The Commonwealth Treasury


DETAILS OF PROPOSED CHANGES ANNOUNCED BY THE MINISTER FOR REVENUE AND ASSISTANT TREASURER

Close Window

TAXATION OF FINANCIAL ARRANGEMENTS:
DETAILS OF PROPOSED CHANGES ANNOUNCED BY THE MINISTER FOR REVENUE AND ASSISTANT TREASURER

A number of measures concerning the implementation of the Taxation of Financial Arrangements (TOFA) reforms have been announced by the Minister for Revenue and Assistant Treasurer, The Hon Mr Mal Brough MP (see Press Release No.002, 5 August 2004).

The purpose of this paper is to provide further guidance to taxpayers and their advisers on these measures. However, to the extent that the announced measures require a change in the law the information in this paper is provided merely as a guide as to how the measures might operate.

The measures announced by Mr Brough concern:

  1. amendments to the foreign currency provisions1;

    These amendments fall into 3 broad categories:

    1. amendments constituting a policy change;
    2. technical amendments; and
    3. minor technical amendments.
  2. regulations made under regulation making powers in the foreign currency provisions;
  3. technical amendments to the debt/equity2 and capital gains tax3 (CGT) provisions; and
  4. deferral of the commencement of the remaining stages of the TOFA reforms.

 

A 1. AMENDMENTS TO THE FOREIGN CURRENCY PROVISIONS CONSTITUTING A POLICY CHANGE

Issue / Background

Proposed change

A 1.1 Exclusion of consolidated groups containing ADIs and non-ADI financial institutions

Authorised deposit-taking institutions (ADIs) and non-ADI financial institutions are excluded from the operation of Division 775 and Subdivisions 960-C and 960-D. This exclusion was introduced as a compliance-cost saving measure for these entities and is intended to apply only until the introduction of the retranslation rules in TOFA stage 4.

As currently drafted, this exclusion will apply to a consolidated group where the head company is an ADI or a non-ADI financial institution, but not where an ADI or a non-ADI financial institution is only a subsidiary member of the group.


Amendments will ensure that:

  • all consolidated groups, including multiple entry consolidated (MEC) groups, which contain an ADI or non-ADI financial institution, are excluded from the operation of the foreign currency provisions, and
  • all consolidated groups which are part of the same wholly owned group as an Australian permanent establishment which is carrying on banking business in Australia are excluded from the operation of the foreign currency provisions.

Timing

These amendments will take effect from the date of effect of the existing foreign currency measures (1 July 2003).

A 1.2 Subdivision 775-E: Extension of retranslation election to non-ADI accounts

The retranslation election in Subdivision 775-E allows taxpayers to elect to calculate gains and losses on certain foreign currency denominated accounts using a retranslation methodology.

The retranslation election is restricted to accounts held with an ADI or similar institution.

Amendments will:

  • remove the requirement in Subdivision 775-E limiting the availability of the retranslation election to accounts maintained with an ADI or with a financial institution similar to an ADI; and
  • allow regulations to be made to include other types of accounts.

Timing

The amendment will take effect from 1 July 2003 and taxpayers will be permitted 90 days from Royal Assent of this amendment to make a backdated election.

A 1.3 Subdivision 775-C: Extension of roll-over relief to multi-currency facility agreements

Subdivision 775-C allows foreign exchange gains and losses on certain securities issued under certain finance facilities to be rolled over.

Subdivision 775-C requires that the facility agreement be denominated in a particular foreign currency. However, in some cases, facility agreements allow securities to be issued in two or more different currencies permitting a company to obtain finance in one or more currencies.

Amendments to Subdivision 775-C will allow roll-over relief for eligible securities issued under a multi-currency facility agreement. The roll-over relief will be limited to circumstances in which the new security and the replaced security are in the same currency.

Timing

The amendment will take effect from 1 July 2003 and taxpayers will be permitted 90 days from Royal Assent of this amendment to make a backdated election.

A 1.4 Section 775-80: Availability of election for short term forex realisation gains and losses rules to apply to new entities

Under section 775-80 an entity may elect for the short term forex realisation gains and losses rules in sections 775-70 and 775-75 to not apply to them.

The election is only available if the entity was in existence at the applicable commencement date or came into existence within 90 days of their applicable commencement date or the date of Royal Assent for the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003.

Section 775-80 will be amended to allow new entities a period of time after they come into existence to make an election to not apply the short-term forex realisation gains and losses rules.

