NTLG Finance and Investment TOFA Working Group

View meetings updates below:

• NTLG Finance and Investment Sub-Group meeting on 25 February 2013 on 25 February 2013

  On 25 February 2013, Alexis Kokkinos, Simon Jenner (Ernst & Young) and Karen Liew (Institute) attended a meeting of the National Tax Liaison Group (NTLG) Finance and Investment Sub-group as representatives of the Institute.

  Matters discussed include:

  • An update from the ATO on the status of various Division 230 issues including interaction issues with tax consolidations, treatment of borrowing costs in relation to a non-revolving loan facility and securitisation
  • ATO compliance activities, private ruling request statistics and the application of the law in relation to the limited recourse debt provisions under Division 243 of the Income Tax Assessment Act 1997 (ITAA 1997)
  • A Treasury update:
    • Treasury is progressing the amendments to section 974-80 of the ITAA 1997 with the new tax system measure for managed investment trusts and is hoping to release the exposure draft legislation by June
    • The exposure draft legislation for the related party bad debts measure is expected to be released in April
    • Treasury is hoping to see the legislative amendments to Division 230 of the ITAA 1997, which were released for consultation earlier in the year, introduced in the Autumn sittings of Parliament.
  • A compliance update from the ATO regarding its activities planned for the banking and finance sector.

  Members can contact the Tax Group for further information on the meeting. The formal minutes of the meeting will be published on the ATO website in due course.

• NTLG TOFA Working Group meeting on 18 October 2012

  On 18 October 2012, Paula Houvardas (Ernst & Young), Tony Stolarek (Ernst & Young), Peter Gillies (Pitcher Partners) and Karen Liew (Institute) attended a meeting of the National Tax Liaison Group (NTLG) Finance & Investment Sub-group Taxation of Financial Arrangements (TOFA) Working Group as representatives of the Institute.

  Matters discussed include:

  • Treasury was currently working on:
    • exposure draft legislation for the changes to Division 230 which were announced by the then Assistant Treasurer on 29 June 2010
    • amendment to s 974-80 of the Income Tax Assessment Act 1997. The amendment will be progressed together with the proposed tax measures for managed investment trusts
    • exposure draft legislation for changes to the debt equity rules in relation to the tax treatment of Tier 2 capital instruments under Basel III Capital Reforms
    • exposure draft legislation for the related party bad debt deductions and limited recourse debt definition amendments announced in the 2012-2013 Budget.

  The abovementioned exposure draft legislation is expected to be released in mid November 2012.

  • The ATO provided an update on the following outstanding issues –
    • Issue 176 – concerning the treatment of borrowing costs in respect of a facility agreement for purposes of s 230-60. The ATO are still considering the issue. 
    • A related issue to issue 315 – concerning the interaction between TOFA (fair value and financial reports elective methods) and CGT for superannuation funds. The ATO have finalised their review and agree that the anti-overlap rule (s 295-85(2)(aa)) does not appear to be effective and are in the course of preparing a note to Treasury.
    • Issue 825 – concerning the interaction between TOFA (fair value elective method) and Division 6 of the Income Tax Assessment Act 1936. While the matter is still under review, the ATO share the concern expressed by the member that raised this issue that the legislation does not appear to be achieving the right policy outcome. 
    • Issue 1040 – concerning securitisation transactions. The ATO are still considering submissions received.
  • TOFA/Consolidation interactions –
    • The ATO have reviewed their response to issue 930 (addressing the operation of the entry history rule in the context of TOFA elections made by a joining entity) and the views expressed in ATO ID 2006/201 and are in the course of preparing a note to Treasury.
    • The ATO are still reviewing their response to issue 931 (the operation of s 701-55(5A) in various scenarios) and the views expressed in ATO ID 2011/51 and are in the course of preparing a note to Treasury.
    • The ATO are also still reviewing their position on an issues raised regarding the interaction of Subdivision 775-F and consolidation.
  • The ATO provided an update on their compliance approach in respect of the TOFA consolidation interaction amendments effected by Tax Laws Amendment (2012 Measures No. 2) Act 2012, particularly with regard to the retrospective application from 26 March 2009. Letters had been sent to approximately 600 taxpayers expected to be affected by the amendments and they were in the process of following up with recipients who had not responded to the letters.

  Members can contact the Tax Group for further information on the meeting. The formal minutes of the meeting will be published on the ATO website in due course.

