Edited version of your private ruling

Authorisation Number: 1012311520997

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Functional currency election

Question 1

Is the taxpayer eligible to choose US Dollars (USD) as its 'applicable functional currency' (AFC) for the purposes of working out its taxable income or tax loss on the basis that the taxpayer satisfies the requirement set out in item 1 of the table in subsection 960-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the taxpayer, assuming it is the head company of the taxpayer's income tax consolidated group (the Group) eligible to choose US Dollars (USD) as its 'applicable functional currency' (AFC) for the purposes of working out the taxable income or tax loss of the Group on the basis that the entities in the Group satisfies the requirement set out in item 1 of the table in subsection 960-60(1) of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

1 January 2013 - 31 December 2013.

The scheme commences on:

1 January 2013

Relevant facts and circumstances

The taxpayer, an Australian incorporated and Australian resident company for income tax purposes is required to prepare a financial report for each financial year under paragraph 292(1)(c) of the Corporations Act 2001 (Corporations Act).

The taxpayer also prepares a consolidated financial report which consolidates the result of its subsidiaries for reporting purposes in accordance with Accounting Standard AASB 127 (Consolidated and Separate Financial Statements).

The taxpayer is also required to lodge financial statements with the Australian Securities and Investment Commission.

Currently, the taxpayer has Australian dollars (AUD) as its Functional Currency (FC) under Australian Accounting Standard AASB 121 (The Effects of Changes in Foreign Exchange Rates) and calculates its taxable income in AUD terms.

The taxpayer has not yet made a choice under item 1 of the table in subsection 960-60(1) of the ITAA 1997 and as such does not have an Applicable Functional Currency (AFC). Each of the entities within the taxpayer reporting entity group also has AUD as their FC. Consistent with this, taxpayer's consolidated financial report is presented in AUD.

The taxpayer has wholly owned subsidiaries. Each subsidiary is an Australian incorporated and Australian resident company for income tax purposes.

The taxpayer and one of its wholly owned subsidiaries are maintaining an AUD and a foreign dollars ledger with anticipation that as of 1 January 2013, a foreign dollars functional currency will be adopted and foreign dollars will be the primary currency for day-to-day accounting purposes.

The taxpayer satisfies the requirements of a head company of a tax consolidated group.

The taxpayer envisages that more than 50% of the tax consolidatable group accounts could be kept in foreign dollars from 1 January 2013 with the remainder being kept in AUD.

Reasons for decision

Question 1

Is the taxpayer eligible to choose foreign dollars as its 'applicable functional currency' (AFC) for the purposes of working out its taxable income or tax loss on the basis that the taxpayer satisfies the requirement set out in item 1 of the table in subsection 960-60(1) of the Income Tax Assessment Act 1997 (TAA 1997)?

Answer

Yes.

Election of functional currency

Subdivision 960-D of the ITAA 1997 allows certain entities or parts of entities that keep their accounts solely or predominantly in a foreign currency to choose that foreign currency as their applicable functional currency (AFC) to calculate their annual net income which is then translated into Australian dollars for income tax purposes.

Broadly, an entity's AFC is the sole or predominant currency in which it conducts its activities or business and keeps its accounts.

A choice to use a functional currency can only be made by following entities:

· an Australian resident required to prepare financial reports under section 292 of the Corporations Act;

· an Australian resident carrying on a business through an overseas permanent establishment (PE);

· a foreign resident carrying on a business through an Australian PE;

· an offshore banking unit;

· an attributable taxpayer of a controlled foreign company (CFC); and

· a transferor trusts.

Section 960-60 of the ITAA 1997 sets out in the table in items 1 to 5 details of the entities that can choose to use a functional currency, the use that may be made of the functional currency and time when the choice takes effect.

Item 1 of the table in subsection 960-60(1) of the ITAA 1997 states as follows:

Choosing to use a functional currency
Item	If you are:	you may choose to use the * applicable functional currency to...	with effect from the start of...
1	an Australian resident who is required to prepare financial reports under section 292 of the Corporations Act 2001	work out so much of your taxable income or tax loss as is not subject to a choice made by you under any of the other items of this table;	(a) if the choice you make under this item is a backdated start up choice (see section 960-65) - the income year in which you make the choice; or (b) in any other case - the income year following the one in which you make the choice."

*denotes a term defined in section 995-1 of the ITAA 1997

As stated in its application for private ruling, the taxpayer is an Australian resident for Australian income tax purposes and required to prepare financial reports under section 292 of the Corporations Act.

The taxpayer has also advised that it has not made a choice under any of the other items of the table in subsection 960-60(1) of the ITAA 1997.

