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Peter Dutton

Minister for Revenue and the Assistant Treasurer

27 January 2006 - 3 December 2007

Media Release of 03/01/2007


3 January 2007


The Minister for Revenue and Assistant Treasurer, Peter Dutton, today released revised exposure draft legislation and explanatory material containing proposals for the tax treatment of financial arrangements.  These proposals, which represent the final stages (Stages 3 and 4) of reforms of the taxation of financial arrangements, will introduce new tax timing rules — fair value, retranslation and hedging — and will modernise the accruals and realisation rules as they apply to financial arrangements.

‘Financial markets are rapidly changing and endlessly innovative in developing new financial products. The law needs to develop too, in order to keep up with the financial developments and provide certainty for the future’, Mr Dutton said.

Stage 1 of TOFA (debt/equity tax reform) was legislated in 2001 in Division 974 of the Income Tax Assessment Act 1997.  Stage 2 (foreign currency tax reform) was legislated in 2003 in Division 775 and Subdivisions 960-C and 960-D of the Income Tax Assessment Act 1997.

Mr Dutton said, ‘The revised exposure draft legislation has been developed following extensive industry consultation on the first exposure draft which was released in December 2005’. 

Mr Dutton said that, in line with industry submissions, the revised exposure draft incorporates a number of significant changes.  These include an amended approach to determining the scope of financial arrangements and additional hedging rules that will facilitate a high level of matching between the tax treatment of the gain or loss on a hedging arrangement and the tax treatment of the gain or loss on the underlying transaction.  Mr Dutton said that the additional hedging rules will have substantial benefits for industry in terms of improved risk management and lower business costs.

Mr Dutton added that hedging rules heavily rely on safeguards such as proper record keeping.  The record keeping requirements are generally consistent with what is required by Australian accounting standards for hedge treatment together with what is required to address the proposed extension beyond accounting hedge rules to matching of the tax status (for example, relating to revenue, capital, assessable or exempt) of the gain or loss.  The Government will monitor the implementation of the hedging rules to ensure that they are used as intended and will, if necessary, review their operation to ensure that they are not exploited.

The latest revised draft legislation also includes details of the proposed commencement date and transitional issues.

Mr Dutton said that he welcomed comments on all aspects of the revised exposure draft and explanatory material.  Mr Dutton said the Government is committed to achieving world‑class reform in this difficult area of taxation policy.

Mr Dutton indicated that the TOFA Stages 3 and 4 reforms will contain rules to address the tax treatment of synthetic financial arrangements.  The Treasury will also consider the need for additional integrity rules over coming months. 

The proposed synthetic rules and any additional integrity rules which may be required will be subject to consultation prior to the introduction into Parliament of a Bill containing the final proposals.

Mr Dutton said, ‘The Government believes that these substantial reforms to the taxation of financial arrangements will reduce uncertainties and distortions.  The reforms will lead to lower costs for financial activities conducted by business and result in improved competitiveness and greater efficiency in the general operation of Australia’s financial markets.’

The revised exposure draft legislation and the accompanying revised explanatory material can be found on the Treasury website at

A paper outlining necessary consequential amendments is also available on the website.  Draft legislation for these amendments will be made available during the consultation period.

Treasury officials will conduct further consultation with taxpayer and industry representatives prior to the development of final legislation.

Interested parties are invited to submit comments on the revised exposure draft legislation, explanatory material and the paper on consequential amendments by 28 February 2007.  Comments can be submitted by email to or to:

The Manager
Taxation of Financial Arrangements Unit
Business Tax Division
The Treasury
Langton Crescent
Parkes  ACT  2600

It is intended that all comments not marked ‘Confidential’ will be treated as public and placed on the Treasury’s website.  Therefore any submissions which are made on a confidential basis should be clearly marked as such.

Media Contact: 
Joanne Hutchinson 02 6277 7360 – 0404 822 421