Integrity rules have been introduced to ensure TOFA is applied consistently, and to address non-arm's length dealings and value shifting in relation to financial arrangements.
Consistency
Gains and losses must be worked out consistently for each financial arrangement through time.
This means the tax-timing methods should be applied:
- consistently from year to year for a particular financial arrangement, provided the entity continues to meet the arrangement and requirements for a particular election
- in the same manner for all financial arrangements essentially of the same nature, where the entity can choose to apply a method in a particular manner (section 230-80).
See Section 230-80 – Consistency in working out gains or losses (integrity measure).
Non-arm's length rules and arm's length rules
Generally, sections 230-510 and 230-515 incorporate non-arm's length rules and arm's length rules that are similar and consistent with those that apply to arrangements not covered by TOFA.
The amount of a financial benefit received or provided under certain non-arm's length financial arrangement dealings must be substituted by the amount that would reasonably be expected to be received or provided if the parties were dealing at arm's length.
The rules also preserve existing non-arm's length rules and arm's length rules in other parts of tax law that would otherwise affect the financial arrangement, such as:
- Division 16K of Part III to the ITAA 1936 (off-market share buy-backs)
- section 775-40 (disposal of foreign currency or right to receive foreign currency).
TOFA incorporates and extends the arm's length rules that are consistent with those that apply to arrangements not covered by TOFA.
For more information, see:
- Section 230-510 – Non-arm's length dealing in relation to financial arrangement
- Section 230-515 – Arm's length dealings in relation to financial arrangement – adjustment to gain or loss in certain situations.
Value shifting
Generally, the rules against value shifting are designed to target situations where, under a scheme, value is shifted away from equity or loan interests. Gains or losses under TOFA are disregarded to the extent that they are attributable to value shifts under Divisions 723, 725 or 727, or a value shift that has consequences analogous to those under these divisions under a repealed provision of the ITAA 1997 or ITAA 1936 (subsection 230-520(1)).
See Section 230-520 – Disregard gains or losses covered by value shifting regime.