• NTLG TOFA Working Group teleconference on 7 August 2012

  On 7 August 2012, Alexis Kokkinos (Pitcher Partners), Paula Houvardas (Ernst & Young), Tony Stolarek (Ernst & Young) and Karen Liew (Institute) participated in a teleconference of the National Tax Liaison Group (NTLG) Finance & Investment Sub-group Taxation of Financial Arrangements (TOFA) Working Group.

  In the teleconference, the ATO outlined its compliance approach for the implementation of Schedule 2 of Tax Laws Amendment (Measures No.2) Act 2012 which contains amendments to the TOFA (Division 230) and consolidation interaction provisions. The amendments affect two types of taxpayers:

  1. head companies with a post-TOFA joining
  2. head companies that had a pre-TOFA joining and made a transitional election.

  Compliance approach

  Taxpayers are expected to amend their assessments within a reasonable time, and also to lodge future income tax returns taking into account the effect of the amendments. As part of this process, the ATO will assist taxpayers, including through the private binding rulings process, compliance products, as well as the NTLG itself.

  Some preliminary work have been conducted by the ATO in identifying the population of taxpayers that are likely to be affected by the amendments – i.e. including pre-TOFA joinings into head companies that made a transitional election, and post-TOFA joinings. Taxpayer data indicates approximately 770 taxpayers are affected by the amendments.

  During August 2012, the ATO will send out letters to these taxpayers, informing them of the changes, and requesting that they review their positions.

  If the effect of the new law is that taxpayers’ positions require that there be an amendment of a previous assessment, the letter requests that additional information be provided. This information can be seen at Changes to the operation of consolidation and TOFA rules.

  Once the ATO receives a request for an amended assessment, it will be processed. The ATO may conduct compliance assurance on the amendment request – as per usual. There will be a small team set up in LB&I which will handle this assurance process.

  There may be some taxpayers that may have had a joining, and are in a sense affected by the amendments, but the amendments will not change their tax position (eg joining entity had no liabilities that fluctuate in value and the head company is only affected by the amendments because there was a post-TOFA joining). It is appropriate for such taxpayers to not respond to our letters.

  Additionally, there are a number of identified taxpayers (around 90) that will be significantly affected by the amendments. For those taxpayers, the ATO will send out a letter initially with appropriate subsequent follow up.

  In the teleconference, the ATO also discussed outstanding consolidation issues affecting the interpretation of Division 230 and provided an update on its Division 230 compliance review pilot.

  For further information on the teleconference, please contact the Tax Group.

• NTLG TOFA Working Group meeting on 20 March 2012

  On 20 March 2012, Matt Hayes (KPMG), Paula Houvardas (Ernst & Young), Tony Stolarek (Ernst & Young) and Karen Liew (Institute) attended a meeting of the National Tax Liaison Group (NTLG) Finance & Investment Sub-group Taxation of Financial Arrangements (TOFA) Working Group as representatives of the Institute.

  Matters discussed include:

  • Whether, under s 230-60, the borrowing costs play an integral role in determining whether the borrower makes gains or losses under the draw downs. The ATO was of the preliminary view that the borrowing costs played an integral role in respect of the draw downs
  • The issue with timing differences denominated in a foreign currency where the foreign exchange translation election has been made by a taxpayer and whether a provision or accrual falls within the definition of ‘arrangement’. The ATO acknowledged there was a mismatch between tax and accounting as a result and that there was no double counting rule to prevent excessive assessable/deductible amounts arising in the case of timing differences denominated in foreign currency
  • The Professional Bodies joint submission on TR 2011/D7 Income tax: taxation of financial arrangements – application of subsections 230-30(2) and 230-30(3) of the Income Tax Assessment Act 1997 to gains and losses relating to exempt income or non-assessable non-exempt income.

  Members can contact the Tax Group for further information on the meeting. The formal minutes of the meeting will be published on the ATO website in due course.

• NTLG TOFA working group meeting on 5 December 2011

  On 5 December 2011, the National Tax Liaison Group’s Finance and Investment’s working group regarding the Taxation of Financial Arrangements (TOFA) met. The following issues were discussed:

  • Updates on the topics:
    • Implications of TOFA taxpayers returning TOFA gains and losses on a net basis in income tax returns 
    • Deductibility of dividends and timing of deduction 
    • Historical rate rollovers 
    • Reduced accounting disclosure requirements 
    • Is the reference to financial assets and asset in s 230-455 a reference to their accounting meanings 
    • Securitisation technical discussion paper
  • Treasury update on TOFA
  • Analysis of the following new topics: 
    • Put options
    • Application of TOFA to non-equity shares in s 230-530 
    • Convertible redeemable preference shares – s 230-530(2) and the absence of the words ‘that you hold’ 
    • Convertible redeemable preference shares that are debt interests
  • Consideration of the following new topics:
    • Timing differences regarding foreign currency due to a foreign exchange retranslation election
    • Treatment of borrowing costs upon entering into a facility agreement where the draw downs are the relevant arrangement.

