The draft legislation represents the Howard Government's proposals for the final stages of reforms of the taxation of financial arrangements (TOFA stages 3 and 4).

"The proposed reforms represent a major milestone in improving this complex area of law and would place Australia at the forefront of the income tax treatment of modern financial arrangements," Mr Brough stated.

"Extensive consultation with industry and professional bodies over several years, as well as obtaining expert advice on the financial accounting treatment of financial arrangements under new accounting standards, has led to the development of the draft legislation," he added.

According to the government, the draft legislation reflects, where possible, financial accounting concepts contained in the new accounting standards, offering significant compliance cost savings compared to the current tax treatment. However, Mr Brough said that he is aware that some industry groups would prefer to see the final legislation based on a direct link to accounting standards.

The draft legislation contains rules that cover tax-timing treatments for financial arrangements, including tax-timing hedging rules that are designed to minimise tax-timing mismatches. Details about the treatment of synthetic financial arrangements, the commencement date and transitional issues, and interactions with the rest of the income tax law are being developed.

Mr Brough said draft legislation had been designed and drafted using the "coherent principles" approach to tax design and will modernise the taxation law's treatment of financial arrangements.

The Assistant Treasurer added that the government welcomed comments on the scope of the proposed rules.