What the rules apply to
Subsection 230-15(1) states that an entity's assessable income includes a gain made from a financial arrangement.
Subsection 230-15(2) states that an entity can deduct a loss made from a financial arrangement, but only to the extent that it is either:
- made in gaining or producing your assessable income
- necessarily made in carrying on a business for the purpose of gaining or producing assessable income.
As provided for in section 230-15, TOFA only applies to gains and losses made from a financial arrangement. To determine whether an arrangement is a financial arrangement, an entity must first identify the arrangement being tested.
Once the arrangement is identified, the entity can determine whether the arrangement meets the definition of a financial arrangement under section 230-45 or section 230-50.
Arrangement being tested
An arrangement is defined in subsection 995-1(1), as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.
In testing the arrangement, an entity is required to identify the relevant rights and obligations that determine the boundary of the arrangement. In doing so, it must determine whether the rights and obligations form a single arrangement or whether these rights and obligations constitute two or more separate arrangements.
Typically, the boundary of the arrangement is the terms and conditions of the contract or agreement – however, this may not always be the case. It is possible that rights and obligations under more than one contract could be aggregated to constitute the relevant arrangement if, based on an economic substance approach, those rights and obligations should be considered as one arrangement.
For TOFA purposes, the testing of an arrangement or arrangements is qualified by section 230-55, which contains grouping and disaggregation rules.
Subsection 230-55(4) sets out the following factors that an entity must have regard to when determining if the rights and obligations comprise a single arrangement, or two or more separate arrangements:
- the nature of the rights and obligations
- their terms and conditions
- the circumstances surrounding their creation and their proposed exercise or performance, including what can reasonably be seen as the purposes of one or more of the entities involved
- whether they can be dealt with separately or must be dealt with together
- normal commercial understandings and practices in relation to them
- the objects of Division 230.
Variation of an arrangement
Where the terms of a contract or agreement that constitute an arrangement are amended or modified, it is necessary to examine whether this results in:
- existing rights and obligations being modified
- previously existing rights and obligations ceasing to exist
- new rights and obligations coming into existence.
Where new rights and obligations have come into existence as a result of the amendment or modification it is necessary to assess whether these new rights and obligations will be aggregated as a new arrangement pursuant to subsection 230-55(4). Alternatively, these might be aggregated with any previously existing rights and obligations that have not ceased to form part of the previously existing arrangement.