After what has been an extremely protracted period of
consultation on proposed changes to the taxation of financial
arrangements (TOFA), the Tax Laws Amendment (Taxation of
Financial Arrangements) Bill 2008 received Royal Assent on 26
This Bill was introduced into Federal Parliament in December
last year and was passed by both the House of Representatives and
the Senate without amendment. The passage of this legislation
represents the final stage of the TOFA reforms.
Date of effect
The amendments contained in the Bill will apply to income years
commencing on or after 1 July 2010 unless a taxpayer elects to
apply the amendments to income years commencing on or after 1 July
Application to Financial Arrangements
The Bill introduces a new Division 230 into the Income Tax
Assessment Act 1997 (ITAA 97). The Bill itself, at some 170
pages in length with the Explanatory Memorandum of some 500 pages,
represents a substantial, and complex, addition to Australia's
body of tax legislation.
The main thrust of the legislation is to provide a comprehensive
framework for the taxation of financial arrangements and specify
the various methods by which gains and losses from financial
arrangements are to be brought to account for tax purposes.
The new Division 230 will apply to all "financial
arrangements" unless a specific exclusion applies. What
constitutes a "financial arrangement" for these purposes
is central to the operation of the new rules. It is expansively
defined to mean a "cash settleable" legal or equitable
right or obligation to receive or provide financial benefits or a
combination of such rights and obligations. Obligations and rights
are cash settleable where they may be settled by money or money
Debt-type arrangements such as loans, bonds, notes and
debentures are common examples of "financial
arrangements", as are risk shifting derivatives such as a
swaps, forwards and options. Also included in the definition of
"financial arrangement" are equity interests, foreign
currency, non-equity shares in companies and certain commodities
and offsetting commodity contracts.
Certain taxpayers are excluded from the operation of Division
superannuation entities and managed investment schemes with
assets under $100m
authorised deposit taking institutions, securitisation vehicles
or other financial sector entities with an aggregated turnover of
less than $20m
other entities with an aggregated turnover of less than $100m,
financial assets of less than $100m and assets of less than
The above exclusions will not apply to qualifying securities
which have a remaining life in excess of 12 months or where a
taxpayer elects for Division 230 to apply to its financial
There are also exclusions for various types of "financial
arrangements", for example:
certain short term arrangements involving property or services
that are settled within 12 months
assets to which Division 250 ITAA 97 applies (Division 250
deals with asset financing arrangements with tax preferred
interests in partnerships and trusts
life insurance policies
superannuation and pension income, and
proceeds from certain business sales including
Tax timing rules
Division 230 specifies various tax timing methods that can apply
to financial arrangements. There are four elective methods and
where these elective methods are not, or cannot, be adopted there
are two default methods specified.
The elective methods are:
the fair value method – which allocates gains and
losses to each income year in accordance with changes in the fair
the foreign exchange retranslation method – which
allocates gains and losses from changes in the value of foreign
currency to the income year in which the change occurs
the hedging method – which allocates gains and losses
from a hedging financial arrangement on a basis that corresponds
with the gains and losses from the relevant hedged item, and
financial reports method – which determines gains and
losses from financial arrangements by reference to relevant
accounting standards and effectively aligns the tax treatment to
the accounting treatment.
The default methods are:
compounding accruals method – which allocates gains
and losses to income years according to an implicit rate of return,
realisation method – which allocates gains and losses
to income years when they occur. The method applies to the extent
that the compounding accruals or the elective methods do not
There are also provisions requiring a balancing adjustment to be
calculated where a taxpayer ceases to have a financial arrangement
or transfers part of a financial arrangement.
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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