Who the rules apply to
TOFA applies to an entity on a mandatory basis, unless the entity is the subject of an exclusion in section 230-455.
The following entities are subject to TOFA on a mandatory basis:
- an authorised deposit-taking institution (ADI), a securitisation vehicle or a financial sector entity with an aggregated turnover of $20 million or more
- a superannuation entity, a managed investment scheme or a similar scheme under a foreign law if the value of the entity's assets is $100 million or more
- any other entity (except an individual) that has any of the following
- an aggregated turnover of $100 million or more
- assets of $300 million or more
- financial assets of $100 million or more.
In determining whether TOFA applies in a particular income year, the entity must determine whether it satisfies the thresholds at the end of the immediately preceding income year. However, if the entity is newly created, the thresholds are tested at the end of the year in which the entity comes into existence.
Once TOFA applies to an entity, it will continue to apply to that entity, even if its aggregated turnover, value of assets or value of financial assets subsequently falls below the requisite threshold.
Generally, the gains or losses from financial arrangements of individuals and entities that do not satisfy the above threshold tests will not be subject to TOFA.
Electing in to TOFA
An entity that is not mandatorily subject to TOFA can make an election to have TOFA apply to its financial arrangements.
The election for TOFA to apply can be made at any time during an income tax year and applies from the first day of the income year in which this election is made.
TOFA elections are complex, and cannot be revoked. Before making any TOFA elections, you should carefully consider your circumstances and seek professional assistance if necessary.
Example: Electing into TOFA
ABC Co is incorporated during 2012–13 and starts to derive income during this year.
ABC Co forecasts that for 2012–13, it will meet the aggregated turnover threshold of $100 million or more – however, towards the end of 2012–13, ABC Co is no longer certain of this.
ABC Co wants TOFA to apply to the financial arrangements it started to have in 2012–13. To ensure this happens, even if its aggregated turnover is less than $100 million, it can elect for TOFA to apply before the end of 2012–13.
End of example
An entity's aggregated turnover is defined in section 328-115 to be the sum of the:
- entity's annual turnover for the income year
- annual turnover for the income year of any other entity that is connected with the entity at any time during the income year
- annual turnover for the income year of any other entity that is an affiliate of the entity at any time during the income year.
An entity's aggregated turnover includes the annual turnover of any foreign entity connected with the entity or that is an affiliate of the entity.
An entity's annual turnover for an income year is the entity's ordinary income derived in the income year in the ordinary course of carrying on a business.
Amounts of ordinary income related to dealings between the entity and entities connected with the entity or affiliates are not included.
Where an entity has carried on a business for a part of an income year only, the entity's annual turnover is worked out using a reasonable estimate of what the annual turnover would have been if it carried on the business for the whole year.
Meaning of 'connected with'
The meaning of 'connected with' is provided in section 328-125. An entity is connected with another entity if either:
- one entity controls the other entity
- both entities are controlled by a same third entity meaning that all three entities would be connected.
An entity controls another entity whether that entity alone or together with affiliates beneficially owns, or has the right to acquire a beneficial ownership of interests (that is, ordinary shares) of at least 40% of the other entity.
An entity can also indirectly control an entity where the entity being tested controls a second entity and the second entity controls a third entity. For the purposes of this test, the entity being tested is taken to be connected with the third entity.
Meaning of 'affiliate'
The meaning of affiliate is provided in section 328-130. An affiliate of an entity is an individual or company that acts or is reasonably expected to act in accordance with the directions of, or in concert with the entity being tested.
There are a number of factors that help determine whether an individual or another entity is an affiliate of the entity being tested, including:
- family or close personal relationships
- financial relationships or dependencies
- relationships created through common directors, partners or share holders
- the degree to which the entities consult with each other on business matters
- the degree of formal or informal arrangements that exist with regards to the purchase and use of goods and services.
Regardless of the TOFA thresholds (see Who the rules apply to) TOFA applies to the qualifying securities of all entities (including individuals) that end more than 12 months after the entity starts to have the qualifying security.
A qualifying security is defined in subsection 159GP(1) of the ITAA 1936. Broadly, a qualifying security is a security that at the time of issue:
- will, or is reasonably likely to, exceed one year
- is reasonably likely to result in the sum of the payments (excluding periodic interest) exceeding the issue price. For a fixed-return security, this excess is greater than 1.5% of the sum of the payments multiplied by the number of years in the term of the security.
Example 1: Individual and arrangements that are not qualifying securities
Cindy, an individual, purchased a home theatre system for $18,000 from Easy Electronics Pty Ltd, on 24-month interest-free terms.
Cindy has not elected to apply TOFA and the arrangement is not a qualifying security. As a result, TOFA will not apply to Cindy's purchase.
Example 2: Company and arrangements that are not qualifying securities
ZED Ltd is a manufacturer of parts for farm machinery. It has an aggregated turnover of $80 million. The company enters into a five-year loan with a bank to borrow $5 million. ZED Ltd has:
- an aggregated turnover of less than $100 million
- assets of less than $300 million
- financial assets of less than $100 million.
Zed Ltd has not elected to apply TOFA and the arrangement is not a qualifying security. As a result, TOFA will not apply to ZED Ltd's loan.
End of example
Tax consolidated groups
The single entity rule for tax consolidated groups means that subsidiary members are treated as part of the head company of the group rather than as separate income tax entities.
Consequently, the entity being tested for the threshold tests is the head company, including all its parts – that is, its subsidiary members.
To work out a tax consolidated group's turnover or value of assets for the threshold tests, intra-tax consolidated group transactions and assets are not recognised.
For accounting reporting purposes, intra-accounting consolidated group transactions and assets are not recognised in the accounting consolidated group's financial report. Therefore, where an accounting consolidated group does not identically reflect the tax consolidated group, some transactions may be required to be reinstated for the purposes of the threshold tests.
If a transaction or asset recognised in the accounting consolidated financial reports is not a transaction or asset of the tax consolidated group, it should not be recognised for tax purposes.