Tax Brief. 19 December Foreign Exchange Rules Become Law and the Countdown to 16 January 2004 Begins. The Six Elections and Choices

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1 Tax Brief 19 December 2003 Foreign Exchange Rules Become Law and the Countdown to Begins On Wednesday 17 December, 2003, the Governor General gave Royal Assent to the legislation enacting the new foreign exchange gains and losses (forex) regime. That action started the very short countdown to make several critical choices and elections under the forex regime. Making these choices or failing to make them can have significant and permanent tax effects for taxpayers, and there are both opportunities to be exploited and pitfalls to be avoided. Our Tax Brief earlier this month detailed how the new forex regime works, and so we won t repeat that discussion here. Let us know if you would like another copy. Needless to say, the initiation of this new regime could hardly be happening at a less convenient time. The message of this Tax Brief is simple: this is an important development; it has to be carefully managed; and it can t be postponed! The Six Elections and Choices The first Table in this Tax Brief sets out the various choices and elections available under the new forex regime. The legislation, and the Table, use two critical concepts the "applicable commencement date" and the "commencement date" for the Act. The "applicable commencement date" is either: the first day of the taxpayer s income year, or if the first day of the income year is earlier than 1 July 2003, the first day of the -05 income year. Table 2 gives some examples. The "commencement" of the Act and of individual sections happened on 17 December, the date of Royal Assent to the Bill. This means that choices and elections discussed below which have to be made within 30 days after the commencement of the Act must be made on or before Friday,. For many taxpayers the most important election will be the transitional election. Making this election may lead to cost savings in not having to keep track or "pre" and "post" transactions. And, depending on how the taxpayer has treated foreign currency denominated transactions prior to the new regime, making this election

2 may lead to permanent differences (favourable or unfavourable) in taxable income. Careful analysis is required. Table 1 Available Elections and Choices The Choice or Election 1.Transitional Election This election allows a taxpayer to elect that the new regime will apply to the realisation of rights acquired and obligations incurred before the "applicable commencement date." How to Make it, and Whether it is Revocable or Not This is an irrevocable election. It must be made in writing. It applies on an "all or nothing" basis. 2.Choice not the apply the short-term forex rules This choice allows the taxpayer to not apply certain sections. These sections seek to achieve "character matching" of a forex gain or loss, arising on the acquisition or sale of a capital asset or the acquisition of a depreciating asset. 3.Choice to adopt rollover relief for a facility agreement This choice applies to an issuer, on a facility basis, so as to defer gains or losses until the repayment of a facility. 4.Limited balance election This election allows a taxpayer to disregard forex This is an irrevocable choice. It must be made in writing. The election applies on an "all or nothing" basis that is, it will apply to every depreciable asset and every CGT asset that a taxpayer buys or sells or otherwise deals with after the election is made. This is an irrevocable choice. It is made on a facility-by-facility basis. It must be made in writing The election is selective it can be for some or all accounts. It must be made in writing It can be withdrawn 2Foreign Exchange Rules Become Law and the Countdown to Begins

3 gains or losses on "qualifying forex accounts" in limited and defined situations. 5.Retranslation choice This choice allows a taxpayer to recognise unrealised forex gains and losses on "qualifying forex accounts". 6.Functional currency choice This choice allows, in certain cases, foreign currency to be the base currency when calculating taxable income. The choice is selective it can be made for some or all accounts. It must be made in writing. It can be withdrawn. The choice must be made in writing. The choice can be withdrawn in defined situations. Determining the Applicable Commencement Dates Subject to the special transitional rules discussed next, the forex regime applies, in broad terms, to transactions which commence on or after the "applicable commencement date." If a taxpayer makes the transitional election noted above, the new regime will also apply to transactions which commenced before the applicable commencement date. In other words, the new regime can be invoked to apply to transactions on foot at the applicable commencement date. Table 2 Applicable Commencement Dates Applicable Commencement Date for a Taxpayer with a Year of Income ending 31 March 30 June 30 September 31 December Applicable Commencement Date 1 April 1 July October Foreign Exchange Rules Become Law and the Countdown to Begins

4 Importantly, for those taxpayers with a 31 December year end, the date above is applicable for the taxpayer regardless of whether the 31 December year end is in lieu of the succeeding 30 June, or the preceding 30 June. The Deadlines for Making the Choices and Elections During Transition Special rules exist during the transition to the new forex regime. These special deadlines for making the relevant choices and elections to "backdate" the commencement of the forex regime are derived in part from the taxpayer s "applicable commencement date." The other factor that influences the deadline is the particular year of income which the taxpayer employs. Only one choice (the choice not to apply the short-term forex rules) provides a mechanism for the Commissioner of Taxation to allow a longer period to make a choice or election. All others have strict time limits. Table 3 Deadlines for Making Elections During Transition Choice or Election Choice or Election Deadlines for a Taxpayer with a Year of Income Ending 31 March 30 June 30 September 31 December 1.Transitional Election 30 May 1 March 2.Choice Not to Apply the Short- Term Forex Rules* 30 June 31 March 3.Choice to Adopt Roll-Over Relief for a Facility Agreement 30 June 31 March 4.Limited Balance Election 1 April 5.Retranslation Choice 1 April 4Foreign Exchange Rules Become Law and the Countdown to Begins

