Taxation of financial arrangements (TOFA) entities are required to report TOFA gains and TOFA losses in specified labels when lodging their income tax returns. This information explains how TOFA gains and TOFA losses should be reported in the relevant labels of income tax returns.
Where a TOFA entity reports gains and losses from financial arrangements on a gross basis for accounting purposes, they should reflect these gains and losses on a gross basis in their income tax return. Gross TOFA gains and gross TOFA losses must be separately reported in both the:
- relevant income and expenses labels
- total TOFA gains and total TOFA losses labels.
An example of amounts that should be reported on a gross basis is interest income and interest expense. These will be recognised separately in a TOFA entity's accounting system and in their books of account. Consequently, they will also be separately reported in the income tax return in both the:
- relevant interest income and interest expense labels
- total TOFA gains and total TOFA losses labels.
Net basis
For a TOFA entity that reports gains and losses from financial arrangements on a net basis in its accounting systems and books of account, it would be a significant compliance burden to separate the financial arrangement gains from the losses. Consequently, where these gains and losses are also TOFA gains and TOFA losses, the entity may report a 'net' TOFA gain or 'net' TOFA loss from these financial arrangements in their income tax return in both the:
- relevant income and expenses labels
- total TOFA gains and total TOFA losses labels.
Examples
The following examples are provided to guide how TOFA gains and TOFA losses should be reflected on a gross and net basis in income tax returns.
CHW Ltd is a TOFA entity whose tax and accounting year ends on 30 June. The company previously made a TOFA fair value method election. During the income year ending 30 June 2012, it had the following gains and losses from its financial arrangements:
- an overall assessable net gain of $8,000,000 from its forward exchange contracts (these forward exchange contracts are fair valued through profit and loss for accounting purposes)
- interest income of $150,000 from its bank account
- interest expense of $400,000 from its Australian bank loan.
CHW Ltd's accounting system records all the gains or losses from the forward exchange contracts it enters into during the income year on a net basis, whilst the interest income and interest expense amounts are separately recorded in its accounting system.
The forward contracts, bank account and loan are financial arrangements to which the TOFA rules apply.
CHW Ltd will complete its Company tax return 2012 as follows:
- Print X in the 'Yes' box at label M Taxation of financial arrangements (TOFA) in item 5.
- $150,000 at label F Gross Interest in item 6.
- $8,000,000 at label K Income from financial arrangement (TOFA) in item 6.
- $400,000 at label V Interest expenses with Australia in item 6.
- $8,150,000 at label T Total TOFA gains in item 8.
- $400,000 at label U Total TOFA losses in item 8.
GGM Trust is a TOFA entity. It buys deferred interest securities and government bonds, which it generally holds to maturity. It had $520,000 of gross interest from the securities it had during the income year ending 30 June 2012.
GGM Trust also entered into a number of derivative contracts which are fair valued through profit and loss for accounting purposes. The gains and losses from the derivative contracts are recorded on a net basis in its accounting system. For the income year ending 30 June 2012, it had a net loss of $1,500,000 from its derivative contracts.
All the securities, bonds and derivative contracts that GGM Trust had during the income year are TOFA financial arrangements. The trust has previously also made a TOFA fair value method election.
GGM Trust will complete its Trust tax return 2012 as follows:
- $1,500,000 at label N All other expenses in item 5.
- $520,000 at label J Gross interest in item 11.
- Print X in the Yes box at label L Taxation of financial arrangements (TOFA) in item 31.
- $520,000 at label M Total TOFA gains in item 31.
- $1,500,000 at N Total TOFA losses in item 31.
Last Modified: Monday, 9 July 2012