) is a gain of a private or domestic nature; and (b) is not covered by an item of the table: Forex realisation gains to which this subsection does not apply Item You make the forex realisation gain as a result of this event... happening to... and the following condition is satisfied... 1 forex realisation event 1 *foreign currency or a right, or a part of a right, to receive foreign currency a gain that would result from the occurrence of a *realisation event in relation to the foreign currency, or to the right, or the part of the right, would, apart from this Division, be taken into account under Part 3‑1 or 3‑3 2 forex realisation event 2 a right, or a part of a right, created or acquired in return for the occurrence of a *realisation event in relation to a *CGT asset you own, where subparagraph 775‑45(1)(b)(iv) applies a gain or loss that would result from the occurrence of the realisation event in relation to the CGT asset would be taken into account for the purposes of Part 3‑1 or 3‑3 3 forex realisation event 4 an obligation, or a part of an obligation, you incurred in return for the acquisition of a *CGT asset a gain or loss that would result from the occurrence of a *realisation event in relation to the CGT asset would be taken into account for the purposes of Part 3‑1 or 3‑3 Note: Parts 3‑1 and 3‑3 deal with capital gains and losses. (3) Section 775‑70 provides for additional exceptions. Note: Section 775‑70 is about the tax consequences of certain short‑term forex realisation gains. No double taxation (4) To the extent that a *forex realisation gain would be included in your assessable income under this section and another provision of this Act, the gain is only included in your assessable income under this section. 775‑20 Certain forex realisation gains are exempt income A *forex realisation gain you make is exempt income to the extent that, if it had been a *forex realisation loss, it would have been made in gaining or producing exempt income. 775‑25 Certain forex realisation gains are non‑assessable non‑exempt income A *forex realisation gain you make is non‑assessable non‑exempt income to the extent that, if it had been a *forex realisation loss, it would have been made in gaining or producing non‑assessable non‑exempt income. 775‑30 Forex realisation losses are deductible Basic rule (1) You can deduct from your assessable income for an income year a *forex realisation loss that you make as a result of a *forex realisation event that happens during that year. Exceptions (2) However, you cannot deduct a *forex realisation loss under this section to the extent that it: (a) is a loss of a private or domestic nature; and (b) is not covered by an item of the table: Forex realisation losses to which this subsection does not apply Item You make the forex realisation loss as a result of this event... happening to... and the following condition is satisfied... 1 forex realisation event 2 a right, or a part of a right, created or acquired in return for the occurrence of a *realisation event in relation to a *CGT asset you own, where subparagraph 775‑45(1)(b)(iv) applies a gain or loss that would result from the occurrence of the realisation event in relation to the CGT asset would be taken into account for the purposes of Part 3‑1 or 3‑3 2 forex realisation event 4 an obligation, or a part of an obligation, you incurred in return for the acquisition of a *CGT asset a gain or loss that would result from the occurrence of a *realisation event in relation to the CGT asset would be taken into account for the purposes of Part 3‑1 or 3‑3 Note: Parts 3‑1 and 3‑3 deal with capital gains and losses. (3) Section 775‑75 provides for additional exceptions. Note: Section 775‑75 is about the tax consequences of certain short‑term forex realisation losses. No double deductions (4) To the extent that this section and another provision of this Act would allow you a deduction for a *forex realisation loss, you can only deduct the loss under this section. 775‑35 Certain forex realisation losses are disregarded (1) A *forex realisation loss you make as a result of forex realisation event 1, 2 or 5 is disregarded to the extent that it is made in gaining or producing exempt income. (2) A *forex realisation loss you make as a result of forex realisation event 3, 4 or 6 is disregarded to the extent that: (a) it is made in gaining or producing exempt income or non‑assessable non‑exempt income; and (b) the obligation, or the part of the obligation, does not give rise to a deduction. 