[Kmymoney] A short howto on handling Australia's taxation/forex rules

[Jason Stubbs]

Hi all,

After using multiple categories to handle differences between received amounts 
and taxable amounts, I found that using multiple accounts is much easier. 
Thomas Baumgart asked me to write a short howto on it and so here it is. Feel 
free to do what you will with it. ;)

Regards,
Jason Stubbs
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A method of managing the ATO's forex general translation rule

DISCLAIMER: I'm not accredited in either accounting or taxation

There are rules regarding how tax-relevant amounts in foreign currency are
converted into Australian dollars. These rules mean that the amounts that flow
through your accounts are rarely the same as the reportable amount. This guide
aims to describe one way of dealing with this issue.

For further information on the translation rules see the following URL:
http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/34749.htm

As an example, I'll describe how to handle ordinary income of US$1000 that was
derived throughout September 2010 and payment received on 15th October 2010.

Looking at the ATO's list of rates for AUD/USD we find that:
September 2010 average rate is 0.9631
October 15th 2010 rate is 1.0189

This means that, even though the amount received would have been about
US$1000/1.0189 = AU$981.45, the taxable amount is $US1000/0.9631 = AU$1038.31.

One way to deal with this is to use a separate asset account for the source of
the income. Another would be to use a separate account for each currency of
foreign source income. The point is to have a separate account to the bank
account that actually receives the income.

For example, take the following accounts, categories and payees:

Accounts
 - Asset
   - Bank Account (AUD)
   - XYZ Company Receivables (USD)

Categories
 - Income
   - Foreign Source Income (AUD)

Payees
 - XYZ Company

Now to have $981.45 end up in Bank Account and $1038.81 in Foreign Source
Income, two transactions are used - each using a different exchange rate.

To record the Foreign Source Income amount, the first transaction will be:

Account: XYZ Company Receivables
Type: Deposit
From: XYZ Company
Category: Foriegn Source Income
Amount: $1000 (USD)

When entering the transaction, you will be asked to enter the amount in AUD or
the exchange rate, where you would enter the September 2010 average of 0.9631.
Foreign Source Income will now record the taxable amount. You might also want
to use the memo field to record what period the transaction is for so that it
is clear what rate was used for the transaction.

The second transaction is simply a transfer into Bank Account:

Account: XYZ Company Receivables
Type: Transfer
Transfer To: Bank Account
Amount: $1000 (USD)

Upon entering this transaction, you will be again asked for the rate at which
to convert it into AUD. This time you would want to enter the amount that
actually ended up in your bank account to ensure that there are no 1c errors.

Side-note: Both transactions should be the same date, unless you are using the
accruals accounting method with GST. If you are using the accruals method, the
date of the XYZ Company Receivables deposit should be the invoice date (as far
as my knowledge goes anyway).

Reports on Foriegn Source Income will now show correct figures for taxation
purposes and bank accounts will be correct too. The same principles can be
applied to other tax-relevant amounts such as non-capital purchases with
little or no modification.