ATO Interpretative Decision
ATO ID 2004/854
Income Tax
Translation of foreign currency denominated interest where bank account opened between 19 February 1986 and 1 July 2003FOI status: may be released
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This ATO ID does not take account of the effect of Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 that implements Stages 3 and 4 of the reforms to the taxation of financial arrangements (TOFA 3 and 4).
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
What exchange rate should be used to translate foreign currency denominated interest income credited after 1 July 2003 to an account opened before that time, where the taxpayer accounts on a cash basis?
Decision
Foreign currency denominated interest income credited after 1 July 2003 to an account opened before that time should be translated at the exchange rate prevailing at the time it is credited to the account, where the taxpayer accounts on a cash basis.
Facts
The taxpayer has held a foreign currency denominated bank account (foreign account) which pays interest since 1998.
The taxpayer accounts on a cash basis.
The taxpayer's applicable commencement date under section 775-155 of the Income Tax Assessment Act 1997 (ITAA 1997), is 1 July 2003.
Reasons for Decision
When interest is credited to the taxpayer's foreign account, the bank's obligation to pay or credit the taxpayer this amount is satisfied, and the taxpayer's corresponding right to receive (or be credited) this amount of foreign currency from the bank ceases.
Forex realisation event 2 will happen when the taxpayer's right to receive interest ceases, as it is a right to receive ordinary income (see subsections 775-45(1) and 775-45(2) of the ITAA 1997). However, as the taxpayer derives interest income at the same time it is credited to the foreign account (and their right to receive it ceases), there will be no currency exchange rate effect as defined in section 775-105 of the ITAA 1997. This means the taxpayer will not make a forex realisation gain or loss upon forex realisation event 2 happening when interest is credited to the foreign account.
This means that despite the taxpayer's right to receive interest arising under an eligible contract entered into before 1 July 2003 (see ATO ID 2004/855), subsection 775-165(2) of the ITAA 1997 will have no application. Accordingly, the taxpayer's right to receive interest on their foreign account is not a right covered by that subsection. This means that the translation rules in section 960-50 of the ITAA 1997 will apply despite the taxpayer's right to receive interest being a right that arises under an eligible contract entered into before 1 July 2003 (see paragraph 960-55(2)(c) of the ITAA 1997).
The interest amounts credited to the taxpayer's foreign account are amounts of ordinary income from the taxpayer's perspective.
Item 6 in the table in subsection 960-50(6) of the ITAA 1997 provides that an amount of ordinary income denominated in a foreign currency must be translated to Australian currency at the earlier of when it is received or derived. The taxpayer derives their interest income at the time it is credited into their foreign account.
Accordingly, the taxpayer must translate each amount of interest credited to the foreign account after 1 July 2003, into Australian currency at the exchange rate applicable at the time the account is credited.
Date of decision: 22 October 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
Division 775
subsection 775-45(1)
subsection 775-45(2)
section 775-105
section 775-155
subsection 775-165(2)
section 960-50
subsection 960-50(6)
paragraph 960-55(2)(c)
ATO ID 2004/855
Keywords
Banking, finance & securities
Foreign currency translation
Foreign exchange rates
ISSN: 1445-2782