Accordingly, under subsection 960-60(1) of the ITAA 1997, the taxpayer can make the choice to use foreign dollars as its AFC to work out so much of its taxable income or tax loss as is not subject to a choice made by it under any of the other items of the table.

How is a choice made?

The choice must be made in writing as stated in subsection 960-60(2) of the ITAA 1997 and continues until a withdrawal takes effect, or in the case of a resident taxpayer who is required to prepare financial reports under section 292 of the Corporations Act, until the first year after that requirement ceases (subsections 960-60(3) and (4) of the ITAA 1997).

What is the AFC

The AFC will depend on the factual circumstances surrounding the entity's operations.

The AFC in relation to a choice made under item 1 of the table in subsection 960-60(1) of the ITAA 1997 is defined in subsection 960-70(1) as follows:

Australian resident required to prepare financial reports under section 292 of the Corporations Act 2001

960-70(1)

If you make a choice under item 1 of the table in subsection 960-60(1) with effect from the start of a particular income year, your applicable functional currency for:

(a) that income year; and

(b) each later income year for which the choice is in effect;

is the sole or predominant *foreign currency in which you kept your accounts at the time when you made the choice.

* denotes a term defined in section 995-1 of the ITAA 1997

Accounts

Subsection 960-70(4) of the ITAA 1997 states for the purposes of this section 'accounts' means:

(a) ledgers; and

(b) journals; and

(c) statements of financial performance; and

(d) profit and loss accounts; and

(e) balance-sheets; and

(f) statements of financial position

and includes statements, reports and notes attached to, or intended to be read with, any of the foregoing.

Sole or predominant

The Explanatory Memorandum to the New Business Tax System (Taxation of Financial Arrangements) Bill (No 1) 2003 (the EM) states:

3.54…Broadly an entity's applicable functional currency is the sole or predominant currency in which its accounts are kept…..This aligns the commercial rationale for accounting in a foreign currency with the use of that currency for income tax purposes….

3.55 For Australian residents required to prepare financial reports under section 292 of the Corporations Act 2001, the applicable functional currency for the income year and each later year for which the choice is in effect, is the sole or predominant foreign currency in which the books are kept…..

However, the term sole or predominant currency is not defined. TD 2006/4 states at paragraph 10:

The test of whether or not a particular foreign currency is the predominant one in which an entity keeps its 'accounts' (as defined), is a quantitative one, as it involves an examination of those 'accounts' in terms of the unit of measurement used (see, for example, FC of T v. FH Faulding & Co Ltd (1950) 83 CLR 594).

The taxpayer has requested us to assume that it will use foreign dollars as the currency for day to day accounting and management reporting purposes from 1 January 2013. Specifically, the taxpayer and subsidiaries would therefore maintain their accounts in foreign dollars effective from 1 January 2013 as outlined in the facts provided:

For an Australian resident making a choice under item 1 of the table in subsection 960-60(1) of the ITAA 1997, the AFC is defined in subsection 960-70(1) to be the sole or predominant foreign currency in which they keep their 'accounts' at the time they made the choice.

Therefore, based on the facts and assumptions stated in the application, the taxpayer is eligible to choose under item 1 of the table in subsection 960-60(1) of the ITAA 1997, foreign dollars as its AFC as defined in subsection 960-70(1) to be the sole or predominant foreign currency in which they keep their 'accounts' from 1 January 2013 being the time they make the choice.

Question 2

Is the taxpayer, assuming it is the head company of the tax consolidated group, eligible to choose foreign dollars as its 'applicable functional currency' (AFC) for the purposes of working out the taxable income or tax loss of the tax consolidated group, on the basis that the entities in the tax consolidated group satisfies the requirement set out in item 1 of the table in subsection 960-60(1) of the ITAA 1997?

Answer

Yes

The taxpayer has requested, for the purposes of this ruling question, the Commissioner to assume that it makes an election to form an income tax consolidated group from 1 January 2012, of which the taxpayer is the head company and as the head entity we are to assume it wishes to adopt USD as its AFC from January 2013.

There are various Taxation Determinations and ATO Interpretative Decisions issued in relation to consolidated tax groups.

Taxation Determination TD 2006/7 states that the head company can make the choice to use the AFC as defined in section 960-70 of the ITAA 1997, under item 1 of the table in subsection 960-60(1).

Taxation Determination TD 2007/24 states:

5. An Australian resident head company can make the choice to use the 'applicable functional currency' under item 1 of the table in subsection 960-60(1) of the ITAA 1997. However, such a choice by a head company will be effective only if there is a sole or predominant foreign currency (that is, other than Australian currency) in which the head company keeps its 'accounts', at the time it makes the choice.

