SMSF Taxation/Limited Balance Election for Forex Accounts

[rx2]

Hi,

I am looking at setting an account with IB for my SMSF for the purpose of trading in US shares and just trying to get my head around the Forex trading implications. I am just reading the ATO website - http://www.ato.gov.au/pathway.aspx?sid=42&ms=businesses&pc=001/003/128 and on first glance it looks relatively complicated.

From what I am learning there are a number of FX realisation events / measures. Quoted from the ATO "These measures do not deal with the effect of any change in the exchange rate for the period of the ownership of foreign currency denominated ordinary shares (that is, between the time of purchase and the sale of the shares). Rather, as an example, if the shares are held on capital account, the capital gains tax (CGT) rules in Parts 3-1 and 3-3 of the ITAA 1997 will incorporate any foreign currency gain or loss which occurs between the time of acquisition and the time of disposal as part of the overall capital gain or loss made on the shares."

I interpret this to be that on acquisition of the US$ shares you need to record the cost base in AUD, and likewise on disposal record the proceeds as AUD to then be able to work out the CGT. Furthermore, if there is a settlement period between acquisition and payment and / or disposal and proceeds received then you have to record any potential gains / losses during that period.

While the CGT aspect make sense - do people generally also take into account gains/losses if a period exists between acquisition / payment and / or disposal / proceeds? It would seem quite a lot of record keeping, especially if trading frequently.

Secondly - It looks like that when US$ are sitting in the IB cash account you are also subject to CGT. I found this example:

In January 2004 (when the exchange rate was A$1:US$0.80), X Co acquired US$10m. In February 2004 (when the exchange rate was A$1:US$0.50), X Co used the US$10m to purchase shares listed on the NASDAQ stock exchange. The US$10m foreign currency is a CGT asset which has a cost base of A$12.5m (US$10m x 1.00/0.80). CGT event A1 happens when X Co disposed of the foreign currency to buy the shares. The capital proceeds from the disposal is A$20m (US$10m x 1.00/ 0.50), being the market value of the shares. Accordingly, pursuant to FRE 1, X Co has made a forex realisation gain of A$7.5m (A$20m – A$12.5m)

Reading this it looks like a simple purchase of shares triggers from the US cash account triggers a CGT / FRE1 event. I thought that maybe if I made a limited balance election on the account it may make things easier but FRE1 events are excluded. Are people recording CGT against there US$ cash accounts?

Are people generally opting for limited balance election on their trading accounts? I am still reading up on this and trying to work out the implications.

I am going to catch up with my accountant later this month - but thought I would see how the broader trading community are managing Forex share trading... Are people using any software (apart from Excel) to help manage this record keeping?

Cheers

 

[village idiot]

so I am thinking about diversifying my SMSF into foreign shares, and wondering what sort of accounting nightmare that might invoke.

In googling the subject I found this thread but not much other info about it , so thought I would bump this thread since it is very relevant but doesn't seem to have got much of a reply.

Judging by what RX2 has turned up (that each purchase of shares is also a disposal of a CGT asset (the US$)) it could be even worse than I imagined. Suppose we take a basic series of events;

transfer some A$ into US$, creating a cgt asset
a week later we spend some of those US$ on XYZ shares or ETFs, ( a CGT event), but leave some US$ still in cash.
Those XYZ shares pay divs 4 times a year in US$, presumably creating new parcels of the US$ asset
We also add to our US$ funds say 4 times a year from A$ contributions,creating new parcels of the US$ asset
We use both the contributions and accumulated divs to purchase new parcels of shares, using several different parcels of our $US




If each time we buy OR sell shares is a CGT event, almost always involving multiple parcels of either US$ or shares, repeat the above 4 times a year, accumulate say 10 stocks so that's 40 different div receipts each year that need the base cost recorded in A$ and are then 'disposed of', throw in some withholding tax complications, and a mark to market unrealised gains/losses on the residual cash at year end, using IB's crap reports, it must turn into a reporting nightmare even for a basic accumulate and hold strategy, let alone trading


Just wondering if anyone has any experience to relate on direct ownership of foreign shares or EFTs in an SMSF, and the accounting/reporting that goes with it.

Is the way round it just to buy the Vanguard ETFs VEU and VTS on the ASX and keep it all in A$?

 

[jorgon]

When trading using a broker which permits the fund to hold money in the dealing account in various foreign currencies (such as Interactive Brokers) a limited balance election helps with most of the accounting problems.

With that election in place accounting is greatly simplified.

The cost of each purchase needs to be recorded in Australian dollar terms using the exchange rate at the time of the purchase; the proceeds of each sale and the applicable gain or loss also needs to be recorded in Australian dollar terms using the exchange rate at the time of the sale.

For the exchange rates, in practice it is easier to use the broker's rate rather than the ATO's rate to reduce balancing discrepancies when you come to final reconciliation.

So the actual amount of accounting involved is no different from that required when you purchase and sell Australian shares using Australian dollars. The only additional factor is converting the figures from the actual currency used to Australian dollars at the correct rate.

Incidentally rx2, I do not agree that using foreign currency to buy shares is a CGT event A1 (disposal of a CGT asset) referred to in the example. I think the withdrawal of the foreign currency from the dealing account in order to purchase the shares in that foreign currency is a CGT event 2, and therefore covered by the limited balance election. As was said in the ATO Interpretive Ruling 2003/551 when referring to a bank account holding foreign currency:-

As the bank account is one asset, each deposit adds to its cost base and reduced cost base and each withdrawal constitutes a part ending or part satisfaction of the debt asset. Each withdrawal will constitute CGT event C2 happening to the relevant 'part' of the asset (the amount withdrawn).