• How to treat different amounts

    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

    The value of franking credits is not used in working out taxable income.

    Franking credits are a tax offset.

    To find out more, refer to subsection 207-20(2) of the ITAA 1997.

    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

    Example 3: foreign income tax offsets

    In this example, you choose US dollars (US$) as your applicable functional currency.

    Calculate your assessable income

     ¥115 = US$1.00 = A$2.00.

     ¥11,500 derived by you consisting of:

     ¥10,350 cash and  ¥1,150 tax withheld in Japan.

    To work out your taxable income, translate  ¥11,500 into the US$ FC as follows:

     ¥11,500 = US$100 added to assessable income.

    Taxable income in US$, including the amount you received in  ¥, is translated into A$ at the end of the tax year. If, between the time you derived the income and tax year end, the relative value of the US$-A$ changes, this change will be reflected in the amount of A$ assessable income you will eventually bring to account. In this example, if at year end US$1.00 = A$1.75, then you will report the A$ assessable income you received from the  ¥11,500 transaction as A$175.

    Calculate your FITO

    Translate the  ¥1,150 tax withheld amount into A$ as follows:

     ¥1,150 = A$20

    A$20 is used in calculating the amount of the foreign income tax offset, being the lesser of the amount of the foreign tax paid or the Australian tax payable on the foreign income.

    End of example

    Franking credits

    Example 4: franking credits

    US$1.00 = A$2.00

    XYZ Corporation (XYZ) is an Australian resident company, which chooses to use US$ as its applicable functional currency.

    XYZ derives a fully franked dividend as follows:

    A$70 cash

    A$30 gross-up amount (franking credit value).

    To find out more, refer to subsection 207-20(1) of the ITAA 1997.

    Assessable income calculation

    XYZ translates A$100 ($70 + $30) into US$ as follows:

    A$100 x 0.5 = US$50.

    At the end of the tax year, US$50 (and other taxable income values) are translated into A$ at regulation rate.

    Franking account balance

    Add A$30 to franking account balance. No translation takes place.

    End of example

    Application of translation rule to a monetary limit

    Example 5: application of translation rule to a monetary limit

    Exact Limited (Exact) has made a valid choice to use US$ as its applicable functional currency. In year 1, Exact purchases a car for US$40,000. At the time, the price is equivalent to A$72,700.

    If the car limit under section 40-230 of the ITAA 1997 was A$60,000 in year 1, Exact would apply that provision by converting the limit to US$33,012. The first element of the US$ cost of a car is therefore reduced to that amount.

    End of example
      Last modified: 01 Mar 2016QC 17626