The general principle is that foreign currency gains and losses have a revenue character, subject to limited exceptions (s 775-15 & 775-30). Forex realisation gain or loss will depend on whether the amount that the taxpayer receives in respect of the withdrawal exceeds or falls short of the forex cost base of the right or part of the right and some or all of the excess or shortfall is attributable to the currency exchange rate (s 775-45).
The forex cost base is the total of the money the taxpayer paid in respect of acquiring the right to receive the foreign income reduced by any amounts that are deductible under another provision of ITAA 1997 (s 775-85).
Assuming that the bank accounts were acquired on or after 1 July 2003, the forex realisation provisions will probably apply to the transaction (s 775-150; 775-155). If a forex realisation gain is made and provided the gain was not of a private or domestic nature, the gain will be assessable (s 775-15). Where a forex realisation loss is made, provided the loss was not of a private or domestic nature, the forex realisation loss will be deductible (s 775-30).
Retranslation election
With respect to qualifying accounts, a taxpayer can make a retranslation election to bring to account gains and losses from a qualifying forex account on a retranslation basis. Where a retranslation election is made the answer to the above question will be different.
The effect of making the retranslation election is that any gains or losses under forex realisation events 2 and 4 that occur from the effective date of the election will be disregarded until the earlier of the taxpayer ceasing to hold the account, the account ceasing to be a qualifying forex account or a withdrawal of the election taking effect (s 775-270, 775-280). As a result, of the election, the gain or loss from forex realisation event 2 arising from the transfer of funds detailed above would be disregarded (s 775-280(1)).
The first retranslation period after making an election begins when the election takes effect, with subsequent retranslation periods commencing on the first day of every subsequent income year for which the election remains in effect.
Each retranslation period ends when an election ceases to apply or on the last day of an income year for which the election remains in effect. [07-11-2011]
Q. Can an SMSF member borrow money from a bank and on-lend to their SMSF at the same interest rate the bank is charging them?
The answer to your question depends on the overall transaction or arrangement involved, as summarised below.
Subject to certain exceptions (see below), the trustee of a regulated superannuation fund must not borrow money, or maintain an existing borrowing of money (SISA s 67(1)).
Briefly, if the proposed on-lending to the SMSF by the member is an isolated transaction (and not part of a permitted borrowing exception), the SMSF is prohibited from borrowing by s 67(1). In this case, the question of the interest rate charge to the SMSF is not relevant.
However, where the proposed on-lending to the SMSF by the member comes within a permitted borrowing exception (eg, temporary borrowing for specified purposes as allowed under s 67(2) or (2A) or (3), or borrowing under a limited recourse arrangement as allowed under s 67A and 67B), the interest charged may be ‘at the same interest rate the bank is charging’ the member (or even lower). This would be consistent with the arm’s length rule in s 109 of the SISA.
Where the other party to a transaction is not at arm’s length to the SMSF, s 109(1)(b) requires that the terms and conditions of the transaction must not be more favourable to the other party than would be reasonably expected if the parties were at arm’s length.
For example, in ATO ID 2010/162, an SMSF entered into a limited recourse borrowing arrangement on 1 June 2009 to acquire an income-producing asset for the SMSF.
The lender was a related party of the SMSF and the interest rate under the arrangement was lower than the rate that would be available to the SMSF from an arm’s length lender for an otherwise similar loan. In this case, the SMSFs borrowing does not contravene s 109(1)(b) as the terms and conditions of the borrowing are not more favourable to the other party than would be reasonably expected if the parties were dealing with each other at arm’s length.
It is expected that establishing the arrangement and borrowing are both documented and conducted in a business-like manner in the same way as an arrangement when dealing with an arm’s length lender. [06-12-2011]
Q. An SMSF needs to sell some assets (including some real estate) before it can make the payment of a death benefit. In the current market, this may take some time. Can the trustees continue to accumulate income to the deceased member’s account and how long do the trustees have to make the death benefit payment?
A member’s benefits in a regulated superannuation fund must be cashed, or rolled over for immediate cashing, as soon as practicable after the member dies (reg 6.21(1), (3)). This is commonly referred to as ‘compulsory cashing’ under the SISR payment rules.
The expression “as soon as practicable” is not defined in the SIS legislation, and it will have its ordinary meaning to mean “capable of being put into practice, done, or effected, especially with the available means or with reason or prudence; feasible” (Macquarie Dictionary).
Whether a payment is made “as soon as practicable” is a question of fact and degree based on the facts and circumstances in each case.
The given information states “An SMSF needs to sell some assets (including some real estate) before it can make the payment of a death benefit. In the current market, this may take some time. Can the trustees continue to accumulate income to the deceased member’s account and how long do the trustees have to make the death benefit payment?”
The SISR payment rules are intended to ensure that a member’s superannuation entitlements do not continue to be retained in the concessionally taxed superannuation system for any period longer than required once the compulsory cashing condition apply.
Therefore, provided the administration of the deceased estate is carried out in the normal manner and is not dilatory, the payment of the death benefits within a reasonable period of finalisation of the administration of the deceased estate will comply with the cashing rule.
On the basis of the above, the trustees can “continue to accumulate income to the deceased member’s account”.
In each case, regard should also be given to any particular requirement in the trust deed of the fund and other SIS rules that may be relevant to the payment of benefits, the form of benefit payments, and the persons to whom the benefits are made (eg new pension benefits, in specie payment, etc).
Where the deceased member was already in the pension phase at the time of death, ID 2004/688 and draft ruling TR 2011/D3 provide useful guidelines on certain taxation aspects on the treatment of income and disposal of pension assets. [19-01-2012]
Disclaimer
The date given in square brackets after each answer is the date on which the answer was sent out. The above information is based on CCH’s understanding of the law as at that date.
