This Ruling, released on Wed 10.12.2014, deals with the application of s770-75 of the ITAA 1997 (foreign income tax offset (FITO) limit) to an Australian resident taxpayer deriving gains and losses from foreign currency hedging transactions undertaken to mitigate the foreign currency fluctuation risk attached to the market value of a portfolio of assets.
Broadly, the Ruling states that while the source of income will always depend on the particular facts and circumstances, in determining the source of foreign currency hedging gains the Commissioner will place significant weight on the place where the foreign currency hedging transactions are formed (not where the Master International Swaps and Derivatives Associations Agreement (ISDA) is formed).
It further notes that for the purposes of s 770-75(4)(a)(ii) the Commissioner accepts that the best available means of determining where each foreign currency hedging transaction is formed is by looking at the office through which the counterparty, as the party accepting the offer, is acting.
The Ruling was previously issued as Draft TR 2014/D2 and contains changes.
DATE OF EFFECT: Applies to years of income commencing on or after 1 July 2014 (Note the date of effect differs from the Draft).
[LTN 239, 10/12/14]
s770-75 of the ITAA 1997
Foreign income tax offset limit
(1) There is a limit (the offset limit ) on the amount of your * tax offset for a year. If your tax offset exceeds the offset limit, reduce the offset by the amount of the excess.
(2) Your offset limit is the greater of:
(a) id=”mce_marker”,000; and
(b) this amount:
(i) the amount of income tax payable by you for the income year; less
(ii) the amount of income tax that would be payable by you for the income year if the assumptions in subsection (4) were made.
Note 1: If you do not intend to claim a foreign income tax offset of more than id=”mce_marker”,000 for the year, you do not need to work out the amount under paragraph (b).
Note 2: The amount of the offset limit might be increased under section 770-80.
(3) For the purposes of paragraph (2)(b), work out the amount of income tax payable by you, or that would be payable by you, disregarding any * tax offsets.
(4) Assume that:
(a) your assessable income did not include:
(i) so much of any amount included in your assessable income as represents an amount in respect of which you paid * foreign income tax that counts towards the * tax offset for the year; and
(ii) any other amounts of * ordinary income or * statutory income from a source other than an * Australian source; and
(b) you were not entitled to any deductions that:
(i) are * debt deductions that are attributable to an * overseas permanent establishment of yours; or
(ii) are deductions (other than debt deductions) that are reasonably related to amounts covered by paragraph (a) for that year.
Note: You must also assume you were not entitled to any deductions for certain converted foreign losses: see section 770-35 of the Income Tax (Transitional Provisions) Act 1997 .
Example: If an entity has paid foreign income tax on a capital gain that comprises part of its net capital gain, only that capitalgain on which foreign income tax has been paid is disregarded.