775‑40 Disposal of foreign currency or right to receive foreign currency—forex realisation event 1 Forex realisation event 1 (1) Forex realisation event 1 is *CGT event A1 that happens if you dispose of: (a) *foreign currency; or (b) a right, or a part of a right, to receive foreign currency. Note: For extended meaning of right to receive foreign currency, see section 775‑135. Disposal (2) For the purposes of this section, use subsection 104‑10(2) to work out whether you have disposed of: (a) *foreign currency; or (b) a right, or a part of a right, to receive foreign currency. Note: Under subsection 104‑10(2), a disposal requires a change of ownership. Time of event (3) For the purposes of this section, subsection 104‑10(3) is modified so that the time of the event is when: (a) the *foreign currency is disposed of; or (b) the right, or the part of the right, is disposed of. Forex realisation gain (4) You make a forex realisation gain if: (a) you make a *capital gain from the event; and (b) some or all of the capital gain is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the capital gain as is attributable to a currency exchange rate effect. Note: For currency exchange rate effect, see section 775‑105. (5) For the purposes of paragraph (4)(a), Part 3‑1 is modified so that section 118‑20 is disregarded in working out the *capital gain. Note: Section 118‑20 deals with reducing capital gains if an amount is otherwise assessable. Forex realisation loss (6) You make a forex realisation loss if: (a) you make a *capital loss from the event; and (b) some or all of the capital loss is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the capital loss as is attributable to a currency exchange rate effect. Note: For currency exchange rate effect, see section 775‑105. No indexation of cost base (7) For the purposes of this section, disregard Division 114. Note: Division 114 deals with indexation of the cost base. Foreign currency hedging gains and losses (8) For the purposes of this section, disregard section 118‑55. Note: Section 118‑55 deals with foreign currency hedging gains and losses. Capital proceeds (9) For the purposes of this section, if the *capital proceeds from the event are more or less than the *market value of: (a) the *foreign currency; or (b) the right, or the part of the right; the capital proceeds from the event are taken to be the market value. (The market value is worked out as at the time of the event.) 775‑45 Ceasing to have a right to receive foreign currency—forex realisation event 2 Forex realisation event 2 (1) Forex realisation event 2 happens if: (a) you cease to have a right, or a part of a right, to receive *foreign currency; and (b) the right, or the part of the right, is one of the following: (i) a right, or a part of a right, to receive, or that represents, *ordinary income or *statutory income (other than statutory income that is assessable under this Division or Division 102); (ii) a right, or a part of a right, created or acquired in return for your ceasing to *hold a *depreciating asset; (iii) a right, or a part of a right, created or acquired in return for your paying, or agreeing to pay, an amount of Australian currency or foreign currency; (iv) a right, or a part of a right, created or acquired in return for the occurrence of a *realisation event in relation to a *CGT asset you own, and none of subparagraphs (i), (ii) and (iii) applies; and (c) you did not cease to have the right, or the part of the right, because you disposed of the right or the part of the right (within the meaning of section 775‑40). Note 1: Disposals are dealt with by section 775‑40 (forex realisation event 1). Note 2: For extended meaning of right to receive foreign currency, see section 775‑135. Time of event (2) The time of the event is when you cease to have the right or the part of the right. Forex realisation gain (3) You make a forex realisation gain if: (a) the amount you receive in respect of the event happening exceeds the *forex cost base of the right or the part of the right (the forex cost base is worked out as at the tax recognition time); and (b) some or all of the excess is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the excess as is attributable to a currency exchange rate effect. Note 1: For forex cost base, see section 775‑85. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775‑105. Forex realisation loss (4) You make a forex realisation loss if: (a) the amount you receive in respect of the event happening falls short of the *forex cost base of the right or the part of the right (the forex cost base is worked out as at the tax recognition time); and (b) some or all of the shortfall is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the shortfall as is attributable to a currency exchange rate effect. Note 1: For forex cost base, see section 775‑85. