The Australian Taxation Office (ATO) has been warned that a Draft Ruling it has issued covering the treatment of foreign exchange hedging losses incurred by superannuation funds needs to be amended because it could give rise to significant unintended consequences.
The Association of Superannuation Funds of Australia (ASFA) has used a submission to the ATO on the Draft Ruling to warn that, “if finalised in its present form, [it] may have significant and unwarranted detrimental effects on the entitlement of superannuation funds to foreign income tax offsets (FITOs).
“ASFA submits that the denial of FITOs as a consequence of a fund’s specific arrangements in respect of foreign exchange (FX) hedging gains and losses is inconsistent with the policy intentions underpinning Division 770,” the ASFA submission said. It claimed the object of the Division was “to relieve double taxation where a taxpayer has paid foreign income tax on amounts included as assessable income and would, apart from Division 770, pay Australian income tax on the same amounts”.
The submission said that ASFA believed the FITO limit rules in section 770-75 should be interpreted, as far as possible, to be consistent with this stated object.
“In practice, superannuation funds rarely, if ever, pay foreign income tax on FX hedging gains and losses,” it said. “Rather, they generally pay foreign income tax primarily on foreign dividend income, foreign interest income, on distributions from foreign entities (such as limited partnerships), or on the income from foreign entities that is assessable pursuant to the foreign hybrid rules in Division 830.”
The submission said that, on rare occasions, superannuation funds might also pay foreign tax on capital gains.
