Terry - Fx loss on overseas loan for Ozzie property

Take this scenario.

You buy a property 1m AUD and finance it with a foreign currency loan, at the time equivalent to AUD 700k (and converted from the foreign currency into AUD, which then goes towards paying the purchase price.

Now it's time to sell. The property is worth 1.3m. But due to currency movements and the AUD weakening it now takes 1m AUD to pay off the money you borrowed in the foreign currency.

In such a case, assuming no other costs, have you made a capital gain of 300k? Ie cost price was 1m sold for 1.3m? Or have you made a zero capital gain as you "gain" was wiped out on repaying the loan back which increased 300k due to fx movements. ?

 

The mortgage is not part of the asset so does not affect cg. Fx translation is for foreign currency assets.

 

cgt will be one event

forex translation rules another event.

both treated differently

 

Ok. But is the fx "loss" something One could deduct from the capital gain?

 

You would have two CGT assets

1. Property
2 Foreign Currency

CGT and foreign exchange gains and losses

Unlike a Australian CGT asset you may have different exchange rates applying to different costs eg Purchase price, improvements, selling costs, sale.

I generally recommend repatriation of proceeds to AUD asap prior to 30 June or you can end up with two CGT events in different tax periods and murphys law says you will do it the way that makes it most costly. (eg CGT gain occurs in Year1 and FX loss in Year2)

 

Got it. So then presumably you could have a capital loss on the fx which could be offset against the capital gain made on the property? So if in the same year the loss on fx could offset some of gain on the property?

 

In this case the foreign currency is in the mortgage, though. Usually a mortgage is not a CG asset. Why would it be in this case? The property is in Australian dollars and has no FX?

 

A mortgage is a debt which provides a currency loan. That currency is used to acquire a property. That currency is a CGT asset when advanced and when it is repaid the CGT asset ends.

The ATO explain as much in the provided link : A CGT asset can be denominated in a foreign currency and foreign currency cash can itself be a CGT asset. Gains or losses that you make while you hold such assets will generally be taxed as a capital gain or capital loss respectively

Note that the foreign currency rule contains a nexus to the property CGT asset. Note unlike say a local loan on local property and a fixed rate break cost or the deductible use of the proceeds to acquire the property.

If a foreign currency loan was used to purchase the AU property then a issue arises.