Taxation of Financial Arrangements

For many taxpayers the new Taxation of Financial Arrangements (TOFA) regime has been put in the too-hard basket for too long.  These new rules will apply to financial arrangements issued or held in the first tax year starting on or after 1 July 2010, however, affected taxpayers need to decide whether they should make any or all of the available elections that deal with the transition to TOFA.

What is a financial arrangement?

A financial arrangement can be described as a right to receive, or an obligation to provide, a financial benefit where the right or obligation is settleable in money, a money equivalent, or another financial arrangement.

Financial arrangements include loans, bonds, notes, swaps, options and hybrid securities.  Equity interests (eg: shares) are also included in the TOFA rules as financial arrangements, although the application of the TOFA rules to equity interests is limited.

The TOFA rules will apply to financial arrangements that are held for more than 12 months.  However, even if you do not hold a financial arrangement for more than 12 months, TOFA may still apply if:

• You are a member of a group which has an annual turnover of $100 million or more (where group includes entities connected or affiliated with you both in Australia and overseas);
• The total value of your financial assets is $100 million or more; or
• The value of your total assets is $300 million or more.

Will you be affected by the new rules?

The new TOFA rules will apply to all taxpayers except if you are:

• An individual taxpayer;
• An authorised deposit taking institution, securitisation vehicles or other financial sector entity with an aggregated turnover of less than $20 million; or
• Another entity with an aggregated turnover of less than $100 million.

Where your business does not fall into any of the above categories, you may still make the election to apply TOFA to your business as it may provide you with tax advantages and/or reduction in compliance costs.

The tax advantages of TOFA include: 

• Early tax deduction for unrealised losses;
• Tax deduction for existing unrealised losses over the next 4 years;
• Deferral of tax liability for existing unrealised gains over the next 4 years;
• No timing differences (deferred tax assets or liabilities) on unrealised gains or losses;
• Reduced compliance costs.

Whilst the TOFA rules are quite complex they can potentially provide tax benefits to many businesses.  Yours could be one of them.

Now is the ideal time to examine the impact of the TOFA legislation on your organisation.  Preparing now also means that the TOFA elections can be made with greater confidence when the time arrives.

 

If you have any questions or wish to schedule a meeting with one of our TOFA consultants, please contact either:

Newcastle -     Darren Shone on (02) 4962 2688; Email Darren
Sydney -          Tina Louras on (02) 8346 6000; Email Tina