Income Tax Act 2007 section 809FZH

Hedging: exchange gains and losses

Section 809FZH sets out how hedging instruments used to manage foreign exchange risk within investment schemes are treated for the purposes of the carried interest rules.

• Where an investment scheme uses a derivative contract or loan liability to hedge exchange rate exposure on an investment, a hedging relationship exists if the instrument is formally designated as a hedge or is intended to hedge changes in fair value or cash flow variability attributable to exchange gains or losses
• The hedging instrument itself is not treated as an investment of the scheme for these purposes, provided the hedging conditions are satisfied
• Entering into the hedging relationship does not trigger a deemed disposal of the underlying hedged investment
• If the hedging relationship is terminated but the instrument continues to exist, it is treated from that point as a new investment of the scheme