In particular, complying with TR 2014/D2 in its current form presents significant practical challenges for superannuation funds seeking to change their present hedging arrangements in order to minimise the risk of loss of FITO entitlement.
Presently, foreign exchange (FX) trading is concentrated in London, New York and Hong Kong, where major dealers operate their main trading desks. Should superannuation funds choose to trade using domestic desks only, the volume and demand (and hence cost to members) of obtaining Australian counterparties for each and every trade would spike to unprecedented levels as one fund alone may execute thousands of FX trades per year. Given the sheer size of the superannuation industry, there may be insufficient Australian holders of the required foreign currencies to meet this demand.
In addition, research has shown that most of the volatility in the Australian dollar occurs outside of the trading hours for domestic trading desks. By effectively limiting a superannuation fund’s trading to domestic desks in the Australian time zone, exchange changes will be potentially unmanaged until the domestic trading desk re-opens the following day. Unless Australian dealers can offer 24 hour trading desks (which is unlikely), this poses a significant increase in risk to a fund’s risk management and FX trading profile.
These observations demonstrate that TR 2014/D2 is not just a tax issue. If released in final in its current form it will require superannuation funds to consult with their tax adviser, internal auditor and risk management team to ensure a holistic approach is adopted.