20 September 2007

Taxation of Financial Arrangements (TOFA)

The Minister for Revenue and Assistant Treasurer, Peter Dutton, today introduced a Bill into Parliament dealing with the tax treatment of financial arrangements.  This Bill, which represents the final stages (stages 3 and 4) of reforms to the taxation of financial arrangements (TOFA), will modernise the accruals and realisation rules as they apply to financial arrangements. The Bill will also introduce four new elective regimes which will improve efficiency and reduce compliance costs of Australian businesses.

The earlier stages of TOFA included reform of the debt/equity borderline and reform to the tax laws dealing with foreign currency gains and losses.

Mr Dutton was pleased to announce the introduction of the Bill, saying “The Government believes that these substantial reforms to the taxation of financial arrangements will reduce uncertainties and distortions. The reforms should lead to lower compliance 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 TOFA stages 3 and 4 legislation has been developed following extensive consultation, including the development and public release of two exposure drafts, with industry and professional bodies over a number of years. I thank all stakeholders for their contributions to the process,” Mr Dutton said.

The Bill contains rules that cover tax-timing treatments for financial arrangements and character hedging rules that are designed to minimise tax-timing and character mismatches. 

“Firms may have hedging arrangements designed to insulate them from risks that are made ineffective by current tax arrangements.  This measure addresses the problem for a large range of instruments by allowing the hedging instrument to have the same tax treatment as the underlying item being hedged.  Business will now be better placed to reduce post-tax risks,” Mr Dutton said.

Eligible taxpayers may also elect to have financial arrangements taxed on a fair value or retranslation basis, or elect to rely on their financial reports for taxation purposes.  These measures will reduce compliance costs by allowing a closer alignment between financial accounting and tax. Taxpayers to which the Bill applies, who do not make these elections, will instead apply the modernised accruals and realisation rules.

The Bill has been further refined since the release of an exposure draft in January 2007.

“Importantly, the aggregated turnover threshold for mandatory entry into the regime is $100 million for non-financial entity taxpayers.  Financial entities will be subject to an aggregated turnover test of $20 million.  This turnover threshold for non-financial entity taxpayers will ensure that the measure applies only to taxpayers with sophisticated financial arrangements,” Mr Dutton said. 

The Bill includes an elective start date of the 2008-09 income year and a general start date from 2009-10.

“Delay in the general start date should provide taxpayers with sufficient time to prepare for the new rules, which deal with complex financial arrangements. The elective start date allows those taxpayers who are keen to benefit from the new arrangements to access them as soon as possible,” Mr Dutton added.

Mr Dutton noted that consequential amendments, particularly dealing with the interaction of TOFA and the tax consolidation rules, would be introduced into Parliament prior to 1 July 2008, following further consultation with industry.

The Bill does not include TOFA-specific integrity rules. Mr Dutton noted the concerns expressed by stakeholders regarding such rules and indicated that further consultation would be undertaken regarding the need for any TOFA-specific synthetic integrity rules.