Edited version of private ruling

Authorisation Number: 1011619120523

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Ruling

Subject: TOFA - Eligibility of Elective Method

Question 1

Is the Consolidated Statement of Financial Condition for the period to 31 December 2011 of the Ultimate Holding Company (UHC) a financial report prepared, in accordance with comparable standards for accounting made under a foreign law that apply to the preparation of the financial report under a foreign law within the meaning of subparagraph 230-395(2)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) for the taxpayer?

Answer

No

This ruling applies for the following period:

Year ended 31 December 2011

The scheme commences on:

1 January 2011

Question 2

If the Commissioner's answer to question 1 is no, is the Director's report and financial statements for the year ended 31 December 2011 of the Holding Company and its subsidiaries a financial report prepared, in accordance with comparable standards for accounting made under a foreign law that apply to the preparation of the financial report under a foreign law within the meaning of subparagraph 230-395(2)(a)(ii) of the ITAA 1997 for the taxpayer?

Answer

No

This ruling applies for the following period:

Year ended 31 December 2011

The scheme commences on:

1 January 2011

Question 3

If the Commissioner's answers to question 1 and 2 are no, is the Special Purpose Annual Financial Report for the year ended 31 December 2011 of the taxpayer's Australian branch a financial report prepared, in accordance with accounting principles within the meaning of subparagraph 230-395(2)(a)(i) of the ITAA 1997 for the taxpayer?

Answer

No

This ruling applies for the following period:

Year ended 31 December 2011

The scheme commences on:

1 January 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

UHC wholly owns the Holding Company which in turn wholly owns the taxpayer which has an Australian branch.

The Australian branch is an Australian permanent establishment of a non-resident, and is an offshore banking unit (OBU) gazetted under Division 9A of the Income Tax Assessment Act 1936 (ITAA 1936).

UHC is also a parent entity of an accounting consolidated group that prepares a Consolidated Statement of Financial Condition in a foreign country.

UHC has produced a Consolidated Statement of Financial Condition for the year to 31 December 2009. In that Statement it has declined to disclose certain matters required under one of the foreign accounting standards .

The principle activity of the Holding Company is the holding of an investment in the taxpayer. The Holding Company prepares a Directors' report and financial statements in the foreign country incorporating the affairs of the taxpayer.

The Holding Company has prepared a Directors' report and financial statements for the year ended 31 December 2010, which does not include a cash flow statement, in a foreign country.

The Australian branch has prepared a Special Purpose Annual Financial Report for the year ended 31 December 2010 in compliance with paragraph 292(2)(b) of the Corporations Act 2001.

In this Report the Australian branch has declined to disclose certain matters required under Australian equivalents to International Financial Reporting Standards (AIFRSs).

The taxpayer has a 31 December year end for accounting purposes, and has been granted a substituted accounting period ending 31 December for tax purposes by the Commissioner.

Division 230 of the ITAA 1997 will apply to the taxpayer from 1 January 2011.

The taxpayer will make the election within subsection 230-395(1) and, if eligible, the election will apply from 1 January 2011.

The applicant has advised that:

UHC is a connected entity of the taxpayer, and the Consolidated Statement of Financial Condition for the period to 31 December 2011 prepared by UHC will deal with and properly reflect the affairs of both UHC and the taxpayer.

The Holding Company is a connected entity of the taxpayer, and the Director's report and financial statements for the year ended 31 December 2011 prepared by the Holding Company will deal with and properly reflect the affairs of both the Holding Company and the taxpayer.

Assumptions

For the reports in the table below:

· The reports will be prepared on exactly the same basis,

· The reports will be prepared using the same accounting principles (or comparable standards for accounting made under a foreign law that apply to the preparation of the financial report under a foreign law),

· The reports will be prepared using the same auditing principles (or comparable standards for auditing made under a foreign law), and

· The notes to and the opinions of the auditor in the reports will be practically identical.

Table of reports

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 Subdivision 230-F

Income Tax Assessment Act 1997 Subsection 230-395(2)

Income Tax Assessment Act 1997 Paragraph 230-395(2)(a)

Income Tax Assessment Act 1997 Subparagraph 230-395(2)(a)(i)

Income Tax Assessment Act 1997 Subparagraph 230-395(2)(a)(ii)

Income Tax Assessment Act 1997 Section 230-525

Income Tax Assessment Act 1997 Subsection 995-1(1)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Unless otherwise indicated, references to legislative provisions are to the Income Tax Assessment Act 1997 (ITAA 1997).

