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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: TOFA and capital proceeds and cost base rules
Both ABC Co's and Aus Co's financial arrangements are subject to the TOFA rules and they have elected to have these rules apply early, in their income year commencing on 1 July 2009.
On 1 July 2009, 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 six months time on 1 January 2010, and payment is to be made on 1 July 2011 (that is, 18 months after title to the land passes). The market value of the land on 1 January 2010 is $200,000.
On 1 January 2010 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.
Last modified: 10 Sep 2010QC 28058