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Australia Progresses Tax Reform Of Financial Arrangements

by Mary Swire,, Hong Kong

10 January 2007

Minister for Revenue and Assistant Treasurer, Peter Dutton, has released revised draft legislation containing proposals for the tax treatment of financial arrangements.

The proposals, which represent the final stages of reforms of the taxation of financial arrangements (TOFA), will introduce new tax timing rules — fair value, retranslation and hedging — and will modernise the accruals and realisation rules as they apply to financial arrangements.

"Financial markets are rapidly changing and endlessly innovative in developing new financial products," Dutton observed.

"The law needs to develop too, in order to keep up with the financial developments and provide certainty for the future," he added.

Stage one of TOFA dealt with debt and equity tax reform and was legislated in 2001. Stage two amended foreign currency tax rules and was enacted in 2003. The latest action represents stages three and four of the TOFA reforms.

"The revised exposure draft legislation has been developed following extensive industry consultation on the first exposure draft which was released in December 2005," Dutton stated.

The minister explained that, in line with industry submissions, the revised exposure draft incorporates a number of significant changes. These include an amended approach to determining the scope of financial arrangements and additional hedging rules that will facilitate a high level of matching between the tax treatment of the gain or loss on a hedging arrangement and the tax treatment of the gain or loss on the underlying transaction. Dutton said that the additional hedging rules will have substantial benefits for industry in terms of improved risk management and lower business costs.

Dutton added that hedging rules heavily rely on safeguards such as proper record keeping. The record keeping requirements are generally consistent with what is required by Australian accounting standards for hedge treatment, together with what is required to address the proposed extension beyond accounting hedge rules to matching of the tax status (for example, relating to revenue, capital, assessable or exempt) of the gain or loss. The government will monitor the implementation of the hedging rules to ensure that they are used as intended and may review their operation to ensure that they are not exploited.

The latest revised draft legislation also includes details of the proposed commencement date and transitional issues.

Dutton indicated that the TOFA Stages 3 and 4 reforms will contain rules to address the tax treatment of synthetic financial arrangements. The Treasury will also consider the need for additional integrity rules over coming months.

The proposed synthetic rules and any additional integrity rules which may be required will be subject to consultation prior to the introduction into Parliament of a Bill containing the final proposals.

"The Government believes that these substantial reforms to the taxation of financial arrangements will reduce uncertainties and distortions," Dutton noted.

"The reforms will lead to lower costs for financial activities conducted by business and result in improved competitiveness and greater efficiency in the general operation of Australia’s financial markets," he claimed.

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