As part of our compliance activities, we will review some taxation of financial arrangements (TOFA) taxpayers to ensure they are correctly applying the TOFA rules to their financial arrangements, and to assess whether the objectives of the TOFA legislation are being met.
TOFA rules have generally applied to all financial arrangements TOFA taxpayers started to have on or after 1 July 2010 (1 July 2009 if they elected to have the TOFA rules apply early).
Managing your TOFA compliance
It is important to review your governance, systems and processes to assess your implementation and continued compliance with the TOFA rules. Some of the things you might review are listed here – note that the list is not intended to be exhaustive:
- Review the steps you took to implement TOFA.
- Ensure you have processes and procedures in place to
- apply the TOFA rules correctly to your current financial arrangements and any new financial arrangements (according to the law and ATO guidance)
- review major transactions for any TOFA implications (and apply for ATO advice if necessary)
- ensure you are aware of legislative changes and settled interpretative issues in relation to the TOFA rules.
If you made a transitional election, check that:
- it was validly made and you notified to the Commissioner by the relevant due date
- your transitional balancing adjustment
- was calculated in accordance with one or both of the relevant methods
- is spread over your first four TOFA income years and appropriately disclosed in your tax return.
Accruals and realisation methods
If these methods apply to your financial arrangements, check that you have systems and processes to ensure that:
- you assess whether gains or losses on each financial arrangement is sufficiently certain, as required by the TOFA rules
- if you want to apply a method whose results approximate that of the compounding accruals method, that you assess it is appropriate to do so.
This may mean that your accounting method and tax treatment may differ.
Tax-timing method elections
If you made any of the tax-timing method elections, check that:
- you were eligible to make them and you have the
- necessary audited financial reports
- required accounting systems and controls in place
- you have systems and processes in place to
- ensure the elections only applied to those arrangements you started to have in or after the income year the election was made (they can also apply to transitional arrangements in certain circumstances)
- continually monitor that you remain eligible to apply those elections to your financial arrangements
- identify the financial arrangements where the TOFA gain or TOFA loss is different from the amount in your financial report (if any)
- ensure the relevant tax-timing method elections continue to apply to your financial arrangements.
If you made the hedging method election, check that:
- in accordance with the TOFA rules, you satisfy the record-keeping requirements by
- ensuring the required documentation was in place for all existing hedging financial arrangements
- having systems and processes in place to ensure that the required documentation is in place for all new hedging financial arrangements
- the hedging method applies to all financial arrangements that are designated as accounting hedges.
Following your review of your TOFA systems and processes, if you identify an error in relation to your tax affairs, you may wish to make a voluntary disclosure. Where you make a voluntary disclosure, we will consider reducing the amount of shortfall penalties and interest that may apply.
As part of our compliance activities, we may review TOFA taxpayers to ensure they are correctly applying the TOFA rules to their financial arrangements, and to assess whether the objective of the TOFA legislation are being met