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?s...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?