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
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
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
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
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.
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