• The retranslation election

    The foreign exchange (forex) measures (in Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)) generally apply a first-in, first-out (FIFO) ordering rule to calculate the cost or value of a fungible foreign currency asset, right or obligation. For example, if you have a foreign currency denominated bank account with a credit balance, withdrawals from your account are broadly treated as a part cessation of a right (that is, the right to receive the foreign currency in the account from the bank), the cost of which is calculated on a FIFO basis.

    However, a retranslation election can be made to instead bring to account gains and losses from a qualifying forex account on a retranslation basis. For many taxpayers, the retranslation method will be simpler to use to calculate gains or losses than the FIFO ordering rule, although retranslation may bring to account gains or losses that would otherwise be unrealised.

    A qualifying forex account is an account denominated in a foreign currency that is either a credit card account, or an account held for the primary purpose of facilitating transactions.

    How does the Taxation of Financial Arrangements Act affect qualifying forex accounts?

    The Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (TOFA Act) received royal assent on 26 March 2009.

    The TOFA Act made two important changes relevant to qualifying forex accounts:

    It extended the definition of a qualifying forex account by removing the requirement that it be an account with an authorised deposit-taking institution or similar financial institution.

    It provided for an additional 90 day period from 26 March 2009 to 24 June 2009 to make a retrospective retranslation election for certain qualifying forex accounts (this is explained below).

    When do you have to make a retranslation election by?

    As a consequence of the TOFA Act, there are now three periods in which a retranslation election can be made:

    If the retranslation election is made at this time…

    Then the election will apply for these periods...

    Between 17 December 2003 and 16 January 2004

    The election can be made to apply for a date on or after 1 July 2003.

    This means the election may have retrospective application.

    On or after 17 January 2004 (except for elections made between 26 March 2009 to 24 June 2009 as outlined below)

    The election can be made to apply from a date on or after the day the election is made.

    This means the elections cannot have retrospective application.

    Between 26 March 2009 and 24 June 2009

    (This is the further election provided for in the TOFA Act.)

    The election can be made to apply for a date on or after 1 July 2003.

    This means the election may have retrospective application.

    What details must be in a retranslation election?

    A retranslation election must be made in writing and should be kept with your tax records. The election should not be sent to us. There is no prescribed form for the making of a retranslation election, but it should include all the following information:

    • your name and tax file number (if you are the taxpayer making the election)
    • a statement that you choose retranslation under section 775-270 of the Income Tax Assessment Act 1997 for one or more specified qualifying forex accounts held by you
    • details of your specified qualifying forex accounts (for example, account numbers and the financial institutions with which they are held)
    • if the election was made between either 17 December 2003 and 16 January 2004 or 26 March 2009 and 24 June 2009, the day on which the election is to come into effect (this may be retrospective, but it cannot be earlier than 1 July 2003)
    • your signature
    • the date the election was made.

    Example

    This choice is made under section 775-270 of the Income Tax Assessment Act 1997.

    I, Joe Taxpayer, choose retranslation for the following qualifying forex accounts with effect from today:

    Financial institution

    Account name

    Account number

    XYZ bank

    Joe Taxpayer

    123 456 789

    ABC credit union

    Joe Taxpayer

    987 654 321

    Joe Taxpayer
    19 January 2016

    End of example

    How does a retranslation election apply?

    There is no limit on the number of qualifying forex accounts this election can be made for or on the balances of those accounts.

    An election generally applies for an account from the time the election is made and ceases at the earliest of the following:

    • when you cease to hold the account
    • your account ceases to be a qualifying forex account
    • your election being withdrawn (a withdrawal of an election will not have effect before it was made).

    The first retranslation period after making an election begins when the election takes effect. Subsequent retranslation periods start on the first day of every subsequent income year for which the election remains in effect.

    Each retranslation period ends when an election ceases to apply or on the last day of an income year for which the election remains in effect.

    You can elect at any time for a particular account and the treatment generally applies prospectively from the time of election. An election will not necessarily apply to an account for a whole income year. It will depend on when the election takes effect, and when (if at all) the election ceases to have effect.

    How do you calculate a gain or loss on a qualifying forex account?

    To calculate the forex gain or loss for a qualifying forex account, do the following:

    Calculate the closing balance of the qualifying forex account for the relevant translation period by translating the foreign currency balance into Australian currency at the exchange rate applicable at the end of the retranslation period.

    less

    The result of calculating the amount of the opening balance of the qualifying forex account for the relevant translation period by translating the foreign currency balance into Australian currency at the exchange rate applicable at the beginning of the retranslation period (see below).

    less

    The total of all deposits made to the qualifying forex account for the relevant translation period each translated into Australian currency at the exchange rate applicable at the time of the deposit.

    plus

    The total of all withdrawals made to the qualifying forex account for the relevant translation period each translated into Australian currency at the exchange rate applicable at the time of the withdrawal.

    A positive amount worked out under the formula will be a forex realisation event (FRE) 8 forex realisation gain, while a negative amount worked out under the formula will be a FRE 8 forex realisation loss.

    If the election is in force over the start of an income year, that is, if one retranslation period immediately follows another, the exchange rate applicable at the beginning of the retranslation period is the exchange rate applicable at the end of the previous retranslation period.

    Gains and losses under forex realisation events 2 and 4 and capital gains tax (CGT) events C1 and C2 that happen to a qualifying forex account are disregarded if you have a choice in effect for that qualifying forex account when the event happens.

      Last modified: 01 Mar 2016QC 17059