Guide to functional currency rules

Information about functional currency rules, eligibility and the implications for tax accounting and reporting.

• How to use this guide
• Functional currency translation rules
• How the functional currency rules work/
• Eligibility to account in a functional currency
• When to make a functional currency choice
• Documenting your choice to use a non-Australian dollar applicable functional currency
• Non-functional currency amounts you receive or pay
• Tax reporting and functional currency
• How to treat different amounts
• Mandatory application of functional currency for CGT
• Capital gains and losses on property
• Reporting during the year
• Label 8O – functional currency chosen
• Currency codes for label 8O

How to use this guide

The electronic version of this document is the only authorised version. Printed copies may be out of date.

Read this guide to find out more about the functional currency rules, including:

• eligibility requirements
• the implications for tax accounting and tax reporting.

You can use this guide if you are:

• an Australian resident or a non-resident with a permanent establishment in Australia and both of the following apply      
  • you keep your accounts solely or predominantly in a particular foreign currency
  • you wish to work out your taxable income (or tax loss) using that foreign currency – that is, using your 'applicable functional currency'.
   
• a non-resident disposing of indirect interests in real property in Australia and the sole or predominant currency in which you keep your accounts at the time of disposal is a foreign currency. The application of functional currency rules is mandatory in this situation.

This guide does not cover:

• income from overseas permanent establishments of resident taxpayers
• income attributable to offshore banking units, controlled foreign companies (CFC) or transferor trusts.

Functional currency translation rules

The functional currency translation rules are an exception to the core foreign currency translation rules.

Under the core foreign currency translation rules, amounts in a foreign currency must be translated into Australian dollars (A$). There are also rules about when and at what exchange rate a translation is to take place for a given type of transaction.

Under the functional currency rules, you can use a currency other than A$ as the unit of account to work out your taxable income or tax loss. The core foreign currency translation rules continue to apply to amounts and transactions not covered by the functional currency rules.

If you are an eligible taxpayer who keeps your accounts solely or predominantly in a particular foreign currency, you can choose to use that foreign currency as the unit of account to work out your taxable income or tax loss.

If you have made such a choice (that is, an effective functional currency choice), you do not translate transactions you undertake in either a foreign currency or in your applicable functional currency into A$. Rather, you translate only your net amount of taxable income or tax loss calculated in your applicable functional currency, into A$.

The core foreign currency translation rules are contained in section 960-50 of Subdivision 960-C of the Income Tax Assessment Act 1997 (ITAA 1997).

The functional currency translation rules are contained in section 960-80 of Subdivision 960-D of the ITAA 1997.

How the functional currency rules work

Once you choose to use a non-Australian dollar applicable functional currency, you must use that currency as the unit of account in your day-to-day tax accounting. After working out your taxable income or tax loss in the applicable functional currency, you must translate that amount into A$ to report on your tax return.

You must also carry out your instalment income calculations in your applicable functional currency and translate that amount into A$ for reporting purposes.

Eligibility to account in a functional currency

Only certain taxpayers can choose to work out their taxable income or tax loss using a non-Australian dollar applicable functional currency. This guide is relevant only if you are either of the following:

• a resident who must prepare financial reports under section 292 of the Corporations Act 2001
• a non-resident carrying on business through a permanent establishment in Australia.

Your applicable functional currency is the sole or predominant currency in which you keep your 'accounts' at the time you choose to use functional currency.

'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.

Find out more in subsection 960-70(4) of the ITAA 1997.

The following taxpayers using a non-A$ applicable functional currency are not covered in this guide:

• Australian residents carrying on business through overseas permanent establishments, using a non-A$ applicable functional currency to work out their taxable income or loss
• offshore banking units, using a non-A$ applicable functional currency to work out total assessable OB income and total allowable OB deductions
• attributable taxpayers in respect of controlled foreign companies (CFC) and transferor trusts, using a non-A$ applicable functional currency to work out the 'attributable income' of the CFC or transferor trust.

When to make a functional currency choice

The functional currency rules started to apply on 1 July 2003.

