Reliance on financial reports method
Broadly, an entity that makes a valid reliance on financial reports election can rely on its financial reports for the purposes of complying with its tax obligations for its financial arrangements.
This election aligns the tax treatment of relevant financial arrangements to the accounting treatment of those arrangements.
This election reduces the administration and compliance costs of the taxation of financial arrangements.
The financial reports election takes precedence over other elective and default tax-timing methods, but only to the extent that the hedging financial arrangements method does not apply to the financial arrangement.
To be eligible to make the reliance on financial reports method election in an income year, an entity must satisfy the following requirements:
- The entity must prepare a financial report for that income year according to the accounting principles that is audited according to the auditing principles.
- The entity's auditor has not qualified the auditor's report on the financial report for that income year or any of the last four financial years in a way that is relevant to the tax treatment of financial arrangements.
- The entity's accounting systems and controls and internal governance processes are reliable.
- No report of an audit or review conducted in the income year or any of the preceding four income years included an adverse assessment of accounting systems relevant to the tax treatment of financial arrangements.
Once made, the election to apply the reliance of financial reports method is irrevocable.
However, the election to apply the reliance on financial reports method will cease to apply if any of the eligibility requirements are no longer satisfied. The election will cease to apply from the start of the income year in which this occurs. The entity must then make balancing adjustments under subsection 230-430(2).
Example: Qualification in an auditor's report
The auditor's report on the financial reports of Scruffy Ltd has been qualified in relation to the amount of directors' fees recognised in the books.
The qualification will not prevent Scruffy Ltd from making a valid election to apply the reliance on financial reports method, as the directors' fees have no impact on the recognition and measurement of gains and losses on the relevant financial arrangements.
End of example