ATO ID 2004/856: Deduction for fees incurred to obtain currency exchange rates
Date of decision: 22 October 2004
Year of income: Year ended 30 June 2004
Business line: Private Groups and High Wealth Individuals

Issue
If a taxpayer is charged a fee for the provision of a rate of exchange used to translate the value of their foreign income, is this fee deductible under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. Reasonable fees charged for the provision of a rate of exchange used to translate the value of a taxpayer's foreign income for tax purposes are deductible under section 25-5 of the ITAA 1997.

Facts
The taxpayer derives foreign income. The Tax Office does not provide information on currency exchange rates in the particular currency the taxpayer's foreign income is denominated in. The taxpayer obtains reasonable exchange rates from an independent external source that commonly quotes foreign exchange rates, for the purpose of translating their foreign income into Australian dollars in accordance with Subdivision 960-C of the ITAA 1997. The taxpayer is charged a small fee from the exchange rate provider for the provision of such rates.

Reasons for decision
Summary: Section 25-5 of the ITAA 1997 provides that certain tax-related expenses are deductible. Paragraphs 25-5(1)(a) and 25-5(1)(b) of the ITAA 1997 respectively provide that a taxpayer can deduct expenditures they incur to the extent that the expenditure is for managing tax affairs or for complying with an obligation imposed on them by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity. The expenditure may relate to a past, present or future year of income of the entity. Section 25-5 of the ITAA 1997 does not specify what constitutes managing tax affairs. However, it is considered that managing tax affairs includes activities required to prepare income tax returns (see ATO Interpretative Decision ATO ID 2003/955). Just as the cost of acquiring valuations required to comply with tax obligations or otherwise relating to the management of tax affairs will be deductible under section 25-5 of the ITAA 1997 (see Taxation Determinations TD 93/92; TD 2003/10 and TD 2003/11), so too will the cost of acquiring exchange rates required to translate foreign amounts into Australian dollars for taxation purposes. Therefore, any reasonable fees the taxpayer incurs to obtain exchange rates required to translate their foreign currency denominated income to Australian dollars in accordance with the requirements of Subdivision 960-C of the ITAA 1997 will be deductible under section 25-5 of the ITAA 1997, at the time such fees are incurred.

Legislative references: Income Tax Assessment Act 1997 Subdivision 960-C section 25-5 paragraph 25-5(1)(a) paragraph 25-5(1)(b)
Related public rulings and determinations: Taxation Determination TD 93/92 | Taxation Determination TD 2003/10 | Taxation Determination TD 2003/11
Related ATO interpretative decisions: ATO ID 2003/955
Subject references: Deductions & expenses Foreign currency translation Foreign exchange rates Tax related expenses