The key provisions of the TOFA rules are found in Division 230 of the ITAA 1997.
When will the TOFA rules affect an entity's tax return?
The TOFA rules will apply to financial arrangements that an affected entity starts to have in its first income year commencing on or after 1 July 2010 (unless it elected for the rules to apply a year earlier).
Which entities are affected?
The TOFA rules will apply to you if you are:
- an authorised deposit-taking institution, securitisation vehicle or financial sector entity with an aggregated annual turnover of $20 million or more
- a superannuation entity, approved deposit fund, pooled superannuation fund, managed investment scheme or entity with a similar status under foreign law relating to foreign regulation, with assets of $100 million or more
- any other entity (other than an individual) which satisfies one or more of the following
- an aggregated turnover of $100 million or more
- assets of $300 million or more
- financial assets of $100 million or more.
If you do not meet these requirements you can elect to have the TOFA rules apply to you.
Key impacts on CGT
Where the TOFA rules apply, they will have the following key impacts on CGT:
- They may operate to modify the cost base or capital proceeds of a CGT asset.
- A capital gain or capital loss made from a CGT asset that is a financial arrangement may be disregarded.
- Certain gains and losses from hedging financial arrangements may be taxed under the CGT rules.
TOFA and capital proceeds and cost base rules
If the TOFA rules apply to you and you start or cease to have a financial arrangement as consideration for the disposal of a CGT asset, the TOFA rules will operate to determine the capital proceeds of the CGT asset. In general the rules operate to ensure your capital proceeds are the market value of the CGT asset at the time of its disposal.
In the same the way, the TOFA rules may determine that the first element of your cost base and reduced cost base is the market value of the CGT asset at the time of its acquisition.
The TOFA rules can also affect other elements of the cost base and reduced cost base if the financial arrangement represents consideration for something obtained which is relevant to the other elements of the cost base and reduced cost base.
Example 52: TOFA and capital proceeds and cost base rules
Both ABC Co and Aus Co are subject to the TOFA rules.
On 1 July 2016, ABC Co enters into a contract to sell land to Aus Co for $250,000. Under the terms of the contract, title to the land passes in 6 months time on 1 January 2017, and payment is to be made on 1 July 2018 (that is, 18 months after title to the land passes). The market value of the land on 1 January 2017 is $200,000.
On 1 January 2017 when ABC Co passes title of the land to Aus Co it will start to have a financial arrangement as consideration for the disposal of its land. The TOFA rules will operate so that ABC Co is taken to have received an amount equal to the market value of the land when it is provided. Therefore, ABC Co’s capital proceeds are $200,000. Similarly, Aus Co’s first element of its cost base is $200,000. For both ABC Co and Aus Co, the additional $50,000 relates to a financial arrangement which is taxed under the TOFA rules and is not subject to the CGT rules.
End of exampleTOFA rules apply instead of CGT rules
Where the TOFA rules determine there is a gain or loss from your financial arrangement that is a CGT asset, a capital gain or capital loss that is made from a CGT event is disregarded. In general, this does not apply for superannuation entities, where CGT remains the primary code for calculating gains and losses from financial arrangements.
Hedging financial arrangements
The TOFA rules provide for a hedging tax-timing method that allows gains and losses from certain hedging financial arrangements to be characterised and taxed in accordance with the tax treatment of the underlying item being hedged. For example, if a valid hedging tax-timing method election is in effect, gains or losses from a hedging financial arrangement used to hedge against risks associated with a CGT asset will be treated as a capital gain or capital loss on the same basis as the capital gain or capital loss on the underlying CGT asset that is being hedged. If this applies to you, specify the amount of the gains or losses from the relevant hedging financial arrangements on the Capital gains tax (CGT) schedule 2017.
For more information, see Guide to the taxation of financial arrangements (TOFA).