Ordinarily, if you choose to use a foreign currency as your applicable functional currency to work out your taxable income or tax loss, your choice will take effect after the end of the tax year during which you made it.

You must make your functional currency choice in writing.

In some circumstances, you can make your functional currency choice after the start of the tax year in which you intend it to take effect. This is referred to as a 'backdated start up choice'. You must make a 'backdated start up choice' within 90 days of either of the following:

• the start of the tax year, if your entity existed at that time
• the day your entity came into existence, if it did not exist at the start of the tax year.

See details on:

• when your choice takes effect in subsection 960-60(1) of the ITAA 1997
• making your choice in writing in subsection 960-60(2) of the ITAA 1997
• making a backdated start up choice in section 960-65 of the ITAA 1997.

Withdrawing an existing functional currency choice and substituting a new choice

You can withdraw your existing functional currency choice if the functional currency you are using ceases to be the sole or predominant currency in which you keep your 'accounts'. Your functional currency choice withdrawal will take effect from the end of the tax year in which you withdraw it.

Your withdrawal:

• cannot be backdated
• must be made in writing
• should be available as part of the business's tax records.

After your previous functional currency choice is withdrawn, you can make a choice to use the new sole or predominant currency in which you keep your accounts, to work out your taxable income or tax loss. You must make this choice in writing. If you don't make a new functional currency choice, the core foreign currency translation rules will apply, which means that all amounts must be translated into A$.

See details on:

• when your choice of currency ceases to be your main currency for accounts in subsection 960-90 of the ITAA 1997
• when your functional currency choice withdrawal will take effect in items 1 and 2 of subsection 960-90(1) of the ITAA 1997
• making a choice to use the new sole or predominant currency in which you keep your accounts in subsection 960-90(3) of the ITAA 1997.

Documenting your choice to use a non-Australian dollar applicable functional currency

When making your written choice to use a non-Australian dollar currency as your applicable functional currency, include all of the following:

• 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 or tax loss
• the date the choice takes effect
• the unit of account that the entity intends to use as its functional currency
• the signature of the entity's public officer and the date the written functional currency choice was signed.

You do not need to send your written functional currency choice to us. However, it should be available as part of your business' tax records.

Non-functional currency amounts you receive or pay

On this page

• Trigger of foreign currency loss
• Amounts attributable to transactions or events that happened before a functional currency choice took effect

All amounts included in working out your taxable income or tax loss must be in the applicable functional currency. This means you must translate all amounts you receive or pay in another currency, including A$ amounts, into the applicable functional currency.

The functional currency translation rules, including applicable exchange rates, follow the principles in the core foreign currency translation rules for translating foreign currency amounts to A$. This is covered in subsection 960-50(6) of Subdivision 960-C and also subsection 960-80(6) of Subdivision 960-D of the ITAA 1997.

However, the A$ is treated as a foreign currency while your applicable functional currency is not a foreign currency for the purposes of working out your taxable income or tax loss in the applicable functional currency. This is covered in subsection 960-80(1) of the ITAA 1997.

A foreign exchange (forex) realisation gain or loss may arise for certain amounts if there is a difference in prevailing exchange rates at the relevant times. For example, the exchange rate applicable at the time you incur an amount may be different from the exchange rate applicable when you pay it. In this situation, changes in the value of the A$ against the applicable functional currency can bring about a forex gain or loss – an example follows.

Trigger of foreign currency loss

Find out more about foreign currency translation (conversion) rules.

Amounts attributable to transactions or events that happened before a functional currency choice took effect

Special translation rules apply to amounts that are attributable to transactions or events that happened before your current functional currency choice took effect ('pre-choice' amounts). Pre-choice amounts that are relevant for working out your taxable income or tax loss for a year after your functional currency choice takes effect must be translated into your applicable functional currency in accordance with these special rules, including pre-choice amounts that are denominated in the same non-A$ currency as your applicable functional currency.

See details on:

• examples of an amount in subsection 960-80(2) of the ITAA 1997
• special translation rules in section 960-85.of the ITAA 1997.

