The electronic version of this document is the only authorised version. Printed copies may be out of date.

Read this guide to find out more about the functional currency rules, including:

• eligibility requirements
• the implications for tax accounting and tax reporting.

You can use this guide if you are:

• an Australian resident or a non-resident with a permanent establishment in Australia and both of the following apply
  • you keep your accounts solely or predominantly in a particular foreign currency
  • you wish to work out your taxable income (or tax loss) using that foreign currency – that is, using your ‘applicable functional currency’
• a non-resident disposing of indirect interests in real property in Australia and the sole or predominant currency in which you keep your accounts at the time of disposal is a foreign currency. The application of functional currency rules is mandatory in this situation.

This guide does not cover income from overseas permanent establishments of resident taxpayers.

The functional currency translation rules are an exception to the core foreign currency translation rules.

Under the core foreign currency translation rules, amounts in a foreign currency must be translated into Australian dollars (A$). There are also rules about when and at what exchange rate a translation is to take place for a given type of transaction.

Under the functional currency rules, you can use a currency other than A$ as the unit of account to work out your taxable income or tax loss. The core foreign currency translation rules continue to apply to amounts and transactions not covered by the functional currency rules.

If you are an eligible taxpayer who keeps your accounts solely or predominantly in a particular foreign currency, you can choose to use that foreign currency as the unit of account to work out your taxable income or tax loss.

If you have made such a choice (that is, an effective functional currency choice), you do not translate transactions you undertake in either a foreign currency or in your applicable functional currency into A$. Rather, you translate only your net amount of taxable income or tax loss calculated in your applicable functional currency into A$.

Once you choose to use a non-Australian dollar applicable functional currency, you must use that currency as the unit of account in your day-to-day tax accounting. After working out your taxable income or tax loss in the applicable functional currency, you must translate that amount into A$ to report on your tax return.

You must also carry out your instalment income calculations in your applicable functional currency and translate that amount into A$ for reporting purposes.

Only certain taxpayers can choose to work out their taxable income or tax loss using a non-Australian dollar applicable functional currency. This guide is relevant only if you are either of the following:

• a resident who must prepare financial reports under section 292 of the Corporations Act 2001
• a non-resident carrying on business through a permanent establishment in Australia.

Your applicable functional currency is the sole or predominant currency in which you keep your ‘accounts’ at the time you choose to use functional currency.

‘Accounts’ means ledgers, journals, statements of financial performance, profit and loss accounts, balance sheets and statements of financial position and includes statements, reports and notes attached to, or intended to be read, with such items.

The functional currency rules started to apply on 1 July 2003.

Ordinarily, if you choose to use a foreign currency as your applicable functional currency to work out your taxable income or tax loss, your choice will take effect after the end of the tax year during which you made it.

You must make your functional currency choice in writing.

In some circumstances, you can make your functional currency choice after the start of the tax year in which you intend it to take effect. This is referred to as a ‘backdated start up choice’. You must make a ‘backdated start up choice within 90 days of either of the following:

• the start of the tax year, if your entity existed at that time
• the day your entity came into existence, if it did not exist at the start of the tax year.

See details on:

You can withdraw your existing functional currency choice if the functional currency you are using ceases to be the sole or predominant currency in which you keep your ‘accounts’. Your functional currency choice withdrawal will take effect from the end of the tax year in which you withdraw it.

Your withdrawal:

• cannot be backdated
• must be made in writing
• should be available as part of the business’s tax records.

After your previous functional currency choice is withdrawn, you can make a choice to use the new sole or predominant currency in which you keep your accounts to work out your taxable income or tax loss. You must make this choice in writing. If you don’t make a new functional currency choice, the core foreign currency translation rules will apply, which means that all amounts must be translated into A$.

See details on:

When making your written choice to use a non-Australian dollar currency as your applicable functional currency, include all the following:

• the name and tax file number of the entity making the choice
• the use to which the functional currency is being put – for example, to work out taxable income or tax loss
• the date the choice takes effect
• the unit of account that the entity intends to use as its functional currency
• the signature of the entity’s public officer and the date the written functional currency choice was signed.

You do not need to send your written functional currency choice to us. However, it should be available as part of your business’ tax records.

All amounts included in working out your taxable income or tax loss must be in the applicable functional currency. This means you must translate all amounts you receive or pay in another currency, including A$ amounts, into the applicable functional currency.

The functional currency translation rules, including applicable exchange rates, follow the principles in the core foreign currency translation rules for translating foreign currency amounts to A$. This is covered in subsection 960-50(6) of Subdivision 960-C and also subsection 960-80(6) of Subdivision 960-D of the ITAA 1997.

However, the A$ is treated as a foreign currency while your applicable functional currency is not a foreign currency for the purposes of working out your taxable income or tax loss in the applicable functional currency. This is covered in subsection 960-80(1) of the ITAA 1997.

A foreign exchange (forex) realisation gain or loss may arise for certain amounts if there is a difference in prevailing exchange rates at the relevant times. For example, the exchange rate applicable at the time you incur an amount may be different from the exchange rate applicable when you pay it. In this situation, changes in the value of the A$ against the applicable functional currency can bring about a forex gain or loss – an example follows.

