• PAYG instalments for TOFA entities

    The taxation of financial arrangements (TOFA) rules apply to taxpayers who meet the TOFA thresholds (generally large taxpayers) and other entities that choose to use the TOFA rules.

    The TOFA pay as you go (PAYG) instalment income rules affect:

    • TOFA entities (except individuals) that use the income-times-rate option to calculate their PAYG instalment income
    • beneficiaries of trusts, where that trust is a TOFA entity
    • partners in partnerships, where that partnership is a TOFA entity.

    Individuals will only use the TOFA method for calculating instalment income when working out their proportion of the instalment income of a relevant partnership or trust.

    See also:

    TOFA methods for calculating instalment income

    The method you use for calculating instalment income depends on whether the TOFA entity is a company, trust or partnership, or a superannuation fund.

     TOFA entities that are companies, trusts and partnership

     TOFA entities that are superannuation funds

    When to start using the TOFA method

    When you start using the TOFA method to calculate your PAYG instalment income varies depends on whether you are:

    TOFA entities

    TOFA entities that calculate PAYG instalment income using the income-times-rate option will start to use the TOFA method for calculating instalment income when both of the following apply:

    • we give the TOFA entity a new PAYG instalment rate in the first instalment quarter of an income year
    • the income tax return used by us to give the TOFA entity a new rate met both of the following requirements    
      • included TOFA gains and TOFA losses
      • was for the 2011 income year or a later income year (for a TOFA entity with an early-balancing, substituted accounting period – SAP – it will be the 2012 income year or a later income year).
       

    TOFA entities generally started using the TOFA method for calculating instalment income from the first instalment quarter in their:

    • 2013 income tax year – if they have a 30 June balance date or a late-balancing SAP
    • 2014 income tax year – if they have an early-balancing SAP.

    TOFA entities can choose to start using the TOFA method for calculating instalment income one year earlier than when the rules apply. See How to apply to use the TOFA method early.

    Example 1: TOFA entity with a 30 June balance date

    Austin Co. made TOFA gains and TOFA losses from their financial arrangements during their income year ending 30 June 2011 (their 2011 income tax year). Austin Co. lodged their 2011 income tax return, which included these TOFA gains and TOFA losses, on 15 January 2012.

    Austin Co. did not use the TOFA method for calculating instalment income for the two instalment quarters that followed the lodgment of their 2011 income tax return (the quarters ending 31 March 2012 and 30 June 2012). This was because the conditions for using the TOFA method had not yet been met.

    Austin Co. could only use the TOFA method for calculating instalment income after we issued them a new PAYG instalment rate during the first instalment quarter of their 2013 income tax year (the 1 July – 30 September 2012 quarter). Austin Co. will use the TOFA method for calculating instalment income in that instalment period and all future instalment periods.

    End of example

     

    Example 2: TOFA entity with a 31 December early balancing SAP

    Mike Co. made TOFA gains and TOFA losses from their financial arrangements during their income tax year ending 31 December 2011 (their 2012 income tax year). Mike Co. lodged its 2012 income tax return, which included these TOFA gains and TOFA losses, on 15 July 2012.

    Mike Co. did not use the TOFA method for calculating instalment income for the two instalment quarters that followed the lodgment of their 2012 income tax return (the quarters ending 30 September and 31 December 2012). This was because the conditions for using the TOFA method had not yet been met.

    Mike Co. could only use the TOFA method for calculating instalment income after we issued them a new PAYG instalment rate during the first instalment quarter of their 2014 income tax year (the 1 January – 31 March 2012 quarter). Mike Co. will use the TOFA method for calculating instalment income in that instalment period and all future instalment periods.

    End of example

    Partners in partnerships and trust beneficiaries

    Partnerships and trusts can be TOFA entities.

    Partners or beneficiaries of such TOFA entities must use the TOFA method for calculating instalment income from the partnership or trust. This is regardless of whether or not the partner or beneficiary is itself a TOFA entity.

    These partners and beneficiaries started to use the TOFA method for calculating their proportion of the partnership or trust's instalment income in instalment quarters which started on or after 29 November 2011 (when the new rules were enacted), where the last completed income year of the partnership or trust was both of the following:

    • an income year which starts on or after 1 July 2010
    • an income year where the TOFA rules applied to the partnership or trust's financial arrangements.

