Translation of foreign currency denominated interest where bank account opened between 19 February 1986 and 1 July 2003

What exchange rate should be used to translate foreign currency denominated interest income credited after 1 July 2003 to an account opened before that time, where the taxpayer accounts on a cash basis?

Foreign currency denominated interest income credited after 1 July 2003 to an account opened before that time should be translated at the exchange rate prevailing at the time it is credited to the account, where the taxpayer accounts on a cash basis.

The taxpayer has held a foreign currency denominated bank account (foreign account) which pays interest since 1998.

The taxpayer accounts on a cash basis.

The taxpayer's applicable commencement date under section 775-155 of the Income Tax Assessment Act 1997 (ITAA 1997), is 1 July 2003.

When interest is credited to the taxpayer's foreign account, the bank's obligation to pay or credit the taxpayer this amount is satisfied, and the taxpayer's corresponding right to receive (or be credited) this amount of foreign currency from the bank ceases.

Forex realisation event 2 will happen when the taxpayer's right to receive interest ceases, as it is a right to receive ordinary income (see subsections 775-45(1) and 775-45(2) of the ITAA 1997). However, as the taxpayer derives interest income at the same time it is credited to the foreign account (and their right to receive it ceases), there will be no currency exchange rate effect as defined in section 775-105 of the ITAA 1997. This means the taxpayer will not make a forex realisation gain or loss upon forex realisation event 2 happening when interest is credited to the foreign account.

This means that despite the taxpayer's right to receive interest arising under an eligible contract entered into before 1 July 2003 (see ATO ID 2004/855), subsection 775-165(2) of the ITAA 1997 will have no application. Accordingly, the taxpayer's right to receive interest on their foreign account is not a right covered by that subsection. This means that the translation rules in section 960-50 of the ITAA 1997 will apply despite the taxpayer's right to receive interest being a right that arises under an eligible contract entered into before 1 July 2003 (see paragraph 960-55(2)(c) of the ITAA 1997).

The interest amounts credited to the taxpayer's foreign account are amounts of ordinary income from the taxpayer's perspective.

Item 6 in the table in subsection 960-50(6) of the ITAA 1997 provides that an amount of ordinary income denominated in a foreign currency must be translated to Australian currency at the earlier of when it is received or derived. The taxpayer derives their interest income at the time it is credited into their foreign account.

Accordingly, the taxpayer must translate each amount of interest credited to the foreign account after 1 July 2003, into Australian currency at the exchange rate applicable at the time the account is credited.