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775‑105. (5) You make a forex realisation loss if: (a) the event happens because an option to buy *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and (b) you were capable of exercising the option immediately before the event happened. The amount of the forex realisation loss is the amount you paid in return for the grant or acquisition of the option. Non‑cash benefit (6) The amount you receive in respect of the event happening can include a *non‑cash benefit. Use the *market value of the benefit to work out the amount you receive. Tax recognition time (7) For the purposes of this section, the tax recognition time is worked out using the table: Tax recognition time Item If the right, or part of the right, is... the tax recognition time is... 1 a right, or a part of a right, to receive, or that represents, *ordinary income or *statutory income (other than statutory income that is assessable under this Division or Division 102) (a) in the case of ordinary income—when the ordinary income is derived; or (b) in the case of statutory income—when the requirement first arose to include the statutory income in your assessable income. 2 a right, or a part of a right, created or acquired in return for your ceasing to *hold a *depreciating asset when you stop holding the asset. 3 a right, or a part of a right, referred to in subsection 775‑165(3) (which deals with extensions of loans) the extension time referred to in that subsection. 4 a right, or a part of a right, created or acquired in return for your paying, or agreeing to pay, an amount of Australian currency, where item 3 does not apply when the amount is paid. 5 a right, or a part of a right, created or acquired in return for your paying, or agreeing to pay, an amount of *foreign currency, where item 3 does not apply when the amount is paid. 6 a right, or a part of a right, created in return for the occurrence of a *realisation event in relation to a *CGT asset you own, and none of the above items apply when the realisation event occurs. Note: Subsection 775‑260(1) modifies the tax recognition time if forex realisation event 2 happens in relation to a qualifying forex account that has ceased to pass the limited balance test. 775‑50 Ceasing to have an obligation to receive foreign currency—forex realisation event 3 Forex realisation event 3 (1) Forex realisation event 3 happens if: (a) you cease to have an obligation, or a part of an obligation, to receive *foreign currency; and (b) the obligation, or the part of the obligation, is one of the following: (i) an obligation, or a part of the obligation, incurred in return for the creation or acquisition of a right to pay foreign currency; (ii) an obligation, or a part of the obligation, incurred in return for the creation or acquisition of a right to pay Australian currency. Note 1: For extended meaning of obligation to receive foreign currency, see section 775‑140. Note 2: For extended meaning of right to pay foreign currency, see section 775‑135. Time of event (2) The time of the event is when you cease to have the obligation or the part of the obligation. Forex realisation gain (3) You make a forex realisation gain if: (a) the amount you receive in respect of the event happening exceeds the net costs of assuming the obligation or the part of the obligation (the net costs are worked out as at the tax recognition time); and (b) some or all of the excess is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the excess as is attributable to a currency exchange rate effect. Note 1: For net costs of assuming the obligation, see section 775‑100. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775‑105. (4) You make a forex realisation gain if: (a) the event happens because an option to sell *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and (b) if the option had been exercised immediately before the event, you would have been obliged to buy the foreign currency. The amount of the forex realisation gain is the amount you received in return for granting or assuming obligations under the option. Forex realisation loss (5) You make a forex realisation loss if: (a) the amount you receive in respect of the event happening falls short of the net costs of assuming the obligation or the part of the obligation (the net costs are worked out as at the tax recognition time); and (b) some or all of the shortfall is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the shortfall as is attributable to a currency exchange rate effect. Note 1: For net costs of assuming the obligation, see section 775‑100. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775‑105. Non‑cash benefit (6) The amount you receive in respect of the event happening can include a *non‑cash benefit. Use the *market value of the benefit to work out the amount you receive. Tax recognition time (7) For the purposes of this section, the tax recognition time is the time when you received an amount in respect of the event happening. Right to pay Australian currency (8) To avoid doubt, for the purposes of this section, a right to pay Australian currency includes a right to pay Australian currency, where the right is subject to a contingency. 