Question 1

Division 230 contains rules for determining gains and losses from financial arrangements. There are two default tax-timing methods and four elective tax-timing methods for determining gains and losses from financial arrangements, one of which is the financial reports method.

The financial reports method is contained in Subdivision 230-F and broadly allows taxpayers to rely on gains and losses recognised under accounting standards for the purposes of calculating gains and losses from financial arrangements under Division 230.

Eligibility to make election to rely on financial reports

In order to elect to use the financial reports method, the taxpayer must satisfy the eligibility criteria set out in subsection 230-395(2). For present purposes, the relevant part of that subsection provides:

You are eligible to make an election to rely on financial reports for an income year if:

(a) you prepare a financial report for that income year in accordance with

i. the *accounting principles; or

ii. if the accounting principles do not apply to the preparation of the financial report--comparable standards for accounting made under a *foreign law that apply to the preparation of the financial report under a foreign law;

…..

* denotes a term defined in section 995-1 of the ITAA 1997.

…

In addition, where the relevant financial report is not one of the taxpayer's, but instead of a consolidated group (for accounting purposes), section 230-525 will be relevant. That section provides:

For the purposes of this Division, treat a financial report prepared by another entity as being prepared by you if:

(a) the other entity is a *connected entity of yours; and

(b) the report is a consolidated financial report that deals with both your affairs and the affairs of the connected entity; and

(c) the report properly reflects your affairs.

'Connected entity' is defined in subsection 995-1(1) as:

an associate of the entity; or

another member of the same wholly owned group if the entity is a company and is a member of such a group.

The applicant has submitted that the requirements in section 230-525 have been satisfied in relation to UHC's Consolidated Statement of Financial Condition for the period to 31 December 2011. The relevant question is therefore whether UHC's Consolidated Statement of Financial Condition for the period to 31 December 2011 is a financial report prepared within the meaning of subparagraph 230-395(2)(a)(ii).

Requirement to prepare a financial report in accordance with comparable standards for accounting

It is therefore necessary to consider whether the UHC's Consolidated Statement of Financial Condition for the period to 31 December 2011 is a financial report that is prepared in accordance with the foreign country standards.

As UHC has declined to disclose certain matters required under one of the foreign country accounting standards when preparing the Consolidated Statement of Financial Condition for the period to 31 December 2010, it cannot be said that it is a financial report that has been prepared in accordance with the foreign country standards for the purposes of subparagraph 230-395(2)(a)(ii).

Question 2

Eligibility to make election to rely on financial reports

This issue raises the question of whether the taxpayer can instead rely on the Director's report and financial statements for the year ended 31 December 2011 of the Holding Company for the purposes of satisfying the eligibility requirements in paragraph 230-395(2)(a).

As noted above, section 230-525 may allow an entity to treat a consolidated financial report as its own if certain conditions are met. The applicant has submitted that the requirements in section 230-525 have been satisfied in relation to the Holding Company's Director's report and financial statements for the year ended 31 December 2011. The relevant question is therefore whether the Holding Company's Director's report and financial statements for the year ended 31 December 2011 satisfies subparagraph 230-395(2)(a)(ii).

Requirement to prepare a financial report in accordance with comparable standards for accounting

The term 'financial report' is not defined. According to the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, it takes its meaning from ordinary commercial usage. A financial report in its ordinary commercial usage both in Australia and the foreign country would be comprised of a balance sheet, profit and loss statement, cash flow statement, statement of changes in equity and supporting notes. Such is the requirement of the accounting standards in Australia and the foreign country.

The Director's report and financial statements for the year ended 31 December 2011 that lacks an important component such as the cash flow statement cannot be said to be a financial report that has been prepared in accordance with accounting standards of the foreign country for the purposes of subparagraph 230-395(2)(a)(ii)

Question 3

Eligibility to make election to rely on financial reports

This issue raises the question of whether the taxpayer can instead rely on other reports for the purpose of satisfying the eligibility requirements in subsection 230-395(2).

The Australian branch will prepare a Special Purpose Annual Financial Report for the year ended 31 December 2011 (see assumptions above).

The Special Purpose Annual Financial Report for the year ended 31 December 2011 which merely reflects part of an operation of the entity is not a financial report that meets the requirements of subsection 230-395(2). It does not answer the description of a financial report that you prepare for that income year in accordance with the accounting principles or comparable standards for accounting within the meaning of subparagraph 230-395(2)(a)(i).