5 6.Functional Currency Choice 30 June 31 March * Note that this date applies only to taxpayers who were "in existence" on the first day of the 2003 income year or the income year if the taxpayer has a year which ends other than on 30 June. For item 3 the election to adopt roll-over relief for a facility agreement the deadline is relevant for a taxpayer who wants to make the roll-over relief apply to a facility agreement that is on foot at the applicable commencement date. Where the election is made by the deadline, roll-over relief will be available for new bills, notes, etc. issued under an existing facility. If the election or choice is not made by that date, the taxpayer can elect into the roll-over regime only for new agreements. For items 4 and 5 the limited balance election and the retranslation choice the deadline is relevant for a taxpayer who wants to make the limited balance rules or the retranslation rules apply to a qualifying forex account on foot at the applicable commencement date. The taxpayer must make the election or choice by the date shown in the Table. If the election or choice is not made by that date, the taxpayer can elect or choose into those rules at any time, but the election or choice will have the effect of making the regime apply only prospectively. For item 6 the functional currency choice the deadline is relevant for taxpayers who want to use the functional currency rules for calculating taxable income from 1 July 2003 or their next commencing year of income. The taxpayer must make the choice by the date shown in the Table. If the choice is not made by that date, the taxpayer can choose at any time to have the regime apply. For those taxpayers with a 31 December year end, these dates are applicable for the taxpayer whether the 31 December year end is in lieu of the succeeding 30 June, or the preceding 30 June. Making Forex Elections for the Future The special time periods just discussed for making elections and choices will apply only for a limited time. Thereafter, of course, taxpayers will still be able to make various (non-transitional) elections and will have to make them within various time periods. The Table below sets out the relevant times on an ongoing basis. 5Foreign Exchange Rules Become Law and the Countdown to Begins

6 The Choice or Election 1.Transitional Election 2.Choice not to Apply the Short-Term Forex Rules 3. Choice to adopt roll-over relief for a facility agreement. 4. Limited balance election. 5. Retranslation choice. 6. Functional currency choice. When to Make it Not available If an entity is in existence at the applicable commencement date it must be made by the latest of - 90 days after the applicable commencement date, - 30 days after the commencement of the subsection, or - such longer period as the Commissioner allows. In other words, all taxpayers in existence now are apparently expected to make their irrevocable choice very quickly. Alternatively, if the entity came into existence within 90 days after the applicable commencement date, it must be made by the latest of - 90 days after coming into existence, or - such longer period as the Commissioner allows. Curiously, there is no rule for a taxpayer who comes into existence more than 90 days after the applicable commencement date! It must be made within 90 days after the first issue of a security under an agreement. The election can be made at any time, and then applies prospectively. The choice can be made at any time, and then applies prospectively. The choice can be made at any time. If the choice is made within 90 days of the start of an income year, the effect of the choice is backdated to the start of that income year. If the choice is made more than 90 days after the start of an income year, the choice takes effect from the beginning of the next income year. 6Foreign Exchange Rules Become Law and the Countdown to Begins

7 Procedural Matters Three other procedural aspects are important for making these choices and elections: There is no prescribed format for making the choice or election, and so a standard, short document referring to the relevant choice or election (with appropriate section references), signed by the Public Officer and kept with the tax working papers should suffice. It is not necessary to lodge the election or choice with the Commissioner. The document should be retained for the prescribed period currently 5 years. In some instances, a relevant date will fall on a Saturday, Sunday or public holiday. The Acts Interpretation Act 1901 provides that where the last day of any period prescribed by an Act falls on a Saturday, Sunday or public holiday, the thing may be done on the next succeeding business day (which would ordinarily be a Monday). Of course, it is probably simplest to avoid an unnecessary dispute and, if possible, to ensure the choice or election is made by the preceding Friday. 7Foreign Exchange Rules Become Law and the Countdown to Begins

8 These notes are in summary form designed to alert clients to tax developments of general interest. They are not comprehensive, they are not offered as advice and should not be used to formulate business or other fiscal decisions. Liability limited by a scheme approved under Professional Standards Legislation Greenwoods & Freehills Pty Limited (ABN ) Sydney ANZ Tower, 1 Castlereagh Street, Sydney NSW 2000 Australia Ph , Fax Melbourne 101 Collins Street, Melbourne VIC 3000, Australia Ph Fax Perth QV.1 Building, 250 St Georges Terrace, Perth WA 6000, Australia Ph Fax Foreign Exchange Rules Become Law and the Countdown to Begins