If you have not previously made a functional currency choice, you should translate a relevant pre-choice amount as follows:

• firstly, into A$ at the exchange rate applicable at the time of the transaction or event
• secondly, into the applicable functional currency at the exchange rate at the time your functional currency choice took effect.

If you have previously made a choice to use a non-A$ currency as your applicable functional currency, you should translate a relevant pre-choice amount:

• firstly, into the previous applicable functional currency at the exchange rate applicable at the time of the transaction or event
• secondly, into the new applicable functional currency at the exchange rate at the time your new functional currency choice took effect.

Sale of assets acquired before making a functional currency choice

Tax reporting and functional currency

The functional currency rules allow you to work out your taxable income or tax loss in your applicable functional currency. However, all tax reporting must still be expressed in A$. When reporting on your tax return or activity statement, work out the reported amounts in your applicable functional currency and then translate these amounts into A$.

For tax reporting purposes, when a translation is needed for label amounts (other than the taxable income amount), use the same translation rate as the taxable income translation rate. If you don't have a taxable income amount in a given income year (that is, you have a tax loss), you should use the same rate you would have used to translate a taxable income amount into A$.

How to treat different amounts

On this page

• Foreign income tax offsets
• Franking credits
• Application of translation rule to a monetary limit

Amount type	Treatment
Amounts used in working out taxable income or tax loss in the applicable functional currency (FC). Note sections 6AB and 6AC of the Income Tax Assessment Act 1936 (ITAA 1936) with regard to foreign income and foreign tax and the 'grossing-up' of foreign income to include foreign tax paid.	Include the amount in the taxable income calculation in the FC before translating taxable income from the FC into A$.
Amounts used to work out taxable income or a tax loss that are in a foreign currency. For example: A$ amounts, including the 'gross-up' amount for a franked dividend amounts of foreign income, including the 'gross-up' amount for foreign tax paid in respect of that income. Section 6AC of the ITAA 1936 requires the amount of foreign income included in your assessable income to be 'grossed-up' to include any foreign tax you paid in relation to the foreign income. If you receive a franked dividend, section 207-20 of the ITAA 1997 requires you to 'gross-up' your assessable income by the amount of the franking credit – and also entitles you to a tax offset equal to the amount of the franking credit.	Translate into the FC using the applicable exchange rate for that amount. As 'gross-up' amounts contribute to the calculation of your taxable income or tax loss, you must translate them into the FC. Include the FC value in the taxable income calculation before translating taxable income from FC into A$ – see Example 3 and Example 4.
Carry-forward losses	Carry-forward losses are allowable deductions that reduce taxable income. Identify the carry forward loss amount in the FC from the previous income year. Include these amounts in the taxable income calculation in the FC before translating taxable income from FC into A$. When reporting the value of a tax loss, translate it from FC into A$.
Tax exempt amounts that reduce carry-forward losses	Tax exempt amounts that reduce carry-forward losses are translated into the FC generally upon being derived. They are then used to absorb the loss to the extent of their value. When reporting the value of a tax exempt amount, translate it into A$.
Foreign income tax offsets (FITO) Subsection 770-10(1) of the ITAA 1997 provides that you are entitled to a foreign income tax offset for foreign income tax you paid in respect of an amount of foreign income that is included in your assessable income in a year of income. (FITO in relation to the 'attributable income' of a CFC is not dealt with in this guide.)	The value of foreign income tax offset amounts is not used in working out taxable income, except for when calculating the 'attributable income' of a controlled foreign company (CFC) or transferor trust. The core foreign currency translation rules apply, and the value of foreign tax paid used to calculate foreign income tax offsets is translated into A$ when the foreign tax is paid – see Example 3.
Franking credits	A credit that arises in the franking account of an entity (a franking credit) is a tax offset. The amount of the tax offset you are entitled to as a result of receiving a franked dividend is not translated into your FC. Your tax offset amount will equal the A$ amount of the franking credit attached to the dividend you received before it was translated into functional currency. Add the A$ value of franking credits to your franking account without translation into FC – see Example 4. You must keep your franking account in A$.
Tax offsets and rebates	Tax offsets and rebates are not used to work out taxable income or a tax loss. The core foreign currency translation rules apply. If the amount is already in A$, then no translation takes place. If the amount is in a non-A$ currency, translate the amount into A$. Do not translate into FC first.
Values expressed in law Paragraph 960-80(2)(i) of the ITAA 1997 covers this.	Translate these amounts to FC at the applicable rate – see Example 5.