Timing

The amendment will have effect from 1 July 2003. Entities, that come into existence more than 90 days after their applicable commencement date, but prior to Royal Assent of the amendments, will be able to make an election within 90 days of that assent.

A 1.5 Deemed election into limited balance rules for individuals

The limited balance election in Subdivision 775-D provides compliance cost savings for taxpayers with small foreign currency holdings by permitting them to ignore the gains and losses on foreign currency bank accounts with a total balance of less than the equivalent of A$250,000.

Subdivision 775-D will be amended so that individual taxpayers with appropriate small foreign currency holdings will be able to benefit from the limited balance account election even though the taxpayer has not made an election.

Timing

This amendment will take effect from 1 July 2003.

A 2. TECHNICAL AMENDMENTS TO THE FOREIGN CURRENCY PROVISIONS

Issue / Background

Proposed change

A 2.1 Subsections 775-45(7) and 775-55(7): double counting of forex realisation gains and losses on pre-payments

As currently drafted sections 775-45 and 775-55 may lead to the double counting of a forex realisation gain or loss.

An amendment will remove the potential for double counting.

Timing

The amendment will take effect from 1 July 2003.

A 2.2 Sections 775-85 to 775-100: Include interest and other income in the forex cost base of a right to receive foreign currency

In some circumstances, the rules in sections 775-85 to 775-100 do not take into account all relevant amounts for the calculation of a forex realisation gain or loss. For example, section 775-85 does not take into account, in calculating a forex realisation gain or loss on the receipt of an amount of foreign currency denominated income, any part of the amount which previously was returned as income. This could lead to an incorrect outcome.

An amendment will ensure that the cost base of a right or obligation to pay or receive foreign currency appropriately takes into account, in calculating costs and benefits, amounts which do not take the form of cash or non-cash benefits.

Timing

The amendment will take effect from 1 July 2003.

A 2.3 Calculating forex cost base and other values where a taxpayer becomes an Australian resident

As currently drafted, the foreign currency provisions may apply so that a taxpayer who becomes an Australian resident is taxed on forex realisation gains or losses that were made while the taxpayer was not an Australian resident.

To the extent that the gains or losses are not Australian sourced, only changes in exchange rates that occur once a taxpayer has become an Australian resident should be taken into account in determining any gain or loss.

Amendments will be made so that the cost base (or value) for a new resident of a foreign currency right or obligation that gives rise to a non-Australian sourced gain or loss is based on the exchange rate applicable at the time that the taxpayer became an Australian resident.

Timing

The amendment will take effect from 1 July 2003.

A 2.4 Foreign currency denominated convertible and exchangeable securities

Subsections 26BB(4), 26BB(5), 70B(2B) and 70B(2C) of the Income Tax Assessment Act 1936 ensure that a gain or loss does not arise on the conversion or exchange of a “traditional security” into ordinary shares.

However, a foreign exchange gain or loss may still be made on the conversion or exchange of the traditional security into ordinary shares.

An amendment will remove the taxing point for foreign exchange gains and losses when a traditional security is converted or exchanged into ordinary shares. Any foreign exchange gain or loss made at this point will effectively be deferred until the shares, which are received on the conversion or exchange, are disposed of.

Timing

The amendment will take effect from 1 July 2003.

A 2.5 Scope of anti-overlap provisions

The foreign currency anti-overlap rules are designed to ensure that a forex realisation gain (or loss) is assessable (or deductible) only under Division 775 if the gain or loss would otherwise be assessable (deductible) under both Division 775 and another provision of the Income Tax Assessment Acts.

However, as “forex realisation gain” and “forex realisation loss” are defined terms for Division 775 purposes they are only assessable or deductible under section 775-15 or 775-30 respectively.

Amendments will ensure that the anti-overlap rules apply where an amount which represents a foreign exchange gain or loss (without being such a gain or loss within the meaning of Division 775) would be included in assessable income or allowed as a deduction or used in the calculation of a net amount.

Timing

The amendment will take effect from 1 July 2003.

A 2.6 Application to pre-existing bank accounts

The treatment under Division 775 of bank accounts existing prior to the date on which the foreign currency provisions took effect is unclear.

