What is the general translation rule for foreign currency trading?

Under the general translation rule, all tax-relevant amounts must be translated into Australian currency as the Australian Taxation Office (ATO) uses this as a common unit of measurement.

Quite obviously this will be quite easy to calculate if you simply use some Australian dollars to buy say US dollars and then after a certain period of time you convert the whole amount back to Australian dollars.

However the calculations can get quite messy when they are partial conversions (where you would generally use the first-in, first-out method) or where there is multi-currency transactions occurring such as buying US dollars and then converting to Euro and back to US dollars.  In the latter situation, you need to determine the actual translation into Australian dollars on the day that the transaction occurs.  Note that the general translation rule applies regardless of whether or not the foreign amounts are actually remitted back to Australia.

If you have numerous transactions during the year and it is not feasible to calculate the daily rate for each transaction then the ATO will allow you to translate the amounts into Australian currency using an exchange rate that is an average of the rates applicable during the relevant period that the transactions occurred.

The ATO publish daily, as well as average monthly and yearly exchange rates for approximately 30 countries on their website www.ato.gov.au.  If you cannot find a rate, the ATO will allow an appropriate exchange rate provided by a banking institution or another reliable external source.

This article first appeared in the Nov/Dec 2011 issue of YTE Magazine www.YTEmagazine.com. Copyright Your Media Edge Pty Ltd 2011.