Foreign Exchange: translation of exempt salary and wage income into Australian currency where the taxpayer has losses from Australian sources

Must an individual taxpayer who derives salary and wage income that is exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) translate this amount into Australian currency if they incurred losses from Australian sources?

Yes. An individual taxpayer who derives salary and wage income that is exempt under subsection 23AG(1) of the ITAA 1936 must translate this amount into Australian currency using Item 6 of subsection 960-50(6) of the Income Tax Assessment Act 1997 (ITAA 1997) if losses are incurred from Australian sources.

The taxpayer is an Australian resident who has been working in New Zealand for a New Zealand company for 12 months.

The taxpayer receives salary and wages income which is paid in New Zealand currency (NZD) into a bank account held in New Zealand.

On 1 September 2003 the taxpayer's employer deposits NZD 5,000 salary into the taxpayer's account. This income is exempt under subsection 23AG(1) of the ITAA 1936.

The taxpayer derives the New Zealand salary and wage income on a cash basis.

The taxpayer also incurs losses from Australian investments in the same income year.

While the taxpayers salary and wage income is exempt income for Australian tax purposes under subsection 23AG(1) of the ITAA 1936, that exempt income may still be taken into account in determining the taxpayers other Australian tax consequences.

Section 36-10 of the ITAA 1997 (contained in Division 36 of the ITAA 1997) provides that a tax loss is incurred in any income year, if a taxpayer's allowable deductions (other than tax losses of earlier income years) exceeds assessable income and net exempt income (worked out under section 36-20 of the ITAA 1997) for that year.

Here, because the taxpayer incurs a loss from an Australian sourced investment, the exempt income will be taken into account in working out any Australian tax loss available in that year under section 36-10 of the ITAA 1997

Section 960-50 of the ITAA 1997, which applies generally from 1 July 2003, requires that an amount in a foreign currency is to be translated into Australian currency for the purpose of assessing Australian tax.

The salary and wage income is an amount of ordinary income that is to be translated into Australian currency for Australian tax purposes under subsection 960-50(1) and paragraph 960-50(2)(a) of the ITAA 1997. As the taxpayer accounts for the income derived from employment on a cash basis it is derived at the time that it is received.

In accordance with Item 6 of the table at subsection 960-50(6) of the ITAA 1997 the value of the exempt salary and wage income will be translated at the exchange rate prevailing on the date that it is received.

Therefore, an individual taxpayer who derives salary and wage income that is exempt under subsection 23AG(1) of the ITAA 1936 must translate this amount into Australian currency at the exchange rate prevailing on the date that it is received (that is, 1 September 2003) under subsection 960-50(6) of the ITAA 1997. Note: This ATOID does not take into account regulations which in some circumstances give taxpayers a choice to use an average exchange rate when translating foreign currency amounts into Australian currency.