This document is current at December 2003. Subsequent editions will be published on our website and will provide details on end of year tax reporting, including the completion of tax returns.
This fact sheet provides an overview of the new functional currency rules, including eligibility requirements.
Eligible taxpayers who keep their accounts solely or predominantly in a particular foreign currency can now use that functional currency as their unit of account to calculate taxable income. Transactions in the applicable functional currency that go into working a taxpayer's taxable income or tax loss need not be translated into Australian dollars ($A); only the net amount of taxable income needs to be translated into $A.
This fact sheet is for Australian residents, and non-residents with a permanent establishment in Australia. It does not cover:
- income from overseas permanent establishments of resident taxpayers, or
- income attributable to offshore banking units, controlled foreign companies or transferor trusts.
The new functional currency rules1 are an exception to the new core foreign currency translation rules2. The core translation rules require that foreign currency amounts be translated into $A and state when a translation is to take place in respect of a given type of transaction. The functional currency rules provide an exception to the requirement that the $A be employed as the unit of account for some taxpayers to work out their taxable income or tax loss. The core translation rules will continue to apply to amounts and transactions not covered by the functional currency rules.
Certain taxpayers can choose to work out their taxable income or loss using a non-$A applicable functional currency. This fact sheet is relevant to:
- residents who are required to prepare financial reports under s292 of the Corporations Act 2001, and
- non-residents carrying on business through a permanent establishment in Australia.3
The applicable functional currency is the sole or predominant currency in which the taxpayer keeps its accounts4 at the time the choice is made.5
The rules operate from 1 July 2003:
- most taxpayers can make a choice that takes effect in the 2003-04 income year, and
- early balancing taxpayers can make a choice that takes effect in the 2004-05 income year.
Ordinarily a choice to employ an applicable functional currency to work out taxable income takes effect after the end of the income year during which the choice was made. 6
In some circumstances a choice may be made after the start of a income year but the choice is intended to take effect during that income year. This is referred to as a 'back dated start up choice 7. For a taxpayer that is in existence at the start of the income year, a back dated start up choice must be made within 90 days of the start of that taxpayer's income year.
For a taxpayer that was not in existence at the start of a tax year, a back dated start up choice may be made within 90 days of the taxpayer coming into existence.
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Important: For the tax year commencing 1 July 2003, taxpayers may make a back dated start up choice between 17 December 2003 and 16 January 20048.
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The choice can be withdrawn in writing, if the applicable foreign currency ceases to be the sole or predominant currency in which the taxpayer keeps its books of account.9 The withdrawal of a choice takes effect from the end of the year in which the choice is withdrawn.10 No provision is made for a withdrawal to be back dated.
After withdrawing a previous choice, a taxpayer can then make a written choice to use the new applicable functional currency as its functional currency for the purpose of working out its taxable income.11 If no further choice is made, the core translation rules will apply requiring the translation of all amounts into $A.
A choice to use a non-$A functional currency must be made in writing. The choice should include:
- the name and tax file number of the entity making the choice
- the use to which the functional currency is being put (for example, to work out taxable income)
- the date the choice takes effect
- the unit of account that the entity intends to use as a functional currency, and
- the signature of the entity's public officer, and the date the written choice was signed.
The entity does not need to send the written choice to the Australian Taxation Office.
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If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service (TIS) on 13 14 50 for help with your call.
If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77.
If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727.
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1 New Sub-Div 960-D, Income Tax Assessment Act (ITAA) 1997
2 New Sub-Div 960-C, ITAA 1997
3 Australian residents carrying on business through overseas permanent establishments can also choose to work out their taxable income or loss using a non-$A applicable functional currency (see section 960-60 ITAA 1997). Also, attributable taxpayers in respect of controlled foreign companies and transferor trusts can use a non-$A applicable functional currency to work out the attributable income of the CFC or transferor trust.
However, these taxpayers are not covered in this publication.
4 'Accounts' means ledgers, journals, statements of financial performance, profit and loss accounts, balance sheets and statements of financial position and includes statements, reports and notes attached to, or intended to be read, with such items: subsection 960-70(4) ITAA 1997.
5 Section 960-70 ITAA 1997
6 Subsection 960-60(1) ITAA 1997.
7 Section 960-65 ITAA 1997
8 That is, within 30 days of the New Business Tax System (Taxation of Financial Arrangements) Act No. 1 2003 receiving Royal Assent.
9 Section 960-90 ITAA 1997
10 Subsection 960-90(1) Items 1 and 2.
11 Subsection 960-90(3)
Last Modified: Tuesday, 28 June 2005