Amendments will clarify that:

  • taxpayers can bring bank accounts that existed prior to the commencement of the foreign currency provisions within the scope of Division 775; and
  • where such a bank account is brought within the foreign currency provisions a taxpayer cannot then chose to have the bank account subject to the law as it existed prior to the commencement of the foreign currency provisions.

Timing

The amendment will take effect from 1 July 2003.

A 3. MINOR TECHNICAL AMENDMENTS TO THE FOREIGN CURRENCY PROVISIONS

Issue / Background

Proposed change

A 3.1 Section 775-15

Item 1 of the table in paragraph 775-15(2)(b) applies to forex realisation gains from rights to receive foreign currency. Such gains can arise under either forex realisation event 1 or 2. However, the item only refers to forex realisation event 1.

An amendment will ensure that item 1 of the table in paragraph 775-15(2)(b) applies to gains made as a result of forex realisation event 2.

Timing

The amendment will take effect from 1 July 2003.

A 3.2 Sections 775-20, 775-25 and 775-35

A forex realisation loss incurred in gaining or producing exempt income or non-assessable non-exempt income is not disregarded under subsection 775-35(2) if the relevant obligation gives rise to a deduction. (This means that the loss may be deductible under section 775-30.) This is designed to allow losses to be recognised where expenses incurred in producing exempt income or non-assessable non-exempt income are made deductible by a specific provision in the law.

However, a forex realisation gain which arises on such an obligation is exempt income or non-assessable non-exempt income under section 775-20 or 775-25 respectively. There is no corresponding rule in these sections to make the gain assessable.

An amendment will ensure that a forex realisation gain is assessable where, if the gain had been a loss, the loss would have been deductible even though it was made in producing exempt income or non-assessable non-exempt income.

Timing

The amendment will take effect from 1 July 2003.

A 3.3 Section 775-35

Section 775-35 currently provides an inconsistent treatment of forex realisation losses made in the course of producing exempt income and non-assessable non-exempt income. While subsection 775-35(2) disregards losses made in producing exempt income or non-assessable non-exempt income under forex realisation event 3, 4 or 6, subsection 775-35(1) disregards them under forex realisation event 1, 2 or 5 only if they are made in producing exempt income.

An amendment will ensure that subsection 775-35(1) applies to a loss made in gaining or producing non-assessable non-exempt income.

Timing

The amendment will take effect from 1 July 2003.

A 3.4 Section 775-50

As currently drafted forex realisation event 3 applies to an obligation to receive foreign currency if the obligation was incurred in return for the creation or acquisition of a right to pay foreign currency or Australian currency. The provision should also apply if the obligation was incurred in return for the creation or acquisition of an obligation to pay foreign currency or Australian currency.

An amendment to section 775-50 will ensure that the section captures an obligation to receive foreign currency incurred for the creation or acquisition of an obligation to pay foreign currency or Australian currency.

Timing

The amendment will take effect from 1 July 2003.

A 3.5 Subsection 775-55(4)

Reference to “sell” in paragraph 775-55(4)(a) should be “buy”.

Reference to “sell” in paragraph 775-55(4)(b) should be “pay”.

The references to “sell” in:

paragraph 775-55(4)(a) will be changed to “buy”; and

paragraph 775-55(4)(b) will be changed to “pay”.

Timing

The amendments will take effect from 1 July 2003.

A 3.6 Section 775-60

Forex realisation event 5 assesses gains on a put option only when the option was acquired in exchange for the assumption of an obligation to pay foreign or Australian currency. This is an error as this event ought to occur when the option was acquired in exchange for a right to receive foreign or Australian currency.

Amendments will ensure that forex realisation event 5 applies to the appropriate instruments.

Timing

This amendment will take effect from 1 July 2003.

Issue / Background

Proposed change

A 3.7 Realisation of gains and losses on entering or leaving retranslation

At present, when a taxpayer elects to use retranslation to calculate future forex realisation gains and losses on a bank account, any accrued gain or loss on the account at the time of the election will be disregarded. Conversely, when a taxpayer elects to no longer use retranslation, gains and losses on the amounts in the account will be double counted through the subsequent operation of the first-in-first-out (FIFO) rule.

Amendments will:

  • realise an accrued gain or loss on an account when a taxpayer makes an election to use retranslation for the account; and
  • reset the cost of the funds remaining in the account when a retranslation election is withdrawn.

Timing

The amendment will take effect from 1 July 2003.

