Australia Announces Changes To Financial Taxes

by Mary Swire, Tax-News.com, Hong Kong

08 September 2009

Australia’s Assistant Treasurer, Nick Sherry, has announced several amendments to the income tax law relating to the Taxation of Financial Arrangements (TOFA), in a move to further modernise Australia's financial taxation system.

"'Financial arrangements include a range of financial instruments, including bonds, derivatives, promissory notes, swaps, forwards and options, and are used widely by companies and financial institutions, but also individuals - so they form a critical part of our economy," Mr Sherry explained.

"This important reform program,” he added, “provides greater flexibility as it allows more sophisticated decision-making in relation to the timing of the realisation of losses or gains arising from financial arrangements, meaning the financial taxation system will better reflect the economic and commercial substance."

The government, he continued, “has been working closely with industry stakeholders and we're pleased to announce today a package of further technical refinements to the regime. These refinements ensure the clear policy intent of the TOFA reforms is delivered and our financial taxation system works as intended and at global best practice standards."

Among the amendments to be made, the government will ensure that tax-exempt asset financing provisions have priority over capital gains tax provisions; will clarify that a dividend paid on a share that is a debt interest may be deductible, consistent with the corresponding deductibility provision in the debt/equity provisions; and will modify the references to 'accounting standard' so that they extend to accounting standards formulated or made by the Australian Accounting Standards Board.

In addition, an amendment is to be made to extend the definition of a financial arrangement to include a debt interest, and the TOFA transitional provisions will also be amended to ensure appropriate interactions between the transitional provisions and the portfolio method for accruing fees, discounts and premiums.

The operation of hedging financial arrangements is to be clarified by way of attribution rules that ensure that appropriate gains and losses are brought to account, and amendments will be made to the foreign currency retranslation provisions to make them consistent with the accounting standards.

"One particular area where we'll be immediately introducing and seeking to pass changes in the current sittings of Parliament relates to the interaction of TOFA and the pay as you go (PAYG) instalments system," the Assistant Treasurer went on to reveal.

The Treasury and the Australian Taxation Office (ATO) have been working on TOFA issues with stakeholders through the ATO National Tax Liaison Group and consultation on the particular issues arising from the TOFA/PAYG interaction will continue.

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