Application of the financial arrangements rules to foreign currency loans used to finance foreign residential rental property
If your foreign residential rental property is financed by a foreign currency loan, you need to consider whether the loan is subject to the Financial Arrangements rules (FA rules). If the FA rules apply, you may have to account for both the interest you pay on the loan and any foreign exchange gains or losses you make on the loan.
This interpretation statement explains when and how the FA rules apply to a foreign currency loan used to finance a foreign residential rental property:
- Some loans are not subject to the FA rules. If your loan is not subject to the FA rules, you’ll need to consider whether the interest on the loan is deductible.
- If the loan is subject to the FA rules, some people only need to return the foreign exchange gains or losses when the loan ends. This could be when the loan is paid off, or when it is refinanced. This means that each year you can claim a deduction for the interest paid and in the final year of the loan calculate the foreign exchange gain or loss.
- Others need to account for the foreign exchange gains or losses at the end of each year. This means each year you can claim the interest incurred on the loan but also need to account for foreign exchange gains or losses on the loan.
Income Tax Act 2007: ss CC 3, DA 1, DB 6, EW 3, EW 4, EW 5, EW 13, EW 14, EW 20, EW 29, EW 30, EW 31, EW 57, EW 63, YA 1 (“absolute value”, “interest”, “maturity”)