  The next meeting is proposed for 20 March 2012.
  

• NTLG TOFA working group meeting on 6 September 2011

  On 6 September 2011, Tony Stolarek (EY) represented the Institute at the NTLG Taxation of Financial Arrangements (TOFA) working group. The following issues were discussed: 

  • ATO’s approach to assessing a taxpayer’s risk in transitioning to TOFA 3 & 4 
  • Treasury’s priorities in relation to TOFA – announcements regarding accruals and realisation as the default method; announcements regarding amendments to the transitional rules, the foreign branches announcement, and the foreign currency (TOFA 2) announcements 
  • The ATO is now willing to accept for Division 230 financial reports of taxpayers which did not satisfy the full spectrum of accounting disclosure requirements 
  • TOFA and tax consolidation issues are not currently being actioned, pending a review being undertaken on tax consolidation 
  • Securitisation – the ATO issues an extensive paper that will be discussed by a securitisation focus group on 21 September 2011.
    

• NTLG TOFA Subcommittee meeting on 1 June 2011

  On 1 June 2011, a working group of the National Tax Liaison Group (NTLG) Taxation of Financial Arrangement (TOFA) sub-committee met to discuss TOFA and consolidation interactions.

  The agenda items included:

  • Interpretative issues with s701-55(5A) of the Income Tax Assessment Act 1997
  • The treatment of assets that are, or form part of arrangements to which Subdivision 775-F applies
  • Agreement that the ‘election inconsistency rule’ should be extended to the portfolio election
  • Inheritance of the TOFA rules
  • How to deal with the transitional balancing adjustment when the head company acquires another head company or a joining entity
  • The extent of the exit history rule
  • The lack of an actual deemed assumption rule in s715-375
  • Whether s715-375 looks to the TOFA status of the joining entity, not the head company.
    

• NTLG TOFA Subcommittee meeting on 31 May 2011

  On 31 May 2011, there was a National Tax Liaison Group (NTLG) Taxation of Financial Arrangements sub-committee meeting. At this meeting, the following issues were discussed:

  • Update of the Treasury work programme
  • Progress of ATO fact sheets and binding guidance products regarding various issues such as:
    • prospective versus retrospective hedges
    • disposing of, ceasing to have a hedging financial arrangement
    • NANE issues
    • Treatment of portfolio fees
    • Associated financial benefits under s 230-60
  • Division 230 compliance plan
  • Update of NTLG TOFA issues such as historical rate rollovers and securitisation.
  • Analysis of new NTLG TOFA issues such as:
    • Financial arrangements form trade or settlement dates
    • New life insurance company and consolidation
    • Discussion of double taxation issues in relation to superannuation funds and whether the primary code is CGT.
      

• NTLG TOFA Working Group meeting on 8 March 2011

  On 8 March 2011, Alexis Kokkinos (Pitcher Partners), Matt Hayes (KPMG), Paula Houvardas (Ernst & Young), Tony Stolarek (Ernst & Young) and Karen Liew (Institute) attended a meeting of the National Tax Liaison Group (NTLG) Finance and Investment Sub-group Taxation of Financial Arrangements (TOFA) Working Group as representatives of the Institute.

  Matters discussed include:

  • The ATO’s requirement to disclose gross TOFA gains at the TOFA labels in the income tax return and whether the ATO would allow disclosure of net gains where gross gains were not practically obtainable
  • An update from Treasury – Treasury was preparing a discussion paper to facilitate consultation on the outstanding hedging election issues that it was considering; the TOFA Tranche 2 amendments announced last year were being progressed but draft legislation was not likely to be released by June this year; and forex amendments from the government announcement in 2004 were being progressed
  • The question of whether you need to make all the disclosures required under the accounting standards in the financial report to satisfy the requirement to prepare a financial report for that income year in accordance with the accounting principles
  • The issues arising from the interaction of TOFA and consolidation where an entity joined a consolidated group after the commencement of TOFA and the head company and joining company have made different choices in relation to the transitional election to bring in pre-existing financial arrangements and s230-455(7) election (‘opt into TOFA’ election).

  Members can contact the Tax Group for further information on the meeting. The formal minutes of the meeting will be published on the ATO website in due course.