Section 715-660 provides that when an entity joins a tax consolidated group, certain choices that entity has previously made are not inherited by the head company under the entry history rule; nor is the lack of a choice inherited. Hence, if the head company has not already made a choice, it may be entitled to make a choice.

The provisions listed in the table in subsection 715-660(1) as choice provisions include:

· Item 3: subsection 960-60(1) table item 1 (choosing to use an applicable functional currency)

Subsection 715-660(2) states the main objects of this section are:

(a) to override section 701-5 (Entry history rule) in relation to a choice (however described) by the entity under the choice provision or the absence of such a choice; and

(b) to extend, in some cases, the time for the *head company of the *consolidated group to make a choice (however described) under the choice provision after the joining time; and

(c) to modify, in some cases, the time at which such a choice by the head company starts to have effect.

* denotes a term defined in section 995-1 of the ITAA 1997.

Subsection 715-660(3) states that for the head company core purposes set out in section 701-1 (Single entity rule), ignore a choice (however described) made by the entity under the choice provision or the absence of such a choice.

Taxation Determination TD 2007/24 provides that:

1. …..For the purposes of item 1 of subsection 960-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997), the 'applicable functional currency' for the head company of a consolidated group is determined by looking at the 'accounts' of all the members of the consolidated group - and not just at the 'accounts' of the head company.

2. Whether there is such a currency under this view will depend on whether there is one particular foreign currency that is the currency predominantly used for the basic record keeping of the consolidated group.

…………………..

6. The single entity rule in section 701-1 provides that if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for 'head company core purposes and 'entity core purposes' to be part of the head company, rather than separate entities for that period. The intended operation of the single entity rule is to apply the income tax laws for these purposes to a consolidated group, as if it was a single entity being the head company.

7. Calculation of the head company's liability for income tax, where this involves an application of item 1 of subsection 960-60(1), will come within the meaning of 'head company core purposes' for the purposes of section 701-1. The single entity rule in this context, will therefore affect the meaning of 'applicable functional currency' in subsection 960-70(1).

8. Accordingly, the term 'you' in subsection 960(1) refers, in such a case, to the head company of the consolidated group, including as parts of that entity all of the subsidiary members for the relevant period. The term 'your accounts' in the subsection correspondingly refers to the 'accounts' of the head company and all of the subsidiary members for this period. Note that only the 'accounts' of entities within a group consolidated for tax purposes are considered. Thus, in determining whether there is a predominant foreign currency for a consolidated group, no reliance is placed upon any consolidated group 'accounts' that do not related solely to the tax consolidated group.

The taxpayer has asked us to assume that it will use foreign dollars as the currency for day to day accounting and management reporting purposes from 1 January 2013.

As discussed in the response to Question 1 above, based on the facts and assumptions stated in the application, the taxpayer is eligible to choose under item 1 of the table in subsection 960-60(1) of the ITAA 1997, USD as its AFC as defined in subsection 960-70(1) to be the sole or predominant foreign currency in which they keep their 'accounts' from 1 January 2013 being the time they make the choice.

Following from that discussion, based on the assumption that the taxpayer forms a tax consolidated group with it as the head company from 1 January 2012, the taxpayer as the head company of the tax consolidated group is eligible to make the choice effective from 1 January 2013, to use foreign dollars as its AFC.

For an Australian resident making a choice under item 1 of the table in subsection 960-60(1) of the ITAA 1997, the AFC is defined in subsection 960-70(1) to be the sole or predominant foreign currency in which they keep their 'accounts' at the time they made the choice.

Relevant legislative provisions

Income Tax Administration Act 1997, Subdivision 960-D

Income Tax Administration Act 1997, section 960-60

Income Tax Administration Act 1997, subsection 960-60(1)

Income Tax Administration Act 1997, subsection 960-60(2)

Income Tax Administration Act 1997, subsection 960-60(3)

Income Tax Administration Act 1997, subsection 960-60(4)

Income Tax Administration Act 1997, section 960-65

Income Tax Administration Act 1997, section 960-70

Income Tax Administration Act 1997, subsection 960-70(1)

Income Tax Administration Act 1997, subsection 960-70(4)

Income Tax Administration Act 1997, section 701-1

Income Tax Administration Act 1997, section 701-5

Income Tax Administration Act 1997, section 715-660

Income Tax Administration Act 1997, subsection 715-660(1)

Income Tax Administration Act 1997, subsection 715-660(3)

Explanatory Memorandum to the New Business Tax System (Taxation of Financial Arrangements) Bill (no 1) 2003

Corporations Act 2001, section 292

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).