On 4 December 2008 the Assistant Treasurer introduced into Parliament the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, containing the legislation for stages 3 and 4 of TOFA. The 2008 Bill replaces a Bill introduced in 2007, which lapsed upon the proroguing of Parliament for the 2007 Federal election.

The rules are intended to align the accounting and taxation treatments of complex financial transactions and are welcomed. Closer accounting and taxation rules should reduce compliance costs but may result in income being recognised earlier for tax purposes.

The main provisions are contained in the new Division 230 of the Income Tax Assessment Act, 1997. Amendments have been made to the original 2007 Bill to address the interaction with the consolidation rules and specific integrity measures. These were foreshadowed by the previous government and are included in the new Bill following consultation with relevant stakeholders over the last year.

Division 230 provides a comprehensive code for the taxing of financial arrangements, addressing both the calculation and timing of taxation events. The capital/revenue distinction is removed for most financial arrangements, so gains will be assessable and losses deductible. The rules aim to minimise mismatches with the timing or characterisation of financial arrangements.

Eligible taxpayers may elect to have financial arrangements taxed on a fair value or retranslation basis, or to rely on their financial reports. There is also an elective methodology that applies to hedges. By aligning accounting and taxation treatments, it is expected that compliance costs will be reduced. If taxpayers subject to the TOFA rules do not elect to apply one of the above methods, then the accrual and realisation rules set out in Division 230 will apply.

The TOFA rules will not apply to individuals or small business taxpayers unless a significant deferral of tax is involved.

The TOFA rules will apply to:

  • Approved deposit taking institutions, securitisation vehicles and entities that are required to register under the Financial Services (Collection of Data) Act 2001 if their aggregated annual turnover exceeds $20 million;
  • Superannuation funds and managed investment schemes with asset values exceeding $100 million; and
  • Other taxpayers with either turnover exceeding $300 million or more than $100 million in financial assets.

Entities that are not subject to the TOFA rules may elect to apply them.

The new rules will apply to income years commencing on or after 1 July 2010. However, taxpayers may elect to apply the rules one year earlier than that.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.