A 3.8 Power for regulations to deem a retranslation election to be withdrawn

It is proposed that regulations will enable a taxpayer to elect to calculate forex realisation gains and losses on foreign currency bank accounts on a weighted average basis. Some taxpayers have elected to calculate gains and losses on a retranslation basis – but would not have done so if they had known that they would have the option of using a weighted average method. A power for the regulations to deem a retranslation election to be retrospectively withdrawn will enable this election to be taken to have been withdrawn if a retrospective election to use a weighted average method is made which covers the same account.

Amendments will enable the regulations to take a retranslation election to be retrospectively withdrawn.

Timing

This amendment will take effect from 1 July 2003.

A 3.9 List of non assessable non exempt provisions

Section 11-55 lists the provisions that make amounts non-assessable non-exempt income.

An amendment will add section 775-25 to the list in section 11-55.

A 3.10 Change limited balance election comparison time

A forex realisation gain or loss made on an account which passes the limited balance test is disregarded.

It is not clear whether a gain or loss is disregarded if the transaction giving rise to that gain or loss causes the balance of the account to exceed or become less than the equivalent of A$250,000.

An amendment will clarify at what time the limited balance test is applied.

Timing

The amendment will take effect from 1 July 2003.

A 3.11 Setting proceeds of deemed realisation on entry to limited balance exception

Section 775-255 provides for a realisation and reacquisition to be deemed to occur when a taxpayer first passes the limited balance test.

However, the relevant forex realisation events determine a forex realisation gain or loss by comparing the cost base (or value) of a right or obligation with the amount paid or received in ceasing to have it. As no amount is actually paid or received at the time of the deemed realisation – incorrect gains and losses may result.

Amendments will ensure that the appropriate forex realisation gain or loss arises on the deemed realisation of the balance in a foreign currency bank account and that the cost base (or value) of the reacquired right or obligation is appropriately set.

Timing

The amendment will take effect from 1 July 2003.

 

B. PROPOSED REGULATIONS UNDER THE REGULATION MAKING POWERS IN THE FOREIGN CURRENCY PROVISION

Regulations to be made under the regulation making powers in the foreign currency provisions will:

 

C. PROPOSED AMENDMENTS REGARDING THE DEBT/EQUITY PROVISIONS OF THE INCOME TAX LAW

Issue / Background

Proposed change

C 1. The issue of certain redeemable preference shares may give rise to a capital gain (under sections 104-35 and 104-155 of ITAA 1997). Although there is an exception in the CGT rules to ensure that the issue of shares that are equity interests is not a CGT event, this exception does not apply to interests that are “non-equity shares” for the purpose of the debt/equity rules. Sections 104-35 and 104-155 should apply to non-equity shares in the same way that they apply to shares that are equity interests. The issue of these instruments represents the raising of funds, not the making of a capital gain.

Amendments will ensure the issue of non-equity shares does not give rise to a capital gain.

Timing

The amendment will take effect from 1 July 2001.

C 2. Under the debt/equity rules, a taxpayer may have an equity interest in a company that is not a share: a “non-share equity interest”. Payments of income on these interests are “non-share dividends” (see Subdivision 974-E of the ITAA 1997).

The tax law requires that companies under the pay-as-you-go (PAYG) system withhold tax from dividend payments to non-residents. However, there is no corresponding obligation for non-share dividends (see Subdivision 12F of Schedule 1 to the Tax Administration Act 1953). This is inappropriate because a non-share dividend is economically similar to a traditional dividend.

Amendments will ensure amounts are withheld from non-share dividends in the same way as from dividends.

Timing

The amendment will take effect from 1 July 2001.

C 3. The debt/equity rules are intended to apply to transactions from 1 July 2004 in relation to interests issued before 1 July 2001, unless the issuer of the interest has made an election to apply them earlier. There is some uncertainty over whether the application rule in subitem 118(2) of Schedule 1 to the New Business Tax System (Debt and Equity) Act 2001 carries out this intention.

Amendments will ensure that the debt/equity rules will apply from 1 July 2004 to interests issued before 1 July 2001 where the issuer has not made an election to apply them earlier.

C 4. When a company issues non-share equity interests, it must credit its non-share capital account. This is a notional account for tax purposes. When a company has issued non-share equity interests before 1 July 2001 and those interests still exist at 1 July 2004, there should be a credit to the non-share capital account. This is because the debt/equity rules are intended to apply to transactions after 1 July 2004 in relation to interests issued before 1 July 2001.

