Class offers three tax treatment options for foreign cash accounts. This article will detail these options.
Please note weighted average method is not supported in Class due to complexity involved in calculation.
Foreign bank account (loan / credit card account) is not supported in Class.
$250,000 Balance Exemption Election
Class applies this exemption by default but can be easily switched where the appropriate conditions have not been satisfied. Broadly, by making an election you can disregard certain foreign currency gains and losses for tax purposes on qualifying forex accounts with balances below the specified limit. A qualifying forex account is an account that is denominated in a foreign currency and either is a credit card account or an account held for the primary purpose of the facilitation transactions.
For accounting purposes, first-in, first-out (FIFO) methodology is applied in accordance with the foreign exchange measures.
Please refer to the ATO’s website for further information regarding the tax treatment using the $250,000 balance exemption election.
If an election has been made, the gains and losses from a qualifying forex account will be brought to account at the end of each financial year on a retranslation basis. This is a simpler method than FIFO but can bring to account gains or losses that would have otherwise not been realised. For accounting purposes, first-in, first-out (FIFO) methodology is applied in accordance with the foreign exchange measures.
Forex realisation gains and losses are determined by a retranslation amount, which is worked out using the following formula:
|Closing balance of the account for the retranslation period||-||Opening balance of account for the retranslation period||-||Total deposits made to account during the retranslation period||+||Total withdrawals made from the account during the retranslation period|
Please note that the deposits and withdrawals are translated into Australian currency at the exchange rate applicable at the time of the deposit/withdrawal.
If the retranslation amount is positive, then a forex realisation gain arises equal to the positive amount; if the retranslation amount is negative, then a forex realisation loss arises equal to the negative amount.
Please refer to the ATO’s website for further information regarding the tax treatment using the retranslation election.
In the context of the forex rules, applying the FIFO principle means assuming that the forex realisation event happens to the first acquired amount of fungible currency or right, or the first incurred obligation, first. To the extent that the proceeds of the event exceed the amount of that first acquired or first incurred currency, right or obligation, the event is taken to have happened to the amount acquired or incurred next in time, and so on. FIFO ordering is again maintained for accounting purposes.
Please refer to the ATO’s website for further information regarding the tax treatment using FIFO ordering.
Switching Between Tax Elections
According to the ATO, when you switch tax election for a foreign cash account from either FIFO to $250,000 Balance Exemption or FIFO to Retranslation, all unrealised gains should be realised on the first day of the new election period. As a result, there will be a recognition of realised taxable gain, as if an actual sale and purchase event occurred for the foreign cash account.
Switching back to FIFO will reset the cost base of all holding parcels to be equal to the exchange rate at that date, multiplied by the quantity of foreign currency held at date of transition.