Taxation Determination

TD 2006/4

Income tax: can an Australian resident entity which keeps its 'accounts' predominantly in a foreign currency, choose to use that foreign currency as its 'applicable functional currency', where the entity is required to prepare financial statements in Australian dollars for statutory reporting purposes?

• Please note that the PDF version is the authorised version of this ruling.

FOI status:

may be released

Ruling

1. Yes. An Australian resident entity which is required to prepare financial statements in Australian dollars for statutory reporting purposes, can choose to use a foreign currency as its 'applicable functional currency', where that foreign currency is the sole or predominant foreign currency in which it kept its 'accounts' (as defined in subsection 960-70(4) of the Income Tax Assessment Act 1997 (ITAA 1997)), at the time of making the choice.

Date of effect

2. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Commissioner of Taxation
8 March 2006

Appendix 1 - Explanation

Explanation

3. The functional currency provisions, in Subdivision 960-D of the ITAA 1997, allow certain entities or parts of entities that keep their 'accounts' solely or predominantly in a particular foreign currency, to choose to work out their taxable income or tax loss^[1] in that foreign currency - and then translate that net amount to Australian dollars for income tax purposes. This constant unit of foreign currency is called the 'applicable functional currency'.

4. Under item 1 of subsection 960-60(1) of Subdivision 960-D of the ITAA 1997, Australian residents that are required to prepare financial reports under section 292 of the Corporations Act 2001, are included in the list of entities eligible to make an 'applicable functional currency' choice.

5. Section 292 of the Corporations Act 2001 provides that a financial report and directors' report must be prepared for each financial year by:

•

all disclosing entities (incorporated or formed in Australia);^[2]

•

all public companies;

•

all large proprietary companies;^[3] and

•

all registered schemes.

6. Subsection 960-70(1) of the ITAA 1997 provides that the 'applicable functional currency' for entities that are required to prepare financial reports under section 292 of the Corporations Act 2001, is the sole or predominant foreign currency in which they kept their 'accounts' at the time when they made the 'applicable functional currency' choice.

7. Subsection 960-70(4) of the ITAA 1997 defines 'accounts' to mean:

(a)

ledgers; and

(b)

journals;

(c)

statements of financial performance; and

(d)

profit and loss accounts; and

(e)

balance-sheets; and

(f)

statements of financial position;

and includes statements, reports, and notes attached to, or intended to be read with, any of the foregoing.

8. Where a taxpayer which is an Australian resident entity, maintains its 'accounts' as defined in subsection 960-70(4) of the ITAA 1997 predominantly in a foreign currency, but from time to time translates a part of those 'accounts' (such as the Statement of Financial Performance or Statement of Financial Position) into Australian dollars for the purpose of complying with section 292 of the Corporations Act 2001 or any other statutory reporting requirements - the creation of an Australian dollar document does not affect the fact that, taken as a whole, the taxpayer's 'accounts' are still predominantly kept in a foreign currency.

9. Therefore, such a taxpayer that is required to prepare some financial statements in Australian dollars for statutory reporting purposes, can choose to use the foreign currency in question as its 'applicable functional currency', to work out its taxable income or tax loss. Such a choice will apply to the calculation of all of the amounts included in the entity's taxable income or tax loss.

10. The test of whether or not a particular foreign currency is the predominant one in which an entity keeps its 'accounts' (as defined), is a quantitative one, as it involves an examination of those 'accounts' in terms of the unit of measurement used (see, for example, FC of T v. FH Faulding & Co Ltd (1950) 83 CLR 594).

11. In this respect, no one component of those defined as making up these 'accounts' takes on any greater or lesser weight in reaching this conclusion, which is essentially one of fact and degree. For example, if an entity kept a dual ledger system and two sets of journals (that is in both a foreign currency and Australian currency), while its management accounts were kept in a foreign currency - we would accept that, on a quantitative basis, the entity kept its 'accounts' predominantly in a foreign currency.

12. This accords broadly with the meaning given in the Explanatory Memorandum to the Taxation Laws Amendment (Foreign Income) Bill 1990 (EM), to the phrase contained in former subsection 391(2) of Part X of the ITAA 1936, 'a single or predominant currency in which eligible amounts ... are expressed in the accounts ... .' Former section 391 of the ITAA 1936 provided special rules concerning converting amounts not expressed in Australian currency to Australian currency, in calculating the 'attributable income' of a controlled foreign corporation (CFC). The definition of 'accounts'^[4] in section 317 of Part X of the ITAA 1936, that applied for this purpose, closely resembles the definition of this term in subsection 960-70(4).

13. At page 297 of the EM it was stated:

Whether or not there is a predominant foreign currency is not to be determined by the volume or size of the transactions. Rather, the test will turn on whether or not there is a particular foreign currency used for the basic record keeping of the CFC.

14. The same approach is considered appropriate in determining whether there is an 'applicable functional currency' under subsection 960-70(1) (as modified to accommodate the fact that other entities (or parts thereof) besides CFCs are covered by Subdivision 960-D).

15. Note that an entity may be required under Australian law to keep its accounts in a currency other than Australian currency. This is governed currently by whether or not it is required to comply with the relevant Accounting Standard.^[5] At the time of issue of this Determination, the relevant Accounting Standard was AASB 121.^[6] It is accepted in relation to a year of income that, where an eligible entity within the meaning of subsection 960-60(1) of the ITAA 1997) is required under AASB 121 to keep its accounts so that entries are made in a non-Australian currency (referred to in AASB 121 as the 'functional currency'^[7]), then that currency will qualify as the entity's 'applicable functional currency' for the purposes of subsection 960-70(1) of the ITAA 1997.^[8]

Previously issued as TD 2005/D32

References

ATO references:
NO 2005/10584

Related Rulings/Determinations:

TR 92/20

Subject References:
foreign currency transactions
foreign currency translations

Legislative References:
TAA 1953
ITAA 1936 Pt X
ITAA 1936 317
ITAA 1936 391
ITAA 1936 391(2)
ITAA 1997 Subdiv 960-D
ITAA 1997 960-60(1)
ITAA 1997 960-70(1)
ITAA 1997 960-70(4)
ITAA 1936 Pt III Div 9A
Corporations Act 2001 285(2)
Corporations Act 2001 292
Corporations Act 2001 292(2)
Corporations Act 2001 293
Corporations Act 2001 294
Corporations Act 2001 296(1)

Case References:
FC of T v. FH Faulding and Co Ltd
(1950) 83 CLR 594