10 May 2005

Extension of Tax-Timing Hedging Rules

The Australian Government has decided to extend the scope of previously announced tax-timing hedging rules to all taxpayers — in all industries — with audited financial accounts, the Minister for Revenue and Assistant Treasurer, Mal Brough, announced today.

The Government had announced plans in the 2002-03 Budget to reform the taxation of commodity hedging. That measure had been scheduled for inclusion in the Taxation of Financial Arrangements (TOFA) reforms.

Many entities use hedging as a way to manage risk in their businesses. Tax-timing hedging rules work to remove tax distortions. These arise in a hedging arrangement when the hedging instrument is taxed on a different timing basis to the underlying item, which is the subject of the hedge arrangement. 'Many industry and professional bodies have recently lodged submissions with the Treasury seeking the extension of the previously proposed tax-timing hedging rules beyond the gold and cotton sectors to include all industries,' Mr Brough said.

The case for the extension of the tax-timing hedging rules beyond the gold and cotton sectors has been strengthened by the adoption of new accounting standards which impose strict criteria as a pre-condition for hedging treatment in financial accounts. Because of these strict hedging criteria in the accounting standards, the additional tax compliance costs incurred by taxpayers who prepare accounts in accordance with the new standards will now be more manageable if tax-timing hedging rules are extended beyond gold and cotton sectors to business sectors more generally.

'The broadened, generally available, tax-timing hedging rules will be introduced as part of the Stage3 and 4 TOFA tax reforms,' Mr Brough said. These tax-timing hedging rules will remove uncertainties in the present tax system, enhance the potential efficiency of risk management and create opportunities to achieve lower costs.