    Example 3: Trust with 30 June balance date

    XYZ Trust's first TOFA year was the income year ending 30 June 2011.

    The trustee of XYZ Trust provided the beneficiaries of XYZ Trust with the instalment income information to work out their instalment amount from the trust in each instalment quarter.

    End of example

    How to calculate your proportion of the instalment income

    There is a special formula (see below) for working out the partner or beneficiary’s proportion of instalment income for a partnership or trust that is a TOFA entity. Use the formula to work out what proportion of the partnership or trust's instalment income to include in your own instalment income.

    Formula

    The formula is A multiplied by C, all divided by B:

    Proportion of the partnership's or trust's instalment income to include in your own instalment income for the current period

    Formula element A

    A is the partner or beneficiary's assessable income from the partnership or trust for the last income year. This amount is shown on the partnership at item 51 or trust's return at item 54.

    Formula element B

    B is the partnership or trust's instalment income for the last income year. This is generally gross ordinary income, excluding any TOFA amounts, plus net TOFA gains. This is worked out in four steps.

    Step 1: Add up the amounts shown on the partnership or trust's return at:

    • item 5 Total business income
    • item 8 Distribution from partnerships (items A and B only) and Distribution from trusts (items Z and R only)
    • item 9 Gross rent (item F only)
    • item 10 Forestry managed investment scheme income
    • item 11 Gross interest (item J only)
    • item 12 Dividends received (items K and L only)
    • item 14 Other Australian income
    • item 23 Other assessable foreign source income (item B only).

    Step 2: Subtract item 31M Total TOFA gains from the result you got at step 1.

    Step 3: Subtract item 31N Total TOFA losses from item 31M Total TOFA gains (if the result is a negative amount, then use zero as the result of step 3).

    Step 4: Add the result of step 2 to the result of step 3.

    References to item numbers above relate to the numbers in 2016 tax returns.

    You can use the partnership or trust's tax return for the most recent year you have an assessment for to find the information you need to use the formula. These amounts need updating only when a later partnership or trust return is lodged, usually once a year, or when the most recent partnership or trust tax return is amended.

    Formula element C

    C is the partnership or trust's instalment income for the current period. The partnership or trust's records for each instalment period will include this information. The TOFA method for calculating instalment income will be used to work out this amount.

    If you are in more than one partnership or are a beneficiary in more than one trust, you need to include an amount for each partnership or trust.

    How to apply to use the TOFA method early

    TOFA entities can choose to start using the TOFA method for calculating instalment income one year earlier than normally applies.

    We will accept your choice (election) if we are satisfied that it is reasonable to do so having regard to the objects of the PAYG instalment provisions.

    To use the TOFA method for calculating instalment income early, you must write to us during the first quarter of an income year and do both of the following:

    • advise that you want to use the TOFA method for PAYG instalments early
    • provide the information we need to calculate a new PAYG instalment rate.

    To give us time to work out if it would be reasonable for you to use the TOFA method early, you must write to us least 28 days before the end of the first instalment period.

    Information you will need to give us

    You will need to provide additional information if the last tax return you have an assessment for did not include TOFA gains and TOFA losses.

    If the last income tax return was an income year before the TOFA rules applied to your financial arrangements, you must work out what your TOFA gains, TOFA losses and other income and deductions would have been had the TOFA rules applied to your financial arrangements in that income year.

    Once you have worked this out, you must provide these amounts at the relevant labels of a paper-based income tax return:

    • TOFA gains and TOFA losses
    • all other income and deductions labels to allow us to calculate what your taxable income would have been if the TOFA rules applied to you in that income year.

    There are additional disclosures for TOFA entities that include a life insurance business.

    Where to you send your notification

    Send your request to use the TOFA method for PAYG instalments early, together with sufficient information to allow us to work out your new instalment rate:

    • by mail to
      Australian Taxation Office
      Attention: Technical Leadership Group, PG&I
      GPO Box 9977
      MELBOURNE VIC 3001
    Last modified: 10 Jun 2016QC 25240