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  • Realisation method

    The realisation method applies to the extent that the accruals method and the elective tax-timing methods do not apply to a financial arrangement.

    The realisation method brings to account gains or losses in the income year in which the gain or loss occurs.

    Generally, a gain or loss occurs when the last of the financial benefits taken into account in calculating the relevant gain or loss, is provided.

    The last financial benefit is the last financial benefit taken into account in calculating the relevant gain or loss, and is not necessarily the last financial benefit due to be provided or received under the entire financial arrangement. Regard must be had to sections 230-70 and 230-75 in determining this.

    If the last financial benefit is not provided at the time when it is due and it is reasonable to expect that it will be provided, the gain or loss is made when the financial benefit is due to be provided or received.

    If the right to receive or obligation to provide the last financial benefit ceases before it is received or provided, the gain or loss is made when the right or obligation ceases.

    See also:

    Reasonable attribution

    When determining the gains and losses under the financial arrangement, an entity must have regard to the extent to which financial benefits that are received or provided (or are to be received or provided), are reasonably attributable to other financial benefits to be received or provided under the arrangement (sections 230-70 and 230-75).

    Generally, no amounts are reasonably attributable to interest or amounts that are in the nature of interest.

    For example, consider where an entity lends $100, and is to receive $10 in interest each year subject to a contingency. Assuming the contingencies are met, no amounts will be attributable to the $10 coupons, and each will be a realised gain. On maturity, the entity will receive $110, being a return of the principal, and the final $10 coupon. The initial $100 that the entity lent is reasonably attributable to the $100 received, and a $10 gain is made at this time (ignoring Subdivision 230-G balancing adjustment). In this way, the initial $100 lent is not a realised loss when it is paid – the entity must wait until the last reasonably attributable financial benefit is received or provided, which happens when the principal is repaid.

    Tax treatment

    If a number of financial benefits are to be provided under the arrangement, there may be a number of separate gains or losses brought to account under that method at different points in time.

    The application of the realisation method is distinguished from circumstances where the taxpayer must apply the balancing adjustment provisions in Subdivision 230-G.

    The realisation method can apply, for example, when a gain or loss is not sufficiently certain as a financial benefit is subject to a contingency, or the value or the amount of the financial benefit is not fixed or determinable with reasonable accuracy.

    Example: Contingent returns

    Russell Co acquired, from Guy Co, a security for $100 that matures in three years. Under the terms of the security, Russell Co receives $10 at the end of year's one, two and three, contingent on Guy Co's profitability.

    When the contingency was met in years one and two, Russell Co received the amounts at that time. However, as the contingency wasn't met for the payment at the end of year three, Russell Co only received the redemption amount at the end of year three.



    Year 1

    Year 2

    Year 3

    Acquisition cost





    Contingent return





    Redemption price of security





    Tax treatment under the realisation method


    $10 gain

    $10 gain


    * Subdivision 230-G balancing adjustment applies when the financial arrangement ceases.

    Under the realisation method, Russell Co will make a gain of $10 in year one and year two, as the financial benefits provided ($10) do not have any amounts attributable to them under sections 230-70 or 230-75. As a result, they are each the last financial benefits to be taken into account when determining a gain or loss.

    End of example
    Bad debts

    Where a right to receive a financial benefit under a financial arrangement is impaired, an entity will not make a loss as a result of that impairment.

    However, an entity will make a loss from a financial arrangement from writing off as bad, the right to receive a financial benefit (or a part of a financial benefit), if one of the following is satisfied:

    • The financial benefit was taken into account in working out the amount of a gain from the financial arrangement and the gain was included in the entity's assessable income under TOFA.
    • The right is one for money that the entity lent in the ordinary course of its business of money lending.
    • The right is one that the entity bought in the ordinary course of its business of money lending.

    For an entity to deduct the loss, it must satisfy the other tests required outside TOFA in order to deduct the bad debt (for example, satisfying the continuity of ownership test).

    Accruals and realisations methods applying simultaneously

    Both the accruals and the realisation methods can apply to gains or losses arising from a single financial arrangement. This can occur because some of the financial benefits under the financial arrangement are sufficiently certain, while others are not.


    Under section 230-185, an entity must reassess which gains and losses from a financial arrangement the accruals method should apply to, and which gains and losses from the financial arrangement the realisation method should apply to, if both of the following apply:

    • The accruals or realisation method applies to the gains and losses from the arrangement.
    • There has been a material change to the terms and conditions of the arrangement or the circumstances that affect the arrangement.

    See also:

      Last modified: 10 Jun 2016QC 27222