This Draft Ruling, released on Wed 26.3.2014, deals with the application of s 770-75 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 Draft states that while the source of income will always depend on the particular facts and circumstances, in the context of transactions entered into in the manner outlined in Example 1 of the Draft, 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).

Note the ATO has withdrawn ATO ID 2013/14 (FITO: foreign exchange gains and losses: whether “reasonably related to”) with effect from Wed 26.3.2014 also.

DATE OF EFFECT: When the final Ruling is issued, it is currently proposed to apply both before and after its date of issue.

COMMENTS are due by 2 May 2014. ATO contact: Andrew Fort – Tel: (08) 8208 1441; Fax: (08) 8208 1899; Email:

[LTN 58, 26/3/14]

Extract from the Income Tax Assessment Act 1997

s770-75 – 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.