Travelex Ltd v Commissioner of Taxation

The Full Federal Court considered an appeal by Travelex Ltd against a decision of the Administrative Appeals Tribunal (AAT) concerning the deductibility of certain foreign exchange losses. The Commissioner of Taxation had disallowed these losses, arguing they were not incurred in gaining or producing assessable income, nor were they necessarily incurred for the purpose of gaining or producing assessable income, pursuant to section 8-1 of the *Income Tax Assessment Act 1997* (Cth).

The primary legal issue before the Full Federal Court was whether the foreign exchange losses incurred by Travelex on forward exchange contracts, entered into to hedge against currency fluctuations in relation to its foreign currency borrowings, were deductible under section 8-1 of the *Income Tax Assessment Act 1997*. This involved determining whether the losses had the character of outgoings incurred in gaining or producing assessable income, or outgoings necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

The Court affirmed the established principle that outgoings incurred in hedging a business's foreign currency exposure are generally deductible. Applying this principle, the Court found that the forward exchange contracts were an integral part of Travelex's business operations, designed to manage the financial risks associated with its foreign currency borrowings. The losses incurred on these contracts were therefore considered to be on revenue account and deductible under section 8-1. The Court distinguished the present case from situations where foreign exchange losses arise from capital transactions.

The appeal was allowed, and the AAT's decision was set aside. The matter was remitted to the AAT for redetermination of the quantum of the deductible losses.