Using foreign exchange rates

I suspect that when most of you are wanting to convert a client’s foreign currency amounts into New Zealand dollars (NZD), you simply jump on IR’s website and look-up the appropriate rate here. Since April 1st, IR has commenced obtaining these rates from the Reserve Bank of New Zealand.

While it is certainly convenient in my view to use what has been published by the Revenue for the purpose of your calculations (and unlikely IR will dispute the same), you can (unless the Act or Commissioner prescribes a currency conversion method, rate or source for a particular transaction or arrangement) obtain your foreign currency exchange rates from other sources.

In this regard, IR has published an exposure draft titled ‘Foreign Exchanges Rates’ with the reference PUB00401, which is a determination to approve the sources of rates that can be used to convert a foreign currency into NZD to determine a tax liability if the rates needed are not published by IR, or the rates published by IR are not used; and the use of mid-month, end of the month and rolling average rates.

If you use appropriate rates from either the IR link posted above or the foreign exchange rates published by a country’s central bank, then these rates will be considered acceptable for converting your foreign currency amounts to NZD. Depart from the use of either, however, then the risk exists that IR will not accept the rate you selected as correctly reflecting the NZD amount for your tax position – for example, where the rate selected is not considered to be appropriate given the nature of your transaction.

The draft determination also explains how you should source mid-month, end of month and rolling average rates from your selected source, and how to calculate a mid-rate of a currency where one is not provided – for example, instead you are given two rates for the relevant currency – a bid/buy rate and a offer/sell rate. Also explained is what to do if the source does not provide an NZD base rate (often a USD rate will be given however, so naturally you’d convert into USD and then convert into NZD).

Note that if you choose your own rate source, then you must also apply your source consistently (from year to year).

If you’d like to comment on PUB00401, please do so no later than October 11th. I think I’ll just stick with my trusty link.