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  • Taxation of financial arrangements – items 31 to 32

    In this section:

    31 Taxation of financial arrangements (TOFA)

    The key provisions of the TOFA rules are found in Division 230 of the ITAA 1997, which generally provides for:

    • methods of taking into account gains and losses from financial arrangements, being accruals and realisation, fair value, foreign exchange retranslation, hedging, reliance on financial reports and balancing adjustment, and
    • the time at which the gains and losses from financial arrangements will be brought to account.

    The TOFA rules apply to the following entities:

    • authorised deposit-taking institutions, securitisation vehicles and financial sector entities with an aggregated annual turnover of $20 million or more
    • managed investment schemes, or entities with a similar status under foreign law relating to corporate regulation with assets of $100 million or more
    • any other entity which satisfies one or more of the following:          
      • an aggregated turnover of $100 million or more
      • assets of $300 million or more
      • financial assets of $100 million or more.
       

    A trust that does not meet these requirements can elect to have the TOFA rules apply to it.

    The aggregated turnover tests may mean that the TOFA rules will apply to trusts that do not meet the thresholds in their own right. Aggregated turnover includes the annual turnover of any entity a trust is connected with, or any affiliate of the trust, including overseas entities. Once the TOFA rules apply to a trust, they will continue to apply to that trust, even if its aggregated turnover, value of assets or value of financial assets subsequently falls below the requisite threshold.

    There are a number of elections available to trusts under the TOFA rules. Elections under the TOFA rules are irrevocable, and should be carefully considered before being made.

    For more information, see Guide to the taxation of financial arrangements (TOFA).

    M Total TOFA gains

    Show at M the trust’s total assessable TOFA gains from financial arrangements.

    N Total TOFA losses

    Show at N the trust's total deductible TOFA losses from financial arrangements.

    Ensure you take into account at M and N any amount in relation to a TOFA financial arrangement that you have shown at labels, such as:

    • S Net income or loss from business item 5
    • A, Z, S, B, R or T Partnerships and trusts item 8
    • G Interest deductions item 9
    • J Gross interest item 11
    • K Unfranked dividend amount item 12
    • O Other Australian income item 14
    • Q Other deductions item 18
    • B Gross other assessable foreign source income item 23.

    32 Non-concessional MIT income (NCMI)

    In this section:

    Stapled structures

    New measures now:

    • address risks posed by arrangements involving stapled structures
    • limit access to concessions currently available to foreign investors for passive income.

    A stapled structure is an arrangement where two or more entities that are commonly owned (at least one of which is a trust) are bound together, such that interests in them (such as shares or units) cannot be bought or sold separately.

    A 30% managed investment trust (MIT) withholding tax is applied:

    • to trading income that is    
      • converted to passive income via a stapled structure, or
      • distributed by a trading trust
       
    • to income from agricultural land and residential housing (other than affordable housing).

    Tax exemptions for foreign pension funds and sovereign wealth funds are limited to passive income and portfolio-like investments (typically interests of less than 10%).

    For more information, see Stapled structures.

    Non-concessional MIT income (NCMI)

    MIT withholding tax applies to fund payments made by a withholding MIT to foreign residents. For recipients in an exchange-of-information country, the rate of MIT withholding tax was 15%.

    The MIT withholding tax rate is 30% to the extent that the fund payment is attributable to NCMI.

    Subject to certain exemptions, an amount of a fund payment will be NCMI if it is attributable to income that is:

    • MIT cross staple arrangement income
    • MIT trading trust income
    • MIT residential housing income, or
    • MIT agricultural income.

    Transitional rules apply to protect existing arrangements from the impact of the amendments. When the transitional rules apply, the concessional MIT withholding tax rate of 15% (for recipients in exchange-of-information (EOI) countries) will continue to apply for the relevant transitional periods. New, approved, economic infrastructure projects may also be concessionally taxed.

    What is 'excluded from NCMI'?

    Certain income derived by sovereign entities from portfolio-like interests in MITs (or Australian companies) is non-assessable non-exempt income that is also exempt from withholding tax. However, the exemption does not apply to NCMI or amounts that are excluded from NCMI. 'Excluded from NCMI' amounts are amounts that are attributable to income that would be NCMI but for:

    • approved economic infrastructure facility exception (see subsection 12-437(5) of Schedule 1 to the TAA 1953)
    • transitional MIT cross staple arrangement income (see section 12-440 of Schedule 1 to the TAA 1953)
    • transitional MIT trading trust income (see section 12-447 of Schedule 1 to the TAA 1953)
    • transitional MIT residential housing income (see section 12-451 of Schedule 1 to the TAA 1953)
    • transitional MIT agricultural income (see section 12-449 of Schedule 1 to the TAA 1953).

    For more information on NCMI, see Law Companion Ruling LCR 2019/D2: Non-concessional MIT income.

    Business Income

    Primary production

    A – Non-concessional MIT income (NCMI)

    Show at A the total NCMI amount in relation to primary production income, for example, income attributable to agricultural land held for rent.

    B – Excluded from NCMI

    Show at B the total Excluded from NCMI amount in relation to primary production income, that is, income from transitional arrangements or approved economic infrastructure facilities.

    Amounts shown at A and B must be shown at item 5G Primary production - Other business income.

    Non-primary production

    C – Non-concessional MIT income (NCMI)

    Show at C, the total NCMI amount in relation to non-primary production income, that is, cross staple income, trading trust income and residential housing income.

    D – Excluded from NCMI

    Show at D the total Excluded from NCMI amount in relation to non-primary production income, that is, income from transitional arrangements or approved economic infrastructure facilities.

    Amounts shown at C and D must be shown at item 5H Non-primary production - Other business income.

    Partnership and trusts

    Primary production

    E – Non-concessional MIT income (NCMI)

    Show at E the total NCMI amount distributed from partnerships categorised as primary production income.

    F – Excluded from NCMI

    Show at F the total Excluded from NCMI amount distributed from partnerships categorised as primary production income.

    Amounts shown at E and F must be shown at item 8A Distribution from partnerships.

    G – Non-concessional MIT income (NCMI)

    Show at G the total NCMI amount distributed from a trust categorised as primary production income.

    H – Excluded from NCMI

    Show at H the total Excluded from NCMI amount distributed from trusts categorised as primary production income.

    Amounts shown at G and H must be shown at item 8Z Share of net income from trusts.

    Non-primary production

    I – Non-concessional MIT income (NCMI)

    Show at I, the total NCMI amount distributed from partnerships categorised as non-primary production.

    J – Excluded from NCMI

    Show at J the total Excluded from NCMI amount distributed from partnerships categorised as non-primary production.

    Amounts shown at I and J must be shown at item 8B Distribution from partnerships, less foreign income.

    K – Non-concessional MIT income (NCMI)

    Show at K the total NCMI amount distributed from trusts categorised as non-primary production.

    L – Excluded from NCMI

    Show at L the total Excluded from NCMI amount distributed from trusts categorised as non-primary production.

    Amounts shown at K and L must be shown at item 8R Share of net income from trusts, less capital gains, foreign income and franked distributions.

    Capital Gains

    X – Non-concessional MIT income (NCMI)

    Show at X the aggregate amount of all capital gains which are included in the assessable income of a MIT as NCMI.

    Z – Excluded from NCMI

    Show at Z the aggregate amount of all capital gains categorised as Excluded from NCMI.

    The amounts shown at X and Z must be included in the calculation of the amount at 21A Net capital gain.

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    Last modified: 27 May 2021QC 64913