Special translation rules apply to amounts that are attributable to transactions or events that happened before your current functional currency choice took effect (‘pre-choice’ amounts). Pre-choice amounts that are relevant for working out your taxable income or tax loss for a year after your functional currency choice takes effect must be translated into your applicable functional currency in accordance with these special rules. This includes pre-choice amounts that are denominated in the same non-A$ currency as your applicable functional currency.

See details on:

If you haven’t previously made a functional currency choice, you should translate a relevant pre-choice amount as follows:

• firstly, into A$ at the exchange rate applicable at the time of the transaction or event
• secondly, into the applicable functional currency at the exchange rate at the time your functional currency choice took effect.

If you have previously made a choice to use a non-A$ currency as your applicable functional currency, you should translate a relevant pre-choice amount:

• firstly, into the previous applicable functional currency at the exchange rate applicable at the time of the transaction or event
• secondly, into the new applicable functional currency at the exchange rate at the time your new functional currency choice took effect.

The functional currency rules allow you to work out your taxable income or tax loss in your applicable functional currency. However, all tax reporting must still be expressed in A$. When reporting on your tax return or activity statement, work out the reported amounts in your applicable functional currency and then translate these amounts into A$.

For tax reporting purposes, when a translation is needed for label amounts (other than the taxable income amount), use the same translation rate as the taxable income translation rate. If you don’t have a taxable income amount in a given income year (that is, you have a tax loss), you should use the same rate you would have used to translate a taxable income amount into A$.

If:

• you are a foreign resident
• a CGT event happens in relation to a CGT asset that is an indirect Australian real property interest for you, and
• at the time of the CGT event, the sole or predominant currency in which you keep your accounts is a currency other than Australian currency

There are 2 steps to work out a capital gain or capital loss.

Step 1 translate an amount that is not in the applicable functional currency into the applicable functional currency.

Step 2 translate the amount of any capital gain or capital loss into Australian currency.

Different exchange rates apply to the translation of amounts that are elements in the calculation of capital gain or loss.

When completing a business activity statement (BAS):

1. calculate your instalment income in the applicable functional currency
2. translate your instalment income into Australian dollars at the appropriate rate
3. complete label T1 of the BAS accordingly.

The functional currency rules allow some taxpayers to choose to work out their taxable income or tax loss by using a non-A$ currency as their applicable functional currency (FC).

All amounts disclosed on the company tax return must be disclosed in A$.

When a label amount is accounted for in a non-A$ FC, that sum should be translated into A$ using the same functional currency translation rate (shown at label 8N Functional currency translation rate of the company tax return) used to translate the taxable income or tax loss figure.

The following amounts are always accounted for in A$, and not in the FC:

• Label 7 J Franking credits
• Label 7 C Australian franking credits from a New Zealand Company.

The following amounts do not need to be translated into A$ before completion of the return:

• Label 7 R Tax losses deducted
• Label 7 S Tax losses transferred in.

Tax losses are allowable deductions from taxable income. If you carry forward losses, you should account for and claim them in your FC. Report any losses used during the income year at label 7R by translating the value of the loss used into A$ at the FC translation rate.

As mentioned above, label 8N is where you show the exchange rate used to translate the FC taxable income figure (and many other figures on the company tax return) into A$.

At label 8N, show the translation rate the company used to translate the taxable income figure from the FC into A$. The translation rate is the amount the FC amount is divided by to get an equivalent amount of A$. That is, the number of non-A$ currency units that equal one A$ rounded to 4 significant figures – see Examples for labels 8N and 8O.

The calculation statement on the company tax return shows you how to work out the amount of tax payable or refundable. It starts with the ‘Taxable income’ figure at label A. This figure should have been worked out earlier, using the applicable FC and then translated into A$.

Other figures in the calculation statement are either of the following:

• A$ amounts, such as pay as you go (PAYG) instalments raised
• amounts translated into A$ previously, such as any foreign income tax offset.

These currency codes are from international standard ISO 4217 – Currency codes.

• Afghan Afghani – AFN
• Albanian Lek – ALL
• Algerian Dinar – DZD
• Angolan Kwanza – AOA
• Argentine Peso – ARS
• Armenian Dram – AMD
• Aruban Guilder – AWG
• Azerbaijani Manat – AZN

B

• Bahamian Dollar – BSD
• Bahraini Dinar – BHD
• Bangladeshi Taka – BDT
• Barbados Dollar – BBD
• Belarusian Ruble – BYN
• Belize Dollar – BZD
• Bermudian Dollar – BMD
• Bhutanese Ngultrum – BTN
• Bolivian Boliviano – BOB
• Bosnia & Herzegovina Convertible Marks – BAM
• Botswanan Pula – BWP
• Brazilian Real – BRL
• British Pound – GBP
• Brunei Dollar – BND
• Bulgarian Lev – BGN
• Burundi Franc – BIF