Foreign income tax offsets

Franking credits

Application of translation rule to a monetary limit

Mandatory application of functional currency for CGT

Foreign residents and trustees of foreign trusts for capital gains tax (CGT) purposes are required to apply the functional currency rules if both of the following occur:

• a CGT event happens in relation to their indirect Australian real property interest
• accounts are kept in a foreign currency at the time.

This requirement applies to CGT events that happen on or after 12 December 2006.

Capital gains and losses on property

On this page

• Exchange rates to apply
• CGT and the disposal of property

If, at the time that the CGT event happens in relation to the indirect Australian real property interest, the sole or predominant currency in which you keep your accounts is a currency other than Australian currency, you must use the applicable functional currency to work out the amount of any capital gain or capital loss Subsection 960-61(2) of the ITAA 1997 covers this.

There are 2 steps to work out a capital gain or capital loss.

Step 1 translate an amount that is not in the applicable functional currency into the applicable functional currency.

Step 2 translate the amount of any capital gain or capital loss into Australian currency.

See more details at table item 6 of subsection 960-80(1) of the ITAA 1997.

Exchange rates to apply

Different exchange rates apply to the translation of amounts that are elements in the calculation of capital gain or loss.

See more details at subsection 960-80(4) of the ITAA 1997.

The exchange rate to be used when translating amounts will be either the rate at the time the costs are incurred, or the rate at the time of the CGT event.

Exchange rate applicable at the time the costs are incurred

Amounts relating to the payments made and costs incurred that form part of the cost base of a CGT asset

These amounts are translated into your functional currency at the exchange rate applicable at the time the costs are incurred.

See details in:

• table item 5 of subsection 960-50(6) of the ITAA 1997
• TR 2007/5 Income tax: functional currency – when is an amount not in the 'applicable functional currency'? paragraphs 110 and 153.

Exchange rate applicable at the time of the CGT event

Amounts which are relevant for working out the capital gain or capital loss (capital proceeds or market value of other property) on the happening of a CGT event

These amounts are translated into the applicable functional currency at the exchange rate applicable at the time of the CGT event.

See details in:

• table item 5 in subsection 960-50(6) of the ITAA 1997
• subsection 960-80(6) of ITAA 1997
• TR 2007/5 Income tax: functional currency – when is an amount not in the 'applicable functional currency'?

Amount of capital gain or capital loss calculated in the applicable functional currency

This amount is translated into the Australian currency at the exchange rate applicable at the time of CGT event.

See details in:

• table item 5 in subsection 960-50(6) of the ITAA 1997
• TR 2007/5 Income tax: functional currency – when is an amount not in the 'applicable functional currency'?

CGT and the disposal of property

This example shows how foreign residents need to use the functional currency rules to calculate capital gains and losses on the disposal of an indirect Australian real property interest.

Reporting during the year

• Business activity statements
• Company tax return

Business activity statements

When completing a business activity statement (BAS):

1. calculate your instalment income in the applicable functional currency
2. translate your instalment income into Australian dollars at the appropriate rate
3. complete label T1 of the BAS accordingly.

Company tax return

The functional currency rules allow some taxpayers to choose to work out their taxable income or tax loss by using a non-A$ currency as their applicable functional currency (FC).

All amounts disclosed on the company tax return must be disclosed in A$.

When a label amount is accounted for in a non-A$ FC, that sum should be translated into A$ using the same functional currency translation rate (shown at label 8N of the company tax return) used to translate the taxable income or tax loss figure.

The following amounts are always accounted for in A$, and not in the FC:

The following amounts do not need to be translated into A$ before completion of the return:

Tax losses are allowable deductions from taxable income. If you carry forward losses, you should account for and claim them in your FC. Report any losses used during the income year at label 7R by translating the value of the loss used into A$ at the FC translation rate.

