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TOFA tax return labels

Tax return labels your clients must complete if they are taxation of financial arrangement (TOFA) entities.

Last updated 9 June 2016

Entities are required to apply the taxation of financial arrangement (TOFA) rules if they meet certain asset and aggregated turnover thresholds or have chosen to use the TOFA rules.

The TOFA rules contained in Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) determine TOFA entities' tax treatment of gains and losses from financial arrangements.

TOFA taxpayers must complete the following specific TOFA labels:

  • Total TOFA gains
  • Total TOFA losses.

TOFA taxpayers must also include TOFA gains and losses that are assessable or deductible in an income year in the relevant income or expense labels.

This guide is based on the 2016 income tax returns.

Start of example

Example: reporting TOFA gains and losses

Simon Ltd has the following gains and losses from its financial arrangements for the income year ended 30 June 2016:

  • term deposit entered into on 10 August 2014 - interest income - $205,000
  • loan entered into on 20 January 2015 - interest expense - $150,000
  • loan entered into on 1 July 2015 - interest expense - $320,000.

In completing its 2016 tax return, Simon Ltd should include the following:

6F

Gross interest

$205,000

6V

Interest expenses within Australia

$470,000

8T

Total TOFA gains

$205,000

8U

Total TOFA losses

$470,000

Where Total TOFA gains and Total TOFA losses are not completed correctly, an incorrect pay as you go (PAYG) instalment rate may be issued. The tax return instructions identify how to complete the TOFA labels correctly.

End of example

Company tax returns

Companies that have gains or losses from financial arrangements in an income year should record their TOFA gains and TOFA losses as follows:

TOFA labels

Reconciliation

7E

TOFA income from financial arrangements not included at item 6

7W

TOFA deductions from financial arrangements not included at item 6

Financial information

8T

Total TOFA gains

8U

Total TOFA losses

8S

TOFA gains from unrealised movements in the value of financial arrangements

Relevant income and expense labels

Income

6D

Gross distribution from partnerships

6E

Gross distribution from trusts

6F

Gross interest

6H

Total dividends

6J

Unrealised gains on revaluation of assets to fair value

6R

Other gross income

Expenses

6E

Bad debts

6V

Interest expenses within Australia

6J

Interest expenses overseas

6G

Unrealised losses on revaluation of assets to fair value

6S

All other expenses

Partnership and trust tax returns

Partnerships and trusts that have gains and losses from financial arrangements in an income year should record their TOFA gains and TOFA losses as follows:

TOFA labels

Taxation of financial arrangements

31M

Total TOFA gains

31N

Total TOFA losses

Relevant income and expense labels

Business income and expenses - Income

5G

Other business income - Primary production

5H

Other business income - Non-primary production

Business income and expenses - Expenses

5F

Bad debts

5I

Total interest expenses

5N

All other expenses

Reconciliation items

5A

Income reconciliation adjustments

5B

Expense reconciliation adjustments

Partnerships and trusts - Primary production

8A

Distribution from partnerships

8Z

Share of net income from trusts

8S

Deductions relating to amounts shown at A and Z

Partnerships and trusts - Non-primary production

8B

Distribution from partnerships, less foreign income

8R

Share of net income from trusts, less capital gains, foreign income and franked distributions

8T

Deductions relating to amounts shown at B and R

Rent

9G

Interest deductions

Gross interest

11J

Gross interest

Dividends

12K

Unfranked amount

Other assessable foreign source income

23B

Gross

Fund income tax return

Funds that have gains and losses from financial arrangements in an income year should record their TOFA gains and TOFA losses as follows:

TOFA labels

Taxation of financial arrangements

16H

Total TOFA gains

16I

Total TOFA losses

Relevant income and expense labels

Section B: Income

10C

Gross interest

10D

Net foreign income

10D1

Gross foreign income

10I

Gross distributions from partnerships

10J

Unfranked dividend amount

10N

Trust distributions unfranked amount

10Q

Trust distributions other amounts

10G

Foreign exchange gains

10S

Other income

Section C: Deductions

11A

Interest expenses within Australia

11B

Interest expenses overseas

11R

Foreign exchange losses

11L

Other deductions

Self-managed superannuation fund annual return

Self-managed superannuation funds that have gains and losses from financial arrangements in an income year should record their TOFA gains and TOFA losses as follows:

