Important TOFA Deadlines approaching fast for Pre-existing Financial Arrangements

Many companies that have been subject to the new rules for the taxation of financial arrangements (TOFA) since 1 July 2010 will need to lodge an election by January 17 if they wish to apply the TOFA rules to pre-existing financial arrangements that were held on 1 July 2010. 

Ordinarily, TOFA only applies to financial arrangements that a taxpayer begins to hold after the commencement date of the TOFA rules.  However, taxpayers can make an irrevocable election to apply TOFA to all pre-existing arrangements that they held at the commencement date.  This election must be completed and lodged on or before the taxpayer’s first income tax return lodgement due date that occurs after the commencement date.  For many companies, this means that they must lodge this election by January 17 of this year. 

Eligible taxpayers can also elect to use the elective TOFA tax timing methods to calculate the gains and losses on pre-existing financial arrangements, which include:

• The fair value method;
• The foreign exchange retranslation method;
• The hedging method; and
• The reliance on financial reports method.

This election must be completed on or before the due date for lodgement of the election to apply the TOFA rules to pre-existing financial arrangements.  This election does not need to be lodged.  If the elective tax-timing method elections are not made by this date, pre-existing financial arrangements which are brought into the TOFA rules will be subject to the default TOFA taxation methods (realisation and accruals methods).

A copy of all TOFA related election forms can be obtained at ato.gov.au.

Example – Applying elective tax timing methods to pre-existing financial arrangements
The TOFA rules apply to you from 1 July 2010.  Your tax return for the 2010 income year is due on 17 January 2011.  You elected to have the TOFA rules apply to pre-existing financial arrangements on 17 January 2011.  You also make the following elections:

• Hedging tax-timing method election on 1 August 2010; and
• Foreign exchange retranslation tax-timing method election on 31 January 2011.

The hedging tax-timing method will apply to all new financial arrangements that you begin to hold on or after 1 July 2010 and all pre-existing financial arrangements.

The foreign exchange retranslation election will apply to all new financial arrangements that you begin to hold on or after 1 July 2010.  However, this election will not apply to pre-existing financial arrangements because the election was made after the due date for the lodgement of the election to have the TOFA rules apply to such arrangements. 

The TOFA rules apply to the following entities:

• Financial institutions whose annual turnover exceeds $20 million;
• Managed funds and superannuation funds with assets of $100 million or more;
• Other businesses with an annual turnover of $100 million or more and financial assets of $100 million or more and total assets of $300 million or more;
• Other taxpayers that hold certain discounted or deferred interest securities with a remaining term of more than 12 months at the time that they begin to hold them.

If you require further information in relation to the new TOFA rules, feel free to contact a Moore Stephens Director or send a request to Division230insights@moorestephens.com.au  to receive a copy of our Introductory Guide to the Taxation of Financial Arrangements.

 Author: Nick Zanikos, Senior Manager, Moore Stephens Melbourne