For an entity to be eligible to elect to apply an elective tax-timing method (except for the qualifying forex account election) for an income year, the following common requirements must be met:
- The entity must prepare financial reports for the income year, according to the accounting principles or comparable standards for accounting made under a foreign law.
- The financial report must be audited according to the auditing principles or comparable standards for auditing made under a foreign law.
Where a consolidated financial report deals with the affairs of all entities in the tax consolidated group, the consolidated financial report can be used to determine whether the group meets eligibility requirements.
Where stand-alone financial reports deal with the affairs of all entities in the tax consolidated group, such reports can be used to determine whether the group meets eligibility requirements. In such cases, all members of the tax consolidated group must prepare stand-alone financial reports to satisfy the requirements.
Where the affairs of the tax consolidated group are reflected in both the consolidated financial report and stand-alone financial reports, the group can use either report type to determine whether it meets eligibility requirements – however it must make this choice consistently.
For a multiple entry consolidated (MEC) group, the provisional head company's consolidated financial report may not reflect the financial arrangements of the entire MEC group. A consolidated report prepared by an eligible tier-1 entity, which is the provisional head company, most likely would not reflect the financial arrangements of other eligible tier-1 entities or of its wholly-owned subsidiaries.
In such a situation, pursuant to section 230-525, the provisional head company may be able to rely on a consolidated financial report prepared by the top company to satisfy the eligibility requirement that you prepare a financial report (for example, under paragraph 230-210(2)(a)). However, whether the provisional head company can rely on the consolidated financial report for these purposes depends on the particular case.
Non-consolidated tax entities
Where an entity is not part of a tax consolidated group and does not itself prepare a financial report, it may still be able to satisfy the eligibility requirements. To do this, it can use a consolidated financial report prepared by another entity that properly reflects the first entity's affairs.
Financial arrangements subject to elective tax-timing methods
An elective tax-timing method will only apply to financial arrangements that an entity starts to have in the income year in which the election is made or later income years.
However, an elective tax-timing method can apply to existing arrangements where the entity made both the:
- transitional election for existing financial arrangements
- election to apply the tax-timing method on or before the first lodgment date of the entity's tax return that occurs after TOFA first applies.
Gains or losses recognised in financial reports
An elective tax-timing method will only apply to a financial arrangement if the gains or losses from the financial arrangement are recognised or recorded in the relevant audited financial report.
However, an elective tax-timing method may also apply to transactions that are not recognised in the report if they are intra-group transactions of an accounting consolidated group. This requirement will be satisfied where both the following apply:
- The entity is a member of an accounting consolidated group.
- The financial arrangement is not recognised in an audited financial report only because it is an intra-group transaction under AASB 127.
Financial arrangements between members of a consolidated group or MEC group are not covered by this requirement because the single entity rule in section 701-1 operates to treat them as not being financial arrangements for all income tax purposes.
When an election ceases to apply
Once made, an elective tax-timing method cannot be revoked.
However, an election to apply an elective tax-timing method will cease to have effect from the start of an income year if the entity ceases to meet the eligibility requirements to make the election.
Where the elective tax-timing method ceases to apply, the entity must make certain balancing adjustments for the relevant financial arrangements.
Entities can make new elections where they again satisfy the relevant requirements.
Example: Ceasing to satisfy the eligibility requirements
Staples Co is subject to TOFA. Staples Co elected to apply the fair value method to its financial arrangements in its income year ending 30 June 2011.
For the year ending 30 June 2013, Staples Co did not prepare financial reports according to the relevant accounting principles. As it ceased to meet the eligibility requirements to make the fair value method election in that income year, the fair value method ceased to have effect from 1 July 2012 and certain balancing adjustments must be made in respect of Staples Co's relevant financial arrangements.
End of example