• Tax treatment

    If an election to rely on financial reports applies to a financial arrangement, the gain or loss made from the arrangement for the income year is the gain or loss that the accounting principles require the entity to recognise in profit or loss from that arrangement for that income year.

    For eliminated accounting intra-group transactions, the gain or loss made from the arrangement for the income year is the gain or loss that the accounting principles would have required the entity to recognise in profit or loss from that arrangement for that income year if the arrangement had not been an intra-group transaction.

    Impaired debt arrangements

    Where a debt arrangement that is subject to the reliance on financial reports election subsequently becomes impaired, the arrangement ceases to be subject to the reliance on financial reports method, except where the arrangement is fair valued. This is because the arrangement ceases to satisfy the requirement that the differences in the results of the accounting method and the compounding accruals method are reasonably expected to be not substantial.

    The reason for this is that the compounding accruals method does not recognise a provision for doubtful debts. Hence, the relevant financial arrangement will become subject to the remainder of TOFA, that is, to a tax-timing method other than the reliance on financial reports method.

    Where a debt arrangement that is subject to the reliance on financial reports method becomes impaired, and the financial reports election ceases to apply to it, the arrangement is specifically precluded from being subject to a balancing adjustment. The reason for this is that if a balancing adjustment were applied at the time the financial arrangement becomes impaired, the taxpayer would receive an immediate deduction for the impairment of the debt arrangement. Such a result is contrary to the general policy in relation to doubtful debts for financial arrangements that are not subject to the fair value election.

      Last modified: 10 Jun 2016QC 27222