Organisations affected by Stages 3 and 4 of the Taxation of Financial Arrangements (TOFA) reforms, will be given until 30 June 2011 to comply with tax hedging documentation requirements relating to tax allocation of gains and losses, under a proposed amendment announced by the Assistant Treasurer today.
A second proposed amendment gives the Commissioner of Taxation the power to extend the time for taxpayers to notify the Commissioner about making a transitional election to apply the TOFA Stages 3 and 4 provisions to existing financial arrangements.
The transitional election gives taxpayers the choice of not having to comply with two sets of income tax rules for financial arrangements. That is, if they make a valid election, they will not have to apply the old rules for existing financial arrangements and the TOFA Stages 3 and 4 provisions for new financial arrangements.
It is expected that hundreds of organisations will be affected by the hedging amendment. While the number of organisations affected by the transitional election amendment is much smaller, the individual organisations are likely to have a much higher compliance burden without the amendment.
The amendments will help ensure these organisations to properly implement the TOFA reforms.
TOFA Stages 3 and 4 modernise the tax treatment of financial arrangements by introducing tax rules that better reflect the economic and commercial substance of a wide range of instruments, including bonds, loans, swaps, forwards and options.
The new framework includes elective hedging rules designed to minimise tax timing and character mismatches, thereby facilitating the efficient management of risk.
Other elections, including the election to rely on financial reports, create compliance cost savings by allowing eligible taxpayers to make use of particular aspects of accounting standards to determine their taxable income from financial arrangements.
Details of these amendments are contained in the attachment to this press release.29 November 2010
Attachment
extension of time for certain Tax hedging documentation requirements
The TOFA tax hedging rules have certain documentation requirements. Some of these requirements would be met by what is required under financial accounting standards for hedges.
However, there are additional documentation requirements for tax hedging purposes reflecting the need for certain and robust tax hedging rules. Also, there are circumstances in which hedge tax treatment is permissible even where financial accounting standards do not permit accounting hedge treatment.
The general rule is that the required record be made or in place at, or soon after, the time when the hedging financial arrangement is created, acquired or applied. There is, however, a specific provision under which regulations can be made to allow the record to be made or in place at some other time.
To make the transition into the tax hedging regime easier, it is proposed to extend the time by which certain aspects of this record is to be made or in place. In particular, the proposed regulations will provide that hedging documentation with respect to the recording of the basis of the tax allocation of the gain or loss of a new hedging financial arrangement be made or in place by 30 June 2011. If the general rule would allow this documentation to be made after this date, the general rule will apply.
extension of time to notify the making of the transitional election
Taxpayers may, in certain circumstances, elect that the TOFA Stages 3 & 4 provisions apply to their existing financial arrangements. This election and the notification of it must be made on or before the due date for the lodgement of the taxpayer's first tax return on or after the start of the income year in which TOFA first starts to apply to that taxpayer.
To ensure that taxpayers are not prevented from obtaining the intended compliance benefits of this transitional election by having inadvertently failed – by a short period – to notify the Commissioner of Taxation by the due date, it is proposed that the tax law be amended to allow some flexibility in relation to the notification date.
In particular, it is proposed that the Commissioner will be able to extend the time for the notification of the making of a transitional election to apply the TOFA Stages 3 & 4 provisions to existing financial arrangements in either of the following circumstances:
- The election is unable to be notified by the due date because of circumstances beyond the taxpayer's control, and they have taken reasonable steps to mitigate the effects of those circumstances.
- The election is not notified by the due date because of the taxpayer or their agent's honest mistake or inadvertent omission.
The maximum period that the Commissioner can extend the due date for notification will be 3 months.