Translation of profit on notional sale under a hire purchase arrangement
This fact sheet deals with the translation of special accrual amounts into Australian currency under a foreign currency hire-purchase arrangement where there is a profit on notional sale of property.
It does not consider any other amounts which may be deductible or assessable under Division 240 of the Income Tax Assessment Act 1997 (ITAA 1997).
Aussie Ltd, a company resident in Australia, acquires a crane from Singapore for S$115,000 in November 2005. On 15 December 2005, Aussie Ltd hires out the crane to Singapore Co under a two-year hire-purchase arrangement. The arrangement provides for Singapore Co to pay S$120,000 to Aussie Ltd over two years under the terms of the hire-purchase agreement.
The exchange rate on 15 December 2005 is A$1.00 = S$1.20.
The hire-purchase agreement is treated as a sale (notional sale) of the crane to Singapore Co (notional buyer) combined with a loan (notional loan) from Aussie Ltd (notional seller).
It is assumed that the crane does not constitute Aussie Ltd's trading stock, and is used wholly for income producing purposes. Aussie Ltd is an ordinary balancer for income tax purposes.
End of example
Is there a 'special accrual amount' in this arrangement?
Yes. The profit on the notional sale of the crane that is assessable to Aussie Ltd under subsection 240-35(2) of the ITAA 1997 is a 'special accrual amount' for the purpose of Subdivision 960-C of the ITAA 1997.
Subsection 960-50(1) of the ITAA 1997 provides that any amount in a foreign currency must be translated into Australian currency. Subsection 960-50(5) of the ITAA 1997 requires that a 'special accrual amount' be calculated first (without translation) before it is then translated into Australian dollars.
A 'special accrual amount' is defined in subsection 995-1(1) of the ITAA 1997 to mean an amount that is included in assessable income, or an amount that is a deduction from assessable income under certain provisions including Division 240 of the ITAA 1997.
Accordingly, as the amount is included in Aussie Ltd's assessable income by Division 240, the profit calculated on notional sale is a special accrual amount for the purposes of Subdivision 960-C of the ITAA 1997. This means that in accordance with subsection 960-50(5) of the ITAA 1997, the amount of the profit on the notional sale of the crane is worked out under subsection 240-35(2) in Singapore dollars first (that is, S$5,000), then it is translated into Australian currency.
How is the special accrual amount worked out under Division 240 of the ITAA 1997?
The above arrangement is treated as a notional sale of the property by Aussie Ltd and a notional purchase of the property by Singapore Co, financed by a notional loan provided by Aussie Ltd (sections 240-10, 240-17, 240-20 and 240-25 of the ITAA 1997). As the crane does not constitute Aussie Ltd's trading stock, Aussie Ltd is required to include in its assessable income any profit on the notional sale of the crane in the year of the notional sale (see subsection 240-35(2) of the ITAA 1997).
The profit on the notional sale of the crane is equal to the excess of the consideration for the notional sale over the cost of the acquisition of the crane by Aussie Ltd.
Under section 240-25, the consideration for the notional sale is taken to be the stated cost of the crane for the purposes of the hire-purchase arrangement. This is also taken to be the notional loan principal.
In this case, the consideration for the notional sale of the crane by Aussie Ltd to Singapore Co is therefore the stated price of S$120,000. As it cost Aussie Ltd S$115,000 to acquire the crane, Aussie Ltd will make a profit of S$5,000 (S$120,000 - S$115,000) on the notional sale of the crane, for the purposes of Division 240.
How is the special accrual amount translated under Subdivision 960-C of the ITAA 1997?
The special accrual amount is first calculated without translation, and then translated into Australian dollars using the exchange rate prevailing at the time of the notional sale (15 December 2005).
Subsection 960-50(6) requires that the profit of S$5,000 be translated into Australian dollars according to the special translation rules. Item 7 of subsection 960-50(6) requires the amount, being an amount of statutory income, to be translated at the earlier of when it is received or is included in Aussie Ltd's assessable income.
The profit on notional sale is not actually received by Aussie Ltd. Rather, it is an amount worked out on the basis of a notional sale which is deemed to occur for the purposes of Division 240. Accordingly, the amount is to be translated at the exchange rate prevailing on the date on which the requirement first arose to include the amount in Aussie Ltd's assessable income. This will be at the start of the hire-purchase arrangement on 15 December 2005, when the notional sale is taken to have occurred (subsection 240-20(1)).
The amount to be included in Aussie Ltd's income for the year ending 30 June 2006 is therefore A$4,167 (S$5,000/1.20).
Translation (conversion) rules include: 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 notational sale under a hire purchase arrangement.