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
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 × 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$30 to franking account balance. No translation takes place.
End of example
Example 5: application of translation rule to a monetary limit
Exact Limited (Exact) has made a valid choice to use US$ 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