Amendments to currency conversion rules – Section YF 1
Summary of proposed amendment
The drafting of section YF 1 in the 2007 Act incorporated the effect of the decision of the Privy Council in Payne v The Deputy Federal Commissioner of Taxation  AC 497;  2 All ER 793. 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 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 practice was adopted to reduce compliance costs for taxpayers, given the Privy Council’s 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.
The amendment is to apply from the 2008–09 income year.
Under the 2004 Income Tax Act 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.
The common law approach adopted by the courts (Payne) requires conversion at the actual exchange rate applying at the date of the transaction, unless otherwise provided by statute. To reduce compliance costs for taxpayers, the Commissioner adopted an extra-statutory practice of permitting alternative rates or currency conversion methods to that stipulated in Payne.
The currency conversion rules from the 2004 Act have been rewritten into section YF 1 of the Income Tax Act 2007. However, the drafting of that section reflects the effect of the decision in Payne, and arguably prevents the Commissioner from continuing the extra-statutory practice of permitting alternative rates or currency conversion methods.
The amendment legislates for the previous practice of the Commissioner, and now allows the Commissioner to approve taxpayer-specific methods or rates, as well as general methods or rates.