The Treasurer, the Hon Wayne Swan MP, and the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, the Hon Chris Bowen MP, today announced the Government's plans to proceed with Taxation of Financial Arrangements (TOFA) Stages 3 and 4.
The Treasurer also announced plans to proceed with amendments and regulations relating to TOFA Stages 1 and 2.
TOFA Stages 3 and 4
The TOFA Stages 3 and 4 measures, which represent the final stages of the TOFA reforms, will introduce new tax rules for accruals/realisation, fair value, retranslation, reliance on financial reports and hedging.
The TOFA Stages 3 and 4 measures contain rules that cover tax treatments for certain financial arrangements which will achieve compliance cost savings by allowing eligible taxpayers to make use of particular aspects of the accounting standards to determine their taxable income from financial arrangements.
The legislation will apply for income years commencing on or after 1 July 2009. The elective commencement date of 1 July 2008 contained in Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 (the 2007 TOFA Bill) will not apply.
The TOFA Stages 3 and 4 measures are extensive and complex. A commencement date of 1 July 2009 will give taxpayers time to plan for the commencement of the measures and to raise issues in consultation with the Treasury. This period will allow appropriate adjustments to be made, including interactions with other parts of the tax law, prior to the commencement date.
The legislation will be finalised in consultation with interested parties.
Background to TOFA
Stage 1 of TOFA, the debt/equity tax reform, was legislated in 2001. Stage 2, the foreign currency tax reform, was legislated in 2003.
The 2007 TOFA Bill introduced into Parliament last year contained the TOFA Stages 3 and 4 measures but lapsed when the 2007 Federal election was called.
Debt/Equity: Upper tier 2 hybrid instruments
The Government will proceed with measures that clarify the tax treatment of certain Upper Tier 2 and similar capital instruments.
Specifically, regulations will be made to facilitate debt tax treatment for certain Upper Tier 2 and similar capital instruments issued by:
- authorised deposit-taking institutions (ADIs) that are banks and their Australian Prudential Regulations Authority (APRA) regulated subsidiaries;
- ADIs that are non-mutual building societies and their APRA regulated subsidiaries;
- any entity that has undertaken to comply with APRA's prudential standards dealing with capital adequacy and any of its subsidiaries covered by the undertaking;
- a foreign ADI that is a bank and is regulated for prudential purposes by a foreign prudential regulator that has a regulatory role comparable to that of APRA, and under ADI capital requirements comparable to those of APRA.
The Government will extend the debt/equity transitional arrangements under the income tax law to 1 July 2008 to ensure that the law preceding the debt/equity tax rules continues to apply for Upper Tier 2 instruments.
Consultation on the draft regulations, which will have effect for returns made on or after 1 July 2001, will be undertaken prior to their finalisation.
Foreign Currency Amendments
The Government will proceed with amendments to the foreign currency provisions of the income tax law to extend the scope of a number of compliance cost saving measures in the law, and to make technical amendments to ensure that the provisions operate as intended.
Since their introduction a number of issues concerning their operation have been raised by industry and professional bodies.
The amendments will address many of the concerns by extending the scope of compliance cost saving measures in the provisions and ensuring that the provisions operate as intended.
The amendments, which will have effect from 1 July 2003, will be developed in consultation with interested parties.