Edited version of private advice

Authorisation Number: 1051694131057

Date of advice: 4 June 2020

Ruling

Subject: Choosing a functional currency

Question 1

Can XYZ choose to use Country A Dollars as its functional currency, pursuant to section 960-60 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Will the Commissioner apply section 177D of the Income Tax Assessment Act 1936 in respect of XYZ choosing Country A Dollars as its functional currency?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

Year ending 30 June 20XX

Relevant facts and circumstances

All amounts described below are in Country A Dollars unless otherwise stated.

Mr X is a citizen of the Country A. Mr X moved to Australia.

Mrs X is a citizen of Australia and has a Country A Resident Card. Mr X became a resident of Australia for tax purposes.

Mr X is taxed as a Country A resident because of his Country A citizenship.

Mr X intends to remain resident of Australia for tax purposes pursuant to the definition of resident in subsection 6(1) of the Income Tax Assessment Act 1936 and the articles of the Convention between the Government of Australia and the Government of the Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1983] ATS 16, as amended from time to time.

Mr X will not renounce his Country A citizenship.

XYZ

A company, XYZ, was incorporated. XYZ is a resident of Australia for tax purposes. Mr X is the sole officeholder and member of XYZ.

Funds were advanced to XYZ were used to purchase a number of assets. Income derived from the assets held by XYZ will be used to acquire additional assets of the same type.

XYZ is an investment company. All its investments are in Country A and are denominated in Country A Dollars.

Mr X directed XYZ to prepare financial reports for all financial years, pursuant to section 293 of the Corporations Act 2001. On the same day, XYZ elected Country A Dollars as its functional currency.

XYZ made the functional currency election as a compliance cost saving measure and to avoid the loss of foreign tax credits claimed in Country A, arising from the translation of Country A Dollars amounts to and from AUD amounts. The functional currency election allows XYZ to keep its accounts in the same the currency in which all its assets are denominated.

The maintenance of XYZ 's accounts in Country A Dollars assists Mr X in complying with his tax obligations in Country A. Because he is a citizen of Country A, the tax laws of Country A operate in such a way that Mr X's worldwide income forms part of his assessable income regardless of his residency for tax purposes. The tax laws of Country A result in XYZ being treated as a fiscally transparent entity and the gains of XYZ form part of Mr X's assessable income in Country A.

No dividends have been declared by XYZ since its incorporation. Dividends will be declared by XYZ to Mr X if Mr X requires funds.

Reasons for decision

Question 1

Summary

XYZ may choose to use Country A Dollars as its functional currency, pursuant to section 960-60 of the ITAA 1997.

Detailed reasoning

Under item 1 in subsection 960-60(1) of the ITAA 1997, if

·         a taxpayer is 'an Australian resident who is required to prepare financial reports under section 292 of the Corporations Act 2001'; then

·         they may choose to use the 'applicable functional currency' to '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'.

On the facts of this case, XYZ will satisfy the requirements of item 1 because:

·         it is an 'Australian resident'; and

·         it is required to prepare financial reports under section 292 of the Corporations Act 2001 for the following reasons:

-        Mr X directed XYZ to prepare financial reports for all financial years, pursuant to section 293 of the Corporations Act 2001.

-        If a small proprietary company is required to prepare the financial report and directors' report under section 293, it will fall within the scope of subparagraph 292(2)(a) of the Corporations Act 2001. Therefore, XYZ is a taxpayer 'who is required to prepare financial reports under section 292 of the Corporations Act 2001'.

XYZ wishes to choose Country A Dollars to work out its taxable income or loss. Country A Dollars is the 'applicable functional currency' referred to in subsection 960-60(1) in this case, being the sole or predominant foreign currency in which XYZ will keep its accounts at the time it makes the choice: subsection 960-70(1).

As XYZ satisfies the requirements in item 1 of subsection 960-60(1), it may choose to use Country A Dollars, as its 'applicable functional currency', to work out its taxable income or tax loss.

Question 2

Summary

The Commissioner will not apply section 177D of the ITAA 1936 in respect of XYZ choosing USD as its functional currency.

Detailed reasoning

Subsection 177D(1) of the ITAA 1936 provides:

This Part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of:

(a)  enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or

(b)  enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme;

whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

Broadly, the three key requirements of subsection 177D(1) are:

·         a 'scheme', which is given wide definition in subsection 177A(1);

·         a 'tax benefit in connection with the scheme', as defined in section 177C together with section 177CB; and

·         the requisite purpose, the subject matter of section 177D.

'Scheme' is defined in subsection 177A(1) of the ITAA 1936 to mean:

(a)  any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b)  any scheme, plan, proposal, action, course of action or course of conduct.

In this case, the 'scheme' is the choice exercised by XYZ under section 960-60 of the ITAA 1997 to use Country A Dollars as its applicable functional currency.

Tax benefit

The operation of section 177D depends on the finding that a 'tax benefit' was obtained by a taxpayer in connection with the scheme.

Subsection 177C(1) specifies various kinds of tax benefit associated with a scheme, and they broadly refer to:

(a)  an amount not being included in the assessable income of the taxpayer of a year of income;

(b)  a deduction being allowable to the taxpayer in relation to a year of income;

(c)   a capital loss being incurred by the taxpayer during a year of income;

(d)  a loss carry back offset being allowable to the taxpayer in relation to a year of income;

(e)  a foreign income tax offset being allowable to the taxpayer;

(f)    an amount of withholding tax not being incurred by the taxpayer in a year of income.

For schemes entered into on or after 16 November 2012, section 177CB must be read in conjunction with section 177C. It clarifies that there are two postulates under which tax benefits under section 177C may arise:

·         the first comprises all of the events or circumstances that actually happened or existed other than those forming part of the scheme;

·         the second is a reasonable alternative to the scheme, having regard to the substance of the scheme and its effect for the taxpayer, but disregarding any potential tax costs.

The scheme in the present case comprises solely the exercise of the choice by XYZ under section 960-60 of the ITAA 1997 to use Country A Dollars as its applicable functional currency.

The exercise of this choice is not excluded from the operation of section 177C by the exceptions contemplated under subsection 177C(2), which confirms that a choice made pursuant to Subdivision 960-D of the ITAA 1997 may still be regarded as conferring a 'tax benefit' where the relevant conditions are satisfied.

On the basis of the facts of this case, the Commissioner will not apply section 177D of the ITAA 1936 in respect of XYZ choosing Country A Dollars as its functional currency.