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Mal Brough

Minister for Revenue and Assistant Treasurer

18 July 2004 - 26 January 2006

Media Release of 05/08/2004

No.002

5 August 2004

TAXATION OF FINANCIAL ARRANGEMENTS: EASING COMPLIANCE COSTS

The Government has moved to give businesses more time to prepare for reforms to the taxation of financial arrangements (TOFA) and ease compliance costs, following a range of measures announced today by Minister for Revenue and Assistant Treasurer, Mal Brough.

"The changes will broaden the compliance cost saving measures in the foreign currency rules and will give business further opportunities to work with the Government to refine the details of remaining TOFA reforms." Mr Brough said.

Specifically, the Government will:

  • amend the foreign currency provisions of the income tax law to extend the scope of a number of compliance cost saving measures in the law, and to make technical amendments to ensure that the provisions operate as intended;
  • make regulations to allow for the use of rates of exchange other than those rates prescribed in the foreign currency provisions of the law;
  • amend the debt/equity provisions to extend, until 1 July 2005, the existing transitional period applying to the debt/equity rules for all Upper Tier 2 instruments issued by Authorised Deposit-Taking Institutions (ADIs) that are banks or non-mutual building societies, and to make a number of technical amendments; and
  • delay the commencement of the remaining stages of TOFA reforms.

"The development of the TOFA rules have benefited greatly from extensive consultation with industry," Mr Brough said.

"The changes I am announcing today further demonstrate our preparedness to listen and respond to the views of the business community through open and constructive engagement.

Further details regarding these measures can be found in the attachment to this release and also on the Department of the Treasury's web site at www.treasury.gov.au.

Media Contact: Carlie Hogan - (02) 6277 7360


ATTACHMENT

CHANGES TO THE FOREIGN CURRENCY RULES

"The development of the foreign currency provisions benefited from extensive industry consultation. However, since their introduction a number of issues concerning their operation have been raised by industry and professional bodies," Mr Brough said.

"The amendments will address many of the concerns by extending the scope of compliance cost saving measures in the provisions and ensuring that the provisions operate as intended."

The amendments, which will have effect from 1 July 2003, will be developed in consultation with interested parties. The Government will also consider making further amendments to the foreign currency provisions, in response to concerns raised by taxpayers. These issues will be subject to further community consultation.

REGULATIONS FOR THE TAXATION OF FOREIGN CURRENCY TRANSACTIONS

Following consultation with industry and professional bodies, regulations will be made to allow for the use of weighted average cost for amounts of foreign currency and fungible rights to receive or obligations to pay foreign currency (for example bank accounts). Regulations will also allow for the use of rates of exchange (including average rates) other than those currently prescribed in the foreign currency provisions.

Mr Brough said that "the regulations will provide potential compliance cost savings as they will allow many taxpayers to use the same exchange rates for income tax purposes as they do for their financial accounts.

"Also, for many taxpayers the regulations will mean that they will be able to continue to use average rates of exchange previously accepted by the Australian Taxation Office under Income Tax Ruling IT2498."

The final form of the regulations will be developed in consultation with interested parties.

The regulations will have effect from 1 July 2003.

AMENDMENTS TO THE INCOME TAX DEBT/EQUITY RULES

The proposed amendments to the debt/equity rules are designed to respond to issues raised by taxpayers concerning the implementation of these provisions. The amendments will ensure that the provisions operate as intended.

Also, banks and non-mutual building societies (which are ADIs) will have more time to prepare for the application of the new debt/equity rules to certain Upper Tier 2 capital instruments.

"The former Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, announced on 4 March 2003 that a regulation would be developed in consultation with key stakeholders to ensure that certain Upper Tier 2 capital instruments issued by ADIs that are banks would be treated as debt for taxation purposes," Mr Brough said.

"Consultations on this regulation have confirmed that the regulation should also apply to non-mutual building societies which are ADIs."

Mr Brough said that "to allow more time to take into account further issues relevant to the finalisation of the regulation, the existing transitional period applying to the debt/equity rules will be extended until 1 July 2005 for all Upper Tier 2 instruments issued by ADIs that are banks or non-mutual building societies."

The existing transitional rules will apply to instruments which have been issued before 1 July 2001 and amended after 4 March 2003 but before the regulation is gazetted, provided that the instruments continue to be Upper Tier 2 instruments."

CHANGES TO THE TIMING OF THE REMAINING STAGES OF TOFA

The remaining stages of the reforms to the taxation of financial arrangements contain tax timing rules, including commodity hedging, accruals/realisation, market value and retranslation rules. An important issue impacting on the development of these rules has been the release in December 2003 of the Australian version of the international accounting standard which for the first time provides Australian guidance in the form of an accounting standard for the recognition and measurement of gains and losses from financial instruments.

Appropriate coordination and alignment between the implementation of the remaining stages of TOFA and the pending accounting standard – AASB 139 Financial Instruments: Recognition and Measurement – has the potential to provide substantial compliance cost and administrative cost benefits.

The accounting standard is scheduled to become effective from 1 January 2005 and it would be undesirable for the remaining stages of TOFA to commence ahead of that time. Therefore, the commencement of the final stages of the TOFA reforms will be deferred from 1 July 2004 and will not commence prior to 1 January 2005.

Further details regarding these measures can be found on the Department of the Treasury's web site at www.treasury.gov.au.