Specific TOFA labels

Taxation of financial arrangements

17H

Total TOFA gains

17I

Total TOFA losses

Other labels in which to include TOFA amounts

Section B: Income

11C

Gross interest

11D

Net foreign income

11D1

Gross foreign income

11I

Gross distributions from partnerships

11J

Unfranked dividend amount

11M

Gross trust distributions

11S

Other income

Section C: Deductions

12A1

Interest expenses within Australia

12B1

Interest expenses overseas

12L1

Other amounts

Disclosing TOFA gains and losses on gross or net basis

This information explains whether TOFA gains and TOFA losses should be reported in the relevant labels of income tax returns on a gross or net basis.

Gross basis

Where a TOFA entity reports gains and losses from financial arrangements on a gross basis for accounting purposes, they should reflect these gains and losses on a gross basis in their income tax return. Gross TOFA gains and gross TOFA losses must be separately reported in both the:

  • relevant income and expenses labels
  • total TOFA gains and total TOFA losses labels.

An example of amounts that should be reported on a gross basis is interest income and interest expense. These will be recognised separately in a TOFA entity's accounting system and in their books of account. Consequently, they will also be separately reported in the income tax return in both the:

  • relevant interest income and interest expense labels
  • total TOFA gains and total TOFA losses labels.

Net basis

Where a TOFA entity reports gains and losses from financial arrangements on a net basis for accounting purposes, it could be a compliance burden to separate the financial arrangement gains from the losses. Consequently, where these gains and losses are also TOFA gains and TOFA losses, the entity may report a 'net' TOFA gain or 'net' TOFA loss from these financial arrangements in their income tax return in both the:

  • relevant income and expenses labels
  • total TOFA gains and total TOFA losses labels.

Examples

The following examples are provided to guide how TOFA gains and TOFA losses should be reflected on a gross and net basis in income tax returns.

Start of example

Example 1: Company tax return

CHW Ltd is a TOFA entity whose tax and accounting year ends on 30 June. The company previously made a TOFA fair value method election. During the income year ending 30 June 2016, it had the following gains and losses from its financial arrangements:

  • an overall assessable net gain of $8,000,000 from its forward exchange contracts (unrealised gain on forward exchange contracts which are fair valued through profit and loss for accounting purposes)
  • interest income of $150,000 from its bank account
  • interest expense of $400,000 from its Australian bank loan.

CHW Ltd's accounting system records all the gains or losses from the forward exchange contracts it enters into during the income year on a net basis, whilst the interest income and interest expense amounts are separately recorded in its accounting system.

The forward contracts, bank account and loan are financial arrangements to which the TOFA rules apply.

CHW Ltd will complete its Company tax return 2016 as follows:

  • $150,000 at label F Gross Interest in item 6
  • $8,000,000 at label J Unrealised gains on revaluation of assets to fair value in item 6
  • $400,000 at label V Interest expenses with Australia in item 6
  • $8,150,000 at label T Total TOFA gains in item 8
  • $400,000 at label U Total TOFA losses in item 8.

Example 2: Trust tax return

GGM Trust is a TOFA entity. It buys deferred interest securities and government bonds, which it generally holds to maturity. It had $520,000 of gross interest from the securities it had during the income year ending 30 June 2016.

GGM Trust also entered into a number of derivative contracts which are fair valued through profit and loss for accounting purposes. The gains and losses from the derivative contracts are recorded on a net basis in its accounting system. For the income year ending 30 June 2016, it had a net loss of $1,500,000 from its derivative contracts.

All the securities, bonds and derivative contracts that GGM Trust had during the income year are TOFA financial arrangements. The trust has previously also made a TOFA fair value method election.

GGM Trust will complete its Trust tax return 2016 as follows:

  • $1,500,000 at label N All other expenses in item 5
  • $520,000 at label J Gross interest in item 11
  • $520,000 at label M Total TOFA gains in item 31
  • $1,500,000 at N Total TOFA losses in item 31.
End of example

Further information

For more detailed information on how to complete TOFA labels, refer to:

QC26779