This fact sheet deals with the appropriate exchange rate to be used to translate foreign rental income into Australian dollars for tax purposes.
Example scenario
A taxpayer resident in Australia has a rental property in New Zealand which is managed by a real estate agent ('the agent'). The agent receives the amount of NZD1,100 in rent from the tenant on the last Monday of every month. After deducting the commission and monthly rental statement fee, the agent deposits the NZD1,000 on the first day of every month into a New Zealand currency bank account the taxpayer holds in New Zealand. It remains there to cover expenses relating to the rental property. The taxpayer is not in the business of renting properties and accounts for income on a cash basis.
End of exampleQuestion
At what exchange rate should the New Zealand rental income be translated into Australian dollars for tax purposes?
Answer
The exchange rate that should be used is that prevailing on the day the income is received by the agent, that is, the last Monday of each month.
Reasoning
Tax relevant amounts denominated in a foreign currency must be translated (converted) into Australian dollars under subsection 960-50(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Rental income, being ordinary income, is an example of an amount under subsection 960-50(2)(a) of the ITAA 1997.
The table in subsection 960-50(6) of the ITAA 1997 sets out translation rules that apply to various categories of assessable income.
The rental income is an amount of ordinary income and therefore falls within item 6 of the table. As the taxpayer operates on a cash basis, the amount is derived for tax purposes at the time the agent receives the rent - the last Monday of each month.
Under section 775-110 of the ITAA 1997, the taxpayer constructively derives the amount at the time it is received by the agent. Under item 6 paragraph (b) of the table, ordinary income is translated at the exchange rate applicable at the time it is derived. Therefore, the exchange rate prevailing on the last Monday of each month will be used to translate each receipt of NZ currency into Australian dollars.
See also: