Currency conversion rules

The amendment to section YF 1 codifies the Commissioner's practice of permitting alternative currency conversion methods and alternative rates to the actual exchange rates at the time a transaction occurs. This administrative practice permitted alternative rates or currency conversion methods to that stipulated in the Privy Council's decision in Payne v The Deputy Federal Commissioner of Taxation [1936] AC 497; [1936] 2 All ER 793.

This practice was adopted to reduce compliance costs for taxpayers, given the decision in Payne, that currency conversions should be made at the actual exchange rate at the time of the transaction, unless otherwise provided by statute.

Under the Income Tax Act 2004 and earlier legislation, some provisions of the Act had explicit currency conversion rules (in particular the controlled foreign company and foreign investment fund rules). However, apart from those specific rules, the Act was silent on methods of conversion.

When rewriting the currency conversion rules into the 2007 Act, section YF 1 incorporated the effect of the decision of the Privy Council in Payne.

The effect of that decision is that, in calculating taxable income, amounts derived in a foreign currency should be converted at the rate of exchange applying at the time of the transaction, unless the legislation otherwise provided.

The effect of section YF 1 of the 2007 Act, as originally enacted arguably prevented the Commissioner from continuing the extra-statutory practice of permitting alternative rates or currency conversion methods.

The amendment to section YF 1 and the insertion of section YF 2 legislate for the administrative practice of the Commissioner. Together these two provisions permit the Commissioner to approve taxpayer-specific methods or rates, as well as general methods or rates.