ATO warned on simplistic approach to FX

The Australian Taxation Office (ATO) has been warned that a draft tax ruling on foreign currency hedging transactions underestimates the complexity of such arrangements and could be detrimental to the interests of Australian superannuation funds.

The Association of Superannuation Funds of Australia (ASFA) has used a supplementary submission to the ATO on the implications of its draft ruling to outline its concerns, stating from the outset that the ATO’s analysis is “too simplistic”.

“It only contemplates a single contractual transaction between two entities. This understates the complexity of hedge trading,” it said.

The submission then went on to list the various factors as being the need to access markets in different time zones; the methods used by large hedge managers when they access those markets on behalf of clients; that trading is done in many instances on the phone or through platform servers where the location is not revealed; and that counter-parties often did not reveal their locations.

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The submission said that ASFA considered that any attempt to isolate and identify such an acceptance was nearly impossible in the context of the hedging activities undertaken by fund managers.

Further, it said that being required to do so for the purposes of determining the source of the contract could potentially impose a significant compliance burden on both hedge managers and super fund managers, and lead to manipulation so as to have the gain or loss sourced domestically.

It warned that such a move could also create an un-level playing field between overseas and domestic hedge managers, which would result in the Australian fund managers being denied access to the larger fund managers operating in the overseas markets, and create tax risks due to the potential to misidentify the ‘correct’ contract formation point.