As mentioned above, label 8N is where you show the exchange rate used to translate the FC taxable income figure (and many other figures on the company tax return) into A$.

At label 8N, show the translation rate the company used to translate the taxable income figure from the FC into A$. The translation rate is the amount the FC amount is divided by to get an equivalent amount of A$ – that is, the number of non-A$ currency units that equal one A$ rounded to 4 significant figures – see Examples.

Label 8O – functional currency chosen

On this page

• Examples for labels 8N and 8O
• Calculation statement

Label 8O is where you show your chosen FC using the 3-letter code from the international standard ISO 4217 – 'Currency codes'. See the list of commonly used currencies and their ISO standard codes.

Labels 8N and 8O must be completed by:

• Australian resident taxpayers who use FC to work out their taxable income or tax loss
• foreign residents carrying on an activity or business at, or through, an Australian permanent establishment, who use FC to work out their taxable income or tax loss.

You should not complete labels 8N and 8O if you are an Australian resident taxpayer using FC only to work out the attributable income of a controlled foreign company (CFC) or transferor trust.

Examples for labels 8N and 8O

The following are examples of correctly completed labels 8N and 8O. The exchange rates used are from 26 September 2003.

Label		Applicable functional currency
N O	.6695 USD	US Dollar
N O	77.18 JPY	Yen
N O	1.1385 NZD	New Zealand Dollar
N O	785.8 KRW	Won
N O	5679. IDR	Rupiah

As mentioned previously, if you choose to use FC, you should account for the value of any carry-forward losses using that FC.

The value of those tax losses and net capital losses carried forward to later income years should be reported in A$ at 'Losses information' – labels 13U and 13V – on the company tax return.

Calculation statement

The calculation statement on the company tax return shows you how to work out the amount of tax payable or refundable. It starts with the 'Taxable income' figure at label A. This figure should have been worked out earlier, using the applicable FC and then translated into A$.

Other figures in the calculation statement are either of the following:

• A$ amounts, such as pay as you go (PAYG) instalments raised
• amounts translated into A$ previously, such as any foreign income tax offset.

Currency codes for label 8O

These currency codes are from international standard ISO 4217 – Currency codes.

