Depreciating assets and taxation of financial arrangements (TOFA)

New rules have been introduced, the TOFA rules, which modernise the rules for determining the tax treatment of gains and losses from financial arrangements. The key provisions of the TOFA rules are found in Division 230 of the Income Tax Assessment Act 1997.

When do the TOFA rules start to apply to you?

If the TOFA rules apply to you, they will apply to the financial arrangements that you start to have from the beginning of your income year commencing on or after 1 July 2010. However, you can elect to have the TOFA rules apply a year early, so that it applies to financial arrangements that you start to have from the beginning of your income year commencing on or after 1 July 2009.

This means that the TOFA rules will not affect your taxable income for 2010 or how your 2010 income tax return is completed unless you make an election for the TOFA rules to apply to your financial arrangements early.

Do the TOFA rules apply to you?

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.

Generally, the TOFA rules also cover qualifying securities that you start to have after 1 July 2010, provided they have a remaining life of at least 12 months after you start to have them regardless of your turnover or assets.

TOFA rules and UCA

The TOFA rules contain interaction provisions which may modify the cost and termination value of a depreciating asset, where a financial arrangement starts or ceases to be held as consideration for the acquisition or disposal of a depreciating asset.

In addition, a hedging tax-timing method provided for in the TOFA rules allows gains and losses from certain hedging financial arrangements to be recognised and characterised in accordance with the tax treatment of the underlying item being hedged. Where a hedging financial arrangement election is in force, gains or losses from a hedging financial arrangement used to hedge against risks in relation to a depreciating asset may be recognised when the decline in value and balancing adjustments are recognised.