Translation is often referred to as 'conversion'. In this fact sheet, we use the term translation.
The general translation rule applies to the translation of amounts of foreign income, expenses and other tax-relevant amounts to Australian dollars. Generally speaking, this applies from 1 July 2003.
Under the general translation rule, all tax-relevant amounts that are denominated in a foreign currency must be translated into Australian currency (unless falling within certain limited exceptions). This enables all gains and losses to be calculated using a common unit of measurement – the Australian dollar.
Examples of tax-relevant amounts include an amount of:
- ordinary income
- an expense
- an obligation
- a liability
- a receipt
- a payment
- consideration
- a value.
These amounts may be on revenue account, capital account or otherwise.
The general translation rule applies regardless of whether the foreign income is remitted to Australia or not. One significant change from the law as it applied before the operation of these measures is that foreign currency denominated liabilities on capital account are translated into Australian dollars (on a realisation basis) without the need for actual conversion into Australian currency.
Who does the general translation rule apply to?
The forex measures (including the general translation rule) apply to all taxpayers.
Banks and similar financial institutions were excluded from the measures until the application date of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (for most affected entities – that is 1 July 2010).
When does the general translation rule apply?
The general translation rule usually applies prospectively to foreign currency denominated tax-relevant amounts that arise on, or after, the applicable commencement date. The applicable commencement date is most commonly the first day of the 2003-04 income year which, for most taxpayers, is 1 July 2003.
If you have an early substituted accounting period, and the first day of your 2003-04 income year is earlier than 1 July 2003, your applicable commencement date is the first day of the 2004-05 income year.
You may continue to convert tax-relevant amounts to Australian dollars using average or year end rates under the previous rules for converting amounts (as set out in Taxation Ruling IT 2498) if all the following conditions are met:
- the tax-relevant amounts arise from a transaction, event, or thing that involves an amount of foreign currency that was acquired before your applicable commencement date, or a right or obligation for foreign currency that arose under a contract entered into before that time
- the disposal of that foreign currency amount, or the disposal or cessation of the right or obligation results in a foreign exchange (forex) realisation gain or loss
- you have not made a transitional election.
Example
A taxpayer entered into a contract before 1 July 2003 to purchase trading stock for US$100, but did not actually pay for the trading stock until after that date. The value of US$100 in Australian dollar terms was different at the date of contract from the value at the date of payment, and the taxpayer has not made a transitional election.
In this example, the three conditions above will be met. Accordingly, the taxpayer's tax-relevant amounts arising from this transaction, such as the cost of the trading stock, may be converted to Australian dollars using the previous conversion rules (set out in Taxation Ruling IT 2498).
End of exampleHow do translation rules apply to specific amounts?
The measures specify the particular time at which particular types of amounts denominated in a foreign currency are translated into Australian currency. The table below contains examples of the more commonly used specific translation rules.
For details of exchange rates applicable at specific times, refer to Foreign exchange rates.
Example of tax-related amount |
Translate to Australian dollars at the actual rate that applied at the following time |
|---|---|
Ordinary income |
The earlier of the time it is derived and the time it is received |
Statutory income other than capital gains or losses |
The earlier of the time it is first required to be included in assessable income and the time of receipt |
Deductions (other than deductions in relation to depreciating assets) |
The earlier of the time the deductible expense is incurred and the time it is paid |
An amount paid for a depreciating asset |
The earlier of the time the payment is made and the time the depreciating asset starts to be held |
An amount for a capital asset |
The time of the relevant transaction or event |
The value of trading stock on hand at the end of an income year calculated using the cost method |
The exchange rate prevailing at the time the item became trading stock on hand |
The value of trading stock on hand at the end of an income year, calculated using the market selling method or the replacement method |
The exchange rate applying at the end of the income year |
Certain amounts required to be withheld |
The exchange rate applicable at the time the amount is required to be withheld |
Examples of the application of the translation (conversion) rules
The following are examples of the application of the translation (conversion) rules:
- Acquisition of an overseas rental property
- Trading stock valuations
- Translation of foreign currency rental expenses
- Translation of foreign currency rental income
- Translation of notional interest amounts under a hire purchase arrangement
- Translation of profit on notional sale under a hire purchase arrangement
See also:
Where do you find exchange rates?
We publish Average exchange rates and exchange rates applicable at specific times, including lists of exchange rates for selected countries, and average monthly and yearly rates.
How to use an average exchange rate?
Instead of using the exchange rate prevailing at the specific times listed in the table above, in many cases regulations now give you the option of using an average rate of exchange instead.
For more information about translation using average rates, refer to general information on average rates.
Application of forex realisation events to fungible assets, rights and obligations
Monetary assets, rights and obligations can be described as 'fungible' because one unit of currency is identical to and interchangeable with any other unit within a homogenous pool.
Where any of the forex realisation events happen to a fungible asset, right or obligation, the event is applied on a first-in first-out (FIFO) basis or a weighted average basis:
- Forex use of first-in first-out method for fungible assets, rights and obligations
- Forex use of weighted average basis for fungible rights and obligations