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  • Depreciating assets and taxation of financial arrangements (TOFA)

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    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 apply to the financial arrangements that you start to have from the beginning of your income year commencing on or after 1 July 2010 (unless you elected for the rules to apply a year earlier).

    Do the TOFA rules apply to you?

    The TOFA rules 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.

    TOFA rules and UCA

    The TOFA rules contain interaction provisions which may modify the cost and termination value of a depreciating asset acquired by an entity to which the TOFA rules apply. This will be the case where payment (or a substantial proportion of the payment) is deferred for more than 12 months after delivery of the depreciating asset.

    For more information, see:

    TOFA and the cost of a depreciating asset

    If the TOFA rules apply to you and you start or cease to have a financial arrangement (or part of a financial arrangement) as consideration for acquiring a depreciating asset, the TOFA rules will operate to determine the first element of cost. In general the rules mean the first element of cost is the market value of the depreciating asset at the time of acquisition.

    In the same way, the TOFA rules can also affect the second element of a depreciating asset’s cost when the financial arrangement is consideration for something obtained which is relevant to the second element of cost, for example, capital improvements.

    Example: TOFA and the cost of a depreciating asset

    Aus Co is subject to the TOFA rules.

    Aus Co enters into a contract on 1 July 2018 to buy a depreciating asset for $100,000. The depreciating asset is delivered on 1 January 2019 and payment is made on 1 July 2020 (that is, 18 months after delivery). The market value of the depreciating asset on 1 January 2019 is $90,000.

    On 1 January 2019 when Aus Co receives the depreciating asset, it starts to have a financial arrangement (the obligation to pay $100,000 in 18 months) which is provided to acquire the depreciating asset.

    The TOFA rules mean that Aus Co is taken to have provided an amount equal to the market value of the depreciating asset (worked out at the time it is acquired) for its acquisition. Therefore, Aus Co’s first element of cost of the depreciating asset is $90,000.

    The financial arrangement is taxed separately under the TOFA rules. The gain or loss worked out under the TOFA rules (loss of $10,000 in this example) does not form part of the first element of cost of the depreciating asset.

    End of example

    The TOFA rules also provide for a hedging tax-timing method that 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. For example, if this method applies to a gain or loss on a hedging financial arrangement used to hedge against risks for a depreciating asset, the gain or loss will be assessable or deductible on the same basis as the decline in value deduction.

    Note however that the gain or loss on the hedging financial arrangement will not form part of the cost of the depreciating asset.

    TOFA and the termination value of a depreciating asset

    If the TOFA rules apply to you and you start or cease to have a financial arrangement (or part of a financial arrangement) as consideration for providing a depreciating asset, the TOFA rules will determine the termination value of the depreciating asset. In general the rules mean the termination value is the market value of the depreciating asset at the time of disposal.

    Example: TOFA and the termination value of a depreciating asset

    ABC Co is subject to the TOFA rules.

    ABC Co enters into a contract on 1 July 2018 to sell its depreciating asset for $100,000. The depreciating asset is delivered on 1 January 2019 and payment is received on 1 July 2020 (that is, 18 months after delivery). The market value of the depreciating asset on 1 January 2019 is $90,000.

    On 1 January 2019 when ABC Co delivers the depreciating asset it will start to have a financial arrangement (the right to receive $100,000 in 18 months which is received for the provision of the depreciating asset).

    The TOFA rules mean that ABC Co is taken to have received an amount equal to the market value of the depreciating asset (worked out at the time it is provided) for its disposal. Therefore, ABC Co's termination value for the depreciating asset will be $90,000.

    The financial arrangement is taxed separately under the TOFA rules. The gain or loss worked out under the TOFA rules (gain of $10,000 in this example) does not form part of the termination value of the depreciating asset.

    End of example

    The TOFA rules also provide for a hedging tax-timing method that 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. For example, if this method applies to a gain or loss on a hedging financial arrangement used to hedge risks for a depreciating asset, the gain will be assessable (or the loss deductible) on the same basis as for the depreciating asset. Therefore, when there is a balancing adjustment event for that depreciating asset, you may have to work out separately:

    • the balancing adjustment assessable or deductible amount on the depreciating asset, and
    • the assessable or deductible amount for any part of the gain or loss on the hedging financial arrangement under the TOFA rules that has not yet been assessed or deducted.

    The gain or loss on the hedging financial arrangement will not form part of the termination value of the depreciating asset.

      Last modified: 30 May 2019QC 58646