House of Representatives

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008

Second Reading Speech

Mr Bowen (Minister for Competition Policy and Consumer Affairs, and Assistant Treasurer)

I move:

That this bill be now read a second time.

The Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, or TOFA bill, introduces a comprehensive framework for the taxation of financial arrangements designed to reduce tax induced distortions to investment and financing, to facilitate efficient risk management and to reduce compliance and administration costs.

This bill is the final stage of the TOFA reforms which were first announced in the 1992 budget and have progressively been implemented with stage 1 legislated in 2001 and stage 2 in 2003. Stages 3 and 4 implemented by this bill were confirmed as important by Ralph review of taxation in 1999.

The bill will reduce tax distortions by generally ignoring the capital/revenue distinction and taxing financial arrangements based on economic substance rather than legal form. In order to align the tax treatment of economically similar financial arrangements, taxation on an accruals basis will become the standard treatment for many financial arrangements.

The bill will increase the post-tax efficiency and effectiveness of hedging and facilitate effective and efficient risk management by permitting alignment of character and tax timing of eligible hedging arrangements.

The bill will reduce the complexity of accruals calculations present in current tax rules on discounted and deferred interest securities, and will reduce compliance and administration costs by permitting close alignment between tax and accounting outcomes on an elective basis. The bill will allow eligible taxpayers to use results from their financial reports for tax purposes.

The TOFA rules will not be applied on a mandatory basis to individual and small business taxpayers, except where significant deferral of income is involved.

The TOFA rules will apply to taxpayers which are approved deposit-taking institutions, securitisation vehicles or entities that are required to register under the Financial Sector (Collection of Data) Act if their aggregated annual turnover is $20 million or more. Superannuation funds and managed investment schemes will apply the rules if the value of their assets is $100 million or more. Other taxpayers will apply the rules if their turnover is $100 million or more, if the value of their assets is $300 million or more, or if the value of their financial assets is $100 million or more. Taxpayers who are not required to apply the TOFA rules may elect to apply the rules.

This is a significant bill which will provide some much needed certainty and coherence to the tax treatment of the taxation of financial arrangements.

The government has embarked on considerable consultation on these matters over the last 12 months, and there are a number of changes from the legislation the former government introduced just before the last election.

I thank the officers of the Treasury and all the interested parties who have been involved in the consultation.

Because this is a complex area of the law, the government intends to monitor the implementation of this reform of Australia's financial taxation system and will consider the need for any refinements going forward.

Full details of the measures in this bill are contained in the explanatory memorandum.

I commend the bill to the House.

Debate (on motion by Mr Randall) adjourned.