C

• Cambodian Riel – KHR
• Canadian Dollar – CAD
• Cabo Verde Escudo – CVE
• Cayman Islands Dollar – KYD
• CFA Franc BCEAO – XOF
• CFA Franc BEAC – XAF
• CFP Franc – XPF
• Chilean Peso – CLP
• Chinese Yuan Renminbi – CNY
• Colombian Peso – COP
• Comorian Franc – KMF
• Congolese Franc – CDF
• Costa Rican Colon – CRC
• Cuban Peso – CUP
• Czech Koruna – CZK

D

• Danish Krone – DKK
• Djibouti Franc – DJF
• Dominican Peso – DOP

E

• East Caribbean Dollar – XCD
• Egyptian Pound – EGP
• El Salvador Colon – SVC
• Eritrean Nakfa – ERN
• Ethiopian Birr – ETB
• Euro – EUR

F

• Falkland Islands Pound – FKP
• Fijian Dollar – FJD

• Gambian Dalasi – GMD
• Georgian Lari – GEL
• Ghanaian Cedi – GHS
• Gibraltar Pound – GIP
• Guatemalan Quetzal – GTQ
• Guernsey Pound Sterling – GBP
• Guinean Franc – GNF
• Guyanese Dollar – GYD

H

• Haitian Gourde – HTG
• Honduran Lempira – HNL
• Hong Kong Dollar – HKD
• Hungarian Forint – HUF

I

• Icelandic Krona – ISK
• Indian Rupee – INR
• Indonesian Rupiah – IDR
• Iranian Rial – IRR
• Iraqi Dinar – IQD
• Isle of Man Pound Sterling – GBP
• Israeli New Sheqel – ILS

J

• Jamaican Dollar – JMD
• Japanese Yen – JPY
• Jersey Pound Sterling – GBP
• Jordanian Dinar – JOD

K

• Kazakhstani Tenge – KZT
• Kenyan Shilling – KES
• Kuwaiti Dinar – KWD
• Kyrgystani Som – KGS

• Laotian Kip – LAK
• Latvia Euro – EUR
• Lebanese Pound – LBP
• Lesotho Loti – LSL
• Liberian Dollar – LRD
• Libyan Dinar – LYD
• Lithuania Euro – EUR

M

• Macanese Pataca – MOP
• Macedonia Denar – MKD
• Malagasy Ariary – MGA
• Malawian Kwacha – MWK
• Malaysian Ringgit – MYR
• Maldivian Rufiyaa – MVR
• Mauritanian Ouguiya – MRU
• Mauritius Rupee – MUR
• Mexican Peso – MXN
• Moldovan Leu – MDL
• Mongolian Tugrik – MNT
• Moroccan Dirham – MAD
• Mozambique Metical – MZN
• Myanmar Kyat – MMK

N

• Namibia Dollar – NAD
• Nepalese Rupee – NPR
• Netherlands Antillean Guilder – ANG
• New Zealand Dollar – NZD
• Nicaraguan Cordoba Oro – NIO
• Nigerian Naira – NGN
• North Korean Won – KPW
• Norwegian Krone – NOK

O

• Omani Rial – OMR
• Other – OTH

P

• Pakistani Rupee – PKR
• Panamanian Balboa – PAB
• Papuan Kina – PGK
• Paraguayan Guarani – PYG
• Peruvian Nuevo Sol – PEN
• Philippine Peso – PHP
• Polish Zloty – PLN
• Pound Sterling – GBP

• Qatari Rial – QAR

R

• Romanian New Leu – RON
• Russian Ruble – RUB
• Rwandan Franc – RWF

S

• Saint Helena Pound – SHP
• Samoan Tala – WST
• Sao Tome and Principe Dobra – STN
• Saudi Riyal – SAR
• Serbian Dinar – RSD
• Seychelles Rupee – SCR
• Sierra Leonean Leone – SLE
• Singapore Dollar – SGD
• Solomon Islands Dollar – SBD
• Somali Shilling – SOS
• South African Rand – ZAR
• South Korean Won – KRW
• South Sudanese Pound – SSP
• Sri Lankan Rupee – LKR
• Sudanese Pound – SDG
• Surinam Dollar – SRD
• Eswatini Lilangeni – SZL
• Swedish Krona – SEK
• Swiss Franc – CHF
• Syrian Pound – SYP

T

• Taiwanese New Dollar – TWD
• Tajikistani Somoni – TJS
• Tanzanian Shilling – TZS
• Thai Baht – THB
• Tongan Pa’anga – TOP
• Trinidad and Tobago Dollar – TTD
• Tunisian Dinar – TND
• Turkish Lira – TRY
• Turkmenistan New Manat – TMT
• Tuvalu Australian Dollar – AUD

U

• UAE Dirham – AED
• Ugandan Shilling – UGX
• Ukrainian Hryvnia – UAH
• Uruguayan Peso – UYU
• US Dollar – USD
• Uzbekistan Sum – UZS

• Vanuatuan Vatu – VUV
• Venezuelan Bolivar Soberano – VES
• Vietnamese Dong – VND

Y

• Yemeni Rial – YER

Z

• Zambian Kwacha – ZMW
• Zimbabwe Gold – ZWG