775‑55 Ceasing to have an obligation to pay foreign currency—forex realisation event 4 Forex realisation event 4 (1) Forex realisation event 4 happens if: (a) you cease to have an obligation, or a part of an obligation, to pay *foreign currency; and (b) any of the following applies: (i) the obligation, or the part of the obligation, is an expense or outgoing that you deduct; (ii) the obligation, or the part of the obligation, is an element in the calculation of a net amount included in your assessable income (other than under this Division or Division 102 of this Act or Division 5 or 6 of Part III of the Income Tax Assessment Act 1936); (iii) the obligation, or the part of the obligation, is an element in the calculation of a net amount that is deductible (other than under Division 5 of Part III of the Income Tax Assessment Act 1936); (iv) you incurred the obligation, or the part of the obligation, in return for the acquisition of a *CGT asset; (v) you incurred the obligation, or the part of the obligation, as the second, third, fourth or fifth element of the *cost base of a CGT asset; (vi) you incurred the obligation, or the part of the obligation, in return for your starting to hold a *depreciating asset, and you deduct an amount under Division 40 or 328 for the depreciating asset; (vii) you incurred the obligation, or the part of the obligation, as the second element of the *cost of a depreciating asset, and you deduct an amount under Division 40 or 328 for the depreciating asset; (viii) you incurred the obligation, or the part of the obligation, as a *project amount; (ix) you incurred the obligation, or the part of the obligation, in return for receiving an amount of Australian currency or foreign currency; (x) you incurred the obligation, or the part of the obligation, in return for the creation or acquisition of a right to receive an amount of Australian currency or foreign currency. Note: For extended meaning of obligation to pay foreign currency, see section 775‑140. Time of event (2) The time of the event is when you cease to have the obligation or the part of the obligation. Forex realisation gain (3) You make a forex realisation gain if: (a) the amount you paid in respect of the event happening falls short of the proceeds of assuming the obligation or the part of the obligation (the proceeds are worked out as at the tax recognition time); and (b) some or all of the shortfall is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the shortfall as is attributable to a currency exchange rate effect. Note 1: For proceeds of assuming the obligation, see section 775‑95. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775‑105. (4) You make a forex realisation gain if: (a) the event happens because an option to sell *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and (b) if the option had been exercised immediately before the event, you would have been obliged to sell the foreign currency. The amount of the forex realisation gain is the amount you received in return for granting or assuming obligations under the option. Forex realisation loss (5) You make a forex realisation loss if: (a) the amount you paid in respect of the event happening exceeds the proceeds of assuming the obligation or the part of the obligation (the proceeds are worked out as at the tax recognition time); and (b) some or all of the excess is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the excess as is attributable to a currency exchange rate effect. Note 1: For proceeds of assuming the obligation, see section 775‑95. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775‑105. Non‑cash benefit (6) The amount you paid in respect of the event happening can include a *non‑cash benefit. Use the *market value of the benefit to work out the amount you paid. Tax recognition time (7) For the purposes of this section, the tax recognition time is worked out using the table: Tax recognition time Item In this case... the tax recognition time is... 1 (a) the obligation, or the part of the obligation, is an expense or outgoing that you deduct; and the time when the expense or outgoing became deductible. (b) the obligation, or the part of the obligation, was not incurred: (i) in return for the acquisition of an item of *trading stock; or (ii) in return for your starting to hold a *depreciating asset; and (c) the obligation, or the part of the obligation, was not incurred as the second element of the cost of a depreciating asset 2 (a) the obligation, or the part of the obligation, is an expense or outgoing that you deduct; and the time when the item becomes part of your trading stock on hand. (b) the obligation, or the part of the obligation, was incurred in return for the acquisition of an item of *trading stock 3 the obligation, or the part of the obligation, is an element in the calculation of a net amount included in your assessable income (other than under this Division or Division 102 of this Ac