Australian Government Reforms Taxation Of Financial Arrangements

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

09 December 2008

Australia's Assistant Treasurer, Chris Bowen, has announced the introduction of the Taxation of Financial Arrangements (TOFA) Stages 3 and 4 measures.

The introduction of the TOFA regime will bring to a conclusion a process that was first announced in the 1992 Budget and which was confirmed as important by the Ralph Review of Taxation in 1999.

"Since the 2007 TOFA Stages 3 and 4 Bill lapsed following the calling of the 2007 Federal election, the legislation has undergone a number of amendments, including the addition of consolidation interaction rules and changes to the accruals rules to better reflect commercial practices", Bowen explained, going on to further comment:

"There has been substantial consultation on this bill over the last 12 months. The bill also includes integrity rules to address value shifting and non-arm's length dealings in relation to financial arrangements."

TOFA Stages 3 and 4 provides a comprehensive framework for taxing financial arrangements. The measures contain rules that cover tax timing treatments for financial arrangements, including elective tax timing and character hedging rules that are designed to minimize tax timing and character mismatches.

The rules permit eligible taxpayers to elect to have financial arrangements taxed on a fair value or retranslation basis, or to rely on their financial reports for taxation purposes. These elections create compliance cost savings by more closely aligning tax treatment with accounting standards.

Taxpayers to which the measures apply and which do not elect to use these methods will be required to apply the TOFA Stages 3 and 4 accruals and realization rules.

According to the government, the TOFA Stages 3 and 4 measures have been subject to an extensive consultation process and represent a "world class set of tax rules" for financial arrangements.

Minister Bowen thanked taxpayers, industry and professional associations and tax advisors for their participation in the consultation process:

"The input from stakeholders has greatly assisted in the development of this significant reform and the resolution of many complex issues during the legislative design process," Bowen said.

The measures will facilitate investment, financing, price making and risk management decision-making by reducing tax distortions and anomalies.

The TOFA rules:

• will not be applied on a mandatory basis to individual and small business taxpayers, except where significant deferral of tax is involved;
• will apply to: approved deposit-taking institutions; securitisation vehicles; and entities that are required to register under the Financial Services (Collection of Data) Act 2001, if their aggregated annual turnover is AUD20m (USD13.2m) or more.

Superannuation funds and managed investment schemes will apply the rules if the value of their assets is AUD100m or more. Other taxpayers will apply the rules if their turnover is AUD100m or more, if the value of their assets is AUD300m or more, or if the value of their financial assets is AUD100m or more. Taxpayers who are not required to apply the TOFA rules may elect to apply the rules.

The TOFA Stages 3 and 4 measures will apply for income years commencing on or after July 1, 2010.

However, taxpayers may elect to have the measures apply for income years commencing on or after July 1, 2009.

Bowen indicated that the government intends to monitor the implementation of this reform of Australia's financial taxation system and will consider the need for any refinements, particularly given the complex nature of many types of arrangements that the measures address.

In balancing the aims of facilitating financial decision making and minimizing tax deferral and arbitrage, Bowen added, the monitoring would include consideration of the need for additional integrity measures to address issues such as synthetic arrangements.

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