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

Q

R

S

T

U

V

W

X

Y

Z

•  

Currency type	Code
A
Afghan Afghani	AFN
Albanian Lek	ALL
Algerian Dinar	DZD
Angolan Kwanza	AOA
Argentine Peso	ARS
Armenian Dram	AMD
Aruban Guilder	AWG
Azerbaijani Manat	AZN
B
Bahamian Dollar	BSD
Bahraini Dinar	BHD
Bangladeshi Taka	BDT
Barbados Dollar	BBD
Belarusian Ruble	BYN
Belize Dollar	BZD
Bermudian Dollar	BMD
Bhutanese Ngultrum	BTN
Bolivian Boliviano	BOB
Bosnia & Herzegovina Convertible Marks	BAM
Botswanan Pula	BWP
Brazilian Real	BRL
British Pound	GBP
Brunei Dollar	BND
Bulgarian Lev	BGN
Burundi Franc	BIF
C
Cambodian Riel	KHR
Canadian Dollar	CAD
Cabo Verde Escudo	CVE
Cayman Islands Dollar	KYD
CFA Franc BCEAO *	XOF
CFA Franc BEAC **	XAF
CFP Franc	XPF
Chilean Peso	CLP
Chinese Yuan Renminbi	CNY
Colombian Peso	COP
Comorian Franc	KMF
Congolese Franc	CDF
Costa Rican Colon	CRC
Croatian Kuna	HRK
Cuban Peso	CUP
Czech Koruna	CZK
D
Danish Krone	DKK
Djibouti Franc	DJF
Dominican Peso	DOP
E
East Caribbean Dollar	XCD
Egyptian Pound	EGP
El Salvador Colon	SVC
Eritrean Nakfa	ERN
Ethiopian Birr	ETB
Euro	EUR
F
Falkland Islands Pound	FKP
Fijian Dollar	FJD
G
Gambian Dalasi	GMD
Georgian Lari	GEL
Ghanaian Cedi	GHS
Gibraltar Pound	GIP
Guatemalan Quetzal	GTQ
Guernsey Pound Sterling	GBP
Guinean Franc	GNF
Guyanese Dollar	GYD
H
Haitian Gourde	HTG
Honduran Lempira	HNL
Hong Kong Dollar	HKD
Hungarian Forint	HUF
I
Icelandic Krona	ISK
Indian Rupee	INR
Indonesian Rupiah	IDR
Iranian Rial	IRR
Iraqi Dinar	IQD
Isle of Man Pound Sterling	GBP
Israeli New Sheqel	ILS
J
Jamaican Dollar	JMD
Japanese Yen	JPY
Jersey Pound Sterling	GBP
Jordanian Dinar	JOD
K
Kazakhstani Tenge	KZT
Kenyan Shilling	KES
Kuwaiti Dinar	KWD
Kyrgystani Som	KGS
L
Laotian Kip	LAK
Latvia Euro	EUR
Lebanese Pound	LBP
Lesotho Loti	LSL
Liberian Dollar	LRD
Libyan Dinar	LYD
Lithuania Euro	EUR
Currency type	Code
M
Macanese Pataca	MOP
Denar	MKD
Malagasy Ariary	MGA
Malawian Kwacha	MWK
Malaysian Ringgit	MYR
Maldivian Rufiyaa	MVR
Mauritanian Ouguiya	MRU
Mauritius Rupee	MUR
Mexican Peso	MXN
Moldovan Leu	MDL
Mongolian Tugrik	MNT
Moroccan Dirham	MAD
Mozambique Metical	MZN
Myanmar Kyat	MMK
N
Namibia Dollar	NAD
Nepalese Rupee	NPR
Netherlands Antillean Guilder	ANG
New Zealand Dollar	NZD
Nicaraguan Cordoba Oro	NIO
Nigerian Naira	NGN
North Korean Won	KPW
Norwegian Krone	NOK
O
Omani Rial	OMR
Other	OTH
P
Pakistani Rupee	PKR
Panamanian Balboa	PAB
Papuan Kina	PGK
Paraguayan Guarani	PYG
Peruvian Nuevo Sol	PEN
Philippine Peso	PHP
Polish Zloty	PLN
Pound Sterling	GBP
Q
Qatari Rial	QAR
R
Romanian New Leu	RON
Russian Ruble	RUB
Rwandan Franc	RWF
S
Saint Helena Pound	SHP
Samoan Tala	WST
Sao Tome and Principe Dobra	STN
Saudi Riyal	SAR
Serbian Dinar	RSD
Seychelles Rupee	SCR
Sierra Leonean Leone	SLL
Singapore Dollar	SGD
Solomon Islands Dollar	SBD
Somali Shilling	SOS
South African Rand	ZAR
South Korean Won	KRW
South Sudanese Pound	SSP
Sri Lankan Rupee	LKR
Sudanese Pound	SDG
Surinam Dollar	SRD
Lilangeni	SZL
Swedish Krona	SEK
Swiss Franc	CHF
Syrian Pound	SYP
T
Taiwanese New Dollar	TWD
Tajikistani Somoni	TJS
Tanzanian Shilling	TZS
Thai Baht	THB
Tongan Pa'anga	TOP
Trinidad and Tobago Dollar	TTD
Tunisian Dinar	TND
Turkish Lira	TRY
Turkmenistan New Manat	TMT
Tuvalu Australian Dollar	AUD
U
UAE Dirham	AED
Ugandan Shilling	UGX
Ukranian Hryvnia	UAH
Uruguayan Peso	UYU
US Dollar	USD
Uzbekistan Sum	UZS
V
Vanuatuan Vatu	VUV
Venezuelan Bolivar Soberano	VES
Vietnamese Dong	VND
Y
Yemeni Rial	YER
Z
Zambian Kwacha	ZMW
Zimbabwe Dollar	ZWL

Information about functional currency rules, eligibility and the implications for tax accounting and reporting.