Taxation of Financial Arrangements ("TOFA") is finally here!

Mandatory for income years starting on or after 1 July 2010
The Taxation of Financial Arrangements (“TOFA”) provisions are here with mandatory application for income years from 1 July 2010!

Am I affected by TOFA?
Generally, the following types of entities which surpass ANY of the following thresholds will be required to apply TOFA for income years beginning on or after 1 July 2010: 

-      aggregated turnover of $100 million or more; or 
-      financial assets of $100 million or more; or
-      total assets of $300 million or more.

 

The potential scope of TOFA is broad: the definition of “aggregated turnover” includes the turnover of all entities with which it is ‘connected’ (i.e. broadly, related by 40% or more ownership interests) or ‘affiliated’ (i.e. relationship of de facto control by reason of factors other than ownership interests).  In particular, the $100 million turnover threshold is not limited to Australian residents. This means that multinational groups will almost certainly breach the $100 million turnover threshold.

 

What is TOFA?
The TOFA provisions set out a comprehensive regime for the taxation of 'financial arrangements', such as bonds, loans, bills of exchange, promissory notes, equities and derivatives such as options, forwards, futures and swaps.  TOFA will replace the previous tax law applicable to such arrangements.
   
TOFA requires taxpayers to account for gains and losses on financial arrangements which are 'sufficiently certain' on a compounding accruals basis and gains and losses that are not sufficiently certain on a realisation basis.
  
There are also 4 elective tax methods to account for financial arrangements under TOFA (i.e. fair value, foreign exchange retranslation, hedging and reliance on financial reports).
 

What are the consequences of TOFA?
All taxpayers who are within TOFA will need to carefully consider whether they wish to use the default accruals and realisation methods to account for their gains and losses on financial arrangements or whether they wish to make an election to use one or more of the 4 elective methods.  These decisions will need to be considered carefully as generally any elections under TOFA are irrevocable.
  
Furthermore, all affected taxpayers will need to review their accounting and tax compliance systems to check whether they require any modifications in order to operate in accordance with the requirements of TOFA and that they have access to all necessary documentation to support any elections made or tax calculations required under TOFA.
 

Other entities which are exempt from TOFA
The following entities are exempt from TOFA:
 

Steps forward with HLB Mann Judd
There are always risks involved in applying new and complicated tax legislation.  The elections available under TOFA are irrevocable, taxpayers should carefully consider the choices they make to ensure they optimise the outcomes and meet the specific needs of their organisation.

 

Tax and accounting systems will also need to be reviewed and updated in order to ensure that they are capable of operating in compliance with the requirements of TOFA.

 

At HLB Mann Judd we are able to assist you in the transition to the TOFA regime by providing the following services:

 

  
If you would like further advice or assistance with regard to the new TOFA provisions, please contact Mariana von-Lucken on 02 9020 4095 or by email on mvonlucken@hlbnsw.com.au or alternatively please contact your current HLB Mann Judd advisor.