TOFA provides for a number of tax-timing methods that can be applied to work out when gains or losses that an entity makes from a financial arrangement should be brought to account for tax purposes.
There are two default tax-timing methods and four elective tax-timing methods.
If eligible, an entity can apply one or more of the elective tax-timing methods. If no elective tax-timing method applies to a financial arrangement, then the default methods apply.
Although more than one tax-timing method can apply to a financial arrangement, the priority rules in section 230-40 apply when working out which tax-timing method takes priority when calculating gains and losses.
If an entity ceases to have, or disposes of, a financial arrangement, a balancing adjustment must be calculated.
Figure 1: Hierarchy of tax-timing methods under TOFA
Example: Application of the hierarchy of tax-timing methods
Steel Co entered into a hedging financial arrangement and elected to apply the hedging financial arrangements method.
In applying the priority rules, as the hedging financial arrangements method applies to the gains or losses made from the hedging financial arrangement, the other methods will not apply.
If the hedging financial arrangements method did not apply to the hedging financial arrangement (for example, the entity did not make the hedging financial arrangements election), Steel Co would have to consider whether any other elective tax-timing methods apply. As no other elective tax-timing method elections had been made, the default methods would apply.
End of example