In this article, you will learn about three different foreign cash tax treatments (methods) for foreign bank accounts that you can elect in Class.
Note: Class does not support the weighted average method due to the complexity involved in the calculation or foreign loan accounts (including credit card accounts).
Class no longer defaults to $250,000 Balance Election method for Foreign Cash Tax Treatment. Election of a method is a pre-requisite before creating a new foreign bank.
$250,000 Balance Election
When an election is made for a qualifying foreign currency denominated account with the A$250,000 balance method, taxpayers can disregard certain foreign realisation gains and losses for tax purposes when the balance is below a specified limit (limited balance test and buffering provision).
Class does not automatically switch methods or record forex realisation gains and losses when the account fails to satisfy the conditions of the $250,000 balance method. For this reason, forex realisation gains and losses need to be manually recorded for tax purposes.
For accounting purposes, First-In First-Out (FIFO) methodology is applied under the foreign exchange measures.
Please refer to the ATO’s website for further information regarding the tax treatment using the A$250,000 Balance Election.
Retranslation
When an election is made for a qualifying foreign currency denominated account with the retranslation method, gains and losses of the qualifying forex account will be brought to account during the relevant retranslation period. The retranslation method will be much simpler than FIFO, but the gains and losses will be accounted for tax purposes even when unrealised.
The formula below shows the calculation of forex gains and losses for tax purposes:
| Closing balance of the account for the relevant retranslation period | - | Opening balance of account for the relevant retranslation period | - | Total deposits made to account during the relevant retranslation period | + | Total withdrawals made from the account during the relevant 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 gain arises equal to the positive amount; if the retranslation amount is negative, then a forex loss arises equal to the negative amount.
For accounting purposes, First-In First-Out (FIFO) methodology is applied under the foreign exchange measures.
Please refer to the ATO’s website for further information regarding the tax treatment using the retranslation election.
First In First Out (FIFO) Parcel Matching
The FIFO method is the only method that does not need a formal election. In the context of the ordering rules and tax purposes, the FIFO method's forex realisation event happens to the first acquired amount of fungible currency right or obligation. 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.
For accounting purposes, FIFO methodology is maintained under the foreign exchange measures.
Please refer to the ATO’s website for further information regarding the tax treatment using FIFO method.
Switching Between Foreign Cash Tax Treatments
Entities can switch between different tax treatments (methods) for a foreign cash account. Class does not provide any suggestion for the tax treatment and outcome for switching between different tax treatments. To ensure the accuracy of the tax treatment and outcome this may involve manual processing of forex gains/losses.
Switching method takes effect prospectively from when the setting is changed. Please roll back parcel matches and Period Updates if you want the method to apply to parcels already matched.
What's Next?
Learn how to enter transactions for Foreign Bank Account