Under Subdivision 230-G, an entity must make a balancing adjustment when any of the following apply:
- The entity transfers to another entity all of the rights or obligations under a financial arrangement.
- All of the entity's rights or obligations under a financial arrangement otherwise cease.
- The entity transfers any of the following to another entity
- a proportionate share of all of its rights or obligations under a financial arrangement
- a right or obligation it has under a financial arrangement to a specifically identified financial benefit
- a proportionate share of a right or obligation it has under a financial arrangement to a specifically identified financial benefit.
- The financial arrangement subject to TOFA ceases to be a financial arrangement.
A gain or loss is not taken into account under the default methods or elective methods (apart from Subdivision 230-E) to the extent to which it is taken into account under the balancing adjustment method under Subdivision 230-G.
A gain or loss is not taken into account under the balancing adjustment method provided for under Subdivision 230-G to the extent that it is taken into account under the hedging financial arrangement method (Subdivision 230-E).
A balancing adjustment is also made in accordance with certain assumptions when an elective tax-timing method (except the hedging financial arrangement election) ceases to apply. The balancing adjustment made under the elective provisions is the same as the balancing adjustment that would be made under Subdivision 230-G.
A balancing adjustment is not made in certain circumstances (section 230-440), including in relation to:
- equity interests not subject to the fair value or reliance on financial reports elections
- hedging financial arrangements to which the hedging financial arrangements method applies
- the conversion or exchange of traditional securities into ordinary shares
- derivatives being settled or closed out for margining purposes
- a financial arrangement being written off as a bad debt
- a subsidiary member of a consolidated group or MEC group that has a financial arrangement ceasing to be a member of the group.
Upon cessation or transfer, the method statement in section 230-445 is applied to work out the amount that ensures the entity's overall gain or loss from having the financial arrangement (or the relevant part of it) is recognised.
Broadly, the balancing adjustment on disposal of a whole financial arrangement is worked out as (a + b + c) − (d + e + f) where:
- a = the total of the financial benefits received
- b = the total of other amounts that have been allowed as deductions and would have been allowable deductions because of circumstances that have occurred before the disposal
- c = the total of amounts that will be allowed as deductions, such as deductions due to the transitional balancing adjustment
- d = the total of all financial benefits provided
- e = the total of amounts that have been included in assessable income and would have been included in assessable income because of circumstances that have occurred before the disposal
- f = the total of other amounts that will be included in assessable income, such as income due to the transitional balancing adjustment.
Any allocation of gains or losses from the financial arrangement, before cessation or disposal, is taken into account to ensure that only the overall gain or loss from the financial arrangement is recognised for income tax purposes. That is, when working out any gain or loss on cessation or disposal, the balancing adjustment corrects any previous under-allocation or over-allocation of a gain or a loss before cessation or disposal.
Where there is an impairment loss under the financial arrangement, this amount is disregarded for the purposes of c above.
Example: calculating the balancing adjustment on the sale of a bond
Safe Co buys a 5 year bond carrying a fixed annual coupon of 10% per annum for $1,000 and will redeem it for $1,000 in 5 years.
Safe Co receives 2 $100 coupons that it included in its assessable income, and then sells the bond for $1,050.
Safe Co's overall gain from having the bond is $250 – that is:
$1,050 + (2 × $100) – $1,000 = $250
Given that $200 has already been included in Safe Co's assessable income, only $50 has to be included as a gain produced under the disposal balancing adjustment – that is:
$1,250 – ($1,000 + $200) = $50End of example