This fact sheet deals with the translation of trading stock values assuming the taxpayer has not chosen to use an average rate of exchange for foreign currency amounts.
Example scenario
On 1 May 2004 Classic Cars orders and pays US$3,000 for gearboxes from its supplier. The effect of the terms of the contract is such that these items become Classic Car's stock on hand when payment of the items is made. These items remained on hand at year's end. The exchange rate on 1 May 2004 is A$1.00 = US$0.50. On 30 June 2004, the market selling value of these gearboxes is US$3,100. The replacement value is also US$3,100. The exchange rate on 30 June 2004 is A$1.00 = US$0.60.
How should Classic Cars translate the value of their on hand trading stock at the end of an income year if they value the trading stock using the:
cost method |
The exchange rate to use is the rate prevailing on 1 May 2004. The translated value is A$6,000. |
|---|---|
market selling value method |
The exchange rate to use is the rate prevailing on 30 June 2004. The translated value is A$5,167. |
replacement value method |
The exchange rate to use is the rate prevailing on 30 June 2004. The translated value is A$5,167. |
End of example
Explanation
Subsection 960-50(1) of the Income Tax Assessment Act 1997 (ITAA 1997) requires an amount of foreign currency to be translated into Australian currency. Translation of the value of trading stock depends on the method by which Classic Cars has elected to value its trading stock under section 70-45 of the ITAA 1997.
- If Classic Cars elects to value its trading stock using the cost method, the applicable exchange rate is the rate prevailing when the trading stocks become on hand (subsection 960-50(6) Item 3 of the ITAA 1997). In this example, the gearboxes become Classic Cars's stock on hand on 1 May 2004. The rate prevailing on 1 May 2004 is the applicable exchange rate.
The translated value is therefore A$6,000 (US$3,000/0.50).
- If Classic Cars elects to value its trading stock using the market selling value method, the rate prevailing at the end of the income year (in this example 30 June 2004) is the applicable exchange rate (subsection 960-50(6) Item 4 of the ITAA 1997).
The translated value is A$5,167 (US$3,100/0.60).
- If Classic Cars elects to value its trading stock using the replacement value method, the rate prevailing at the end of the income year (in this example 30 June 2004) is the applicable exchange rate (subsection 960-50(6) Item 4 of the ITAA 1997).
The translated value is A$5,167 (US$3,100/0.60).
See also: