4 December 2008

Government Introduces Major Reform of Taxation of Financial Arrangements

The Assistant Treasurer Chris Bowen MP today announced the introduction of the Taxation of Financial Arrangements (TOFA) Stages 3 and 4 measures.

This will bring to a conclusion a process that was first announced in the 1992 Budget and which was confirmed as important by the Ralph Review of Taxation in 1999.

'Since the 2007 TOFA Stages 3 and 4 Bill lapsed following the calling of the 2007 Federal election, the legislation has undergone a number of amendments, including the addition of consolidation interaction rules and changes to the accruals rules to better reflect commercial practices,' Minister Bowen said.

'There has been substantial consultation on this Bill over the last 12 months.

'The Bill also includes integrity rules to address value shifting and non-arm's length dealings in relation to financial arrangements.'

TOFA Stages 3 and 4 provides a comprehensive framework for taxing financial arrangements. The measures contain rules that cover tax timing treatments for financial arrangements, including elective tax timing and character hedging rules that are designed to minimise tax timing and character mismatches. The rules permit eligible taxpayers to elect to have financial arrangements taxed on a fair value or retranslation basis, or to rely on their financial reports for taxation purposes. These elections create compliance cost savings by more closely aligning tax treatment with accounting standards.

Taxpayers to which the measures apply and which do not elect to use these methods will be required to apply the TOFA Stages 3 and 4 accruals and realisation rules.

The TOFA Stages 3 and 4 measures have been subject to an extensive consultation process and represent a world class set of tax rules for financial arrangements.

Minister Bowen thanked taxpayers, industry and professional associations and tax advisors for their participation in the consultation process.

'The input from stakeholders has greatly assisted in the development of this significant reform and the resolution of many complex issues during the legislative design process,' Minister Bowen said.

The measures will facilitate investment, financing, price making and risk management decision making by reducing tax distortions and anomalies.

The TOFA rules:

  • will not be applied on a mandatory basis to individual and small business taxpayers, except where significant deferral of tax is involved;
  • 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 is $20 million or more.

Superannuation funds and managed investment schemes will apply the rules if the value of their assets is $100 million or more. Other taxpayers will apply the rules if their turnover is $100 million or more, if the value of their assets is $300 million or more, or if the value of their financial assets is $100 million or more. Taxpayers who are not required to apply the TOFA rules may elect to apply the rules.

The TOFA Stages 3 and 4 measures will apply for income years commencing on or after 1 July 2010. However, taxpayers may elect to have the measures apply for income years commencing on or after 1 July 2009.

Minister Bowen indicated that the Government intends to monitor the implementation of this reform of Australia's financial taxation system and will consider the need for any refinements, particularly given the complex nature of many types of arrangements that the measures address.

In balancing the aims of facilitating financial decision making and minimising tax deferral and arbitrage, Minister Bowen added, the monitoring would include consideration of the need for additional integrity measures to address issues such as synthetic arrangements.