However, subsection 164-15(3) erroneously requires a credit for non-share equity interests in existence at 1 July 2004 to be made on 1 July 2001.

Amendments will ensure that a credit to the share capital account arises at 1 July 2004 for those interests issued before 1 July 2001 and still in existence on 1 July 2004.

C 5. If the debt/equity rules do not apply to a company until 1 July 2004, it is required to keep a non-share capital account from that date for interests issued before 1 July 2001. However, the law does not provide for a non-share capital account to be created in respect of these interests. This means that credits to the non-share capital account will not arise on 1 July 2004 for non-share equity interests issued before 1 July 2001 and still in existence on 1 July 2004.

Amendments will ensure that a non-share capital account is created for non-share equity interests issued before 1 July 2001 and still in existence on 1 July 2004.

C 6. There is a reference in subsection 160AOA(2) to paragraph (da) of the definition of “frankable dividend” in section 160APA. There is no such paragraph.

An amendment will remove the reference to paragraph (da) of the definition of “frankable dividend”.

C 7. Subsection 974-105 contains an example with an incorrect section reference.

An amendment will replace the reference in the example to section 974-20 with a reference to section 974-70

C 8. Note 3 in subsections 974-110(1) and (2) erroneously refers to subsection 164-20(4) – this subsection does not exist.

The references to subsection 164-20(4) in section 974-110 will be replaced with references to subsection 164-20(3).

 

D. DEFERRAL OF THE COMMENCEMENT OF THE REMAINING STAGES OF THE TOFA REFORMS

Appropriate coordination and alignment between the implementation of the remaining stages of TOFA and the pending accounting standard – AASB 139 Financial Instruments: Recognition and Measurement – has the potential to provide substantial compliance cost and administrative cost benefits. This new accounting standard is due to become effective from 1 January 2005.

AASB 139

AASB 139 was released on 24 December 2003 by the Australian Accounting Standards Board (AASB) and followed the release by the International Accounting Standards Board (IASB) of a revised version of IAS 39 Financial Instruments: Recognition and Measurement. The release of pending AASB 139 is part of a process of implementing the Financial Reporting Council’s policy of adopting standards of the IASB for application to reporting periods beginning on or after 1 January 2005.

Since December 2003, the AASB and IASB have released proposed amendments to AASB 139/IAS 39 on matters such as macro hedging and restrictions on when entities can elect fair value (mark-to-market) treatment for financial instruments.

The adoption of AASB 139 will represent the first time that an Australian financial accounting standard comprehensively addresses the accounting methods to be applied in measuring gains and losses from financial instruments (AASB 1012 is limited to dealing with the effects of exchange rate movements on financial instruments). This presents an opportunity for the tax rules on measurement of gains and losses from financial instruments to take into account their financial accounting treatment, in order to reduce the cost of complying with, and the cost of administering, the new tax and accounting rules.

An analysis of the implications of AASB 139 is therefore being undertaken with a view to determining where the tax rules can adopt financial accounting approaches and results. In light of this, and the ongoing development of the final Australian standard that will be adopted, there could be unnecessary transitional/compliance costs if the remaining stages of TOFA commenced on 1 July 2004 and AASB 139 commenced for reporting periods starting 6 months later.

While tax laws and financial accounting have different purposes, there are similar issues in relation to the recognition of gains and losses from financial instruments for both tax accounting and financial accounting.

Financial accounting

Financial accounting standards are designed to give investors information upon which they can make financial decisions, including making assessments about the stewardship of the entity in question during a particular accounting period.

IAS 39, on which AASB 139 was based, was issued against the background that:

Tax system

The tax system seeks to raise revenue to fund government services in a way that balances efficiency and equity.

Unlike financial accounting, the tax system does not have a direct role in exposing the risks inherent in financial instruments, i.e. it does not have an informational role in the same way that financial accounting has. Further, the revenue raising role of the tax system means that it has a much more direct cash impact than financial accounting; accordingly liquidity impacts may be more important in relation to tax accounting than financial accounting.

Nevertheless, both tax and financial accounting rules should be as certain, coherent and neutral as possible. Neutrality in this context implies rules that are based on economic substance: in relation to financial accounting this is important to ensure a true financial picture of the entity is available; in relation to tax accounting this is important in order that non-tax driven financial innovation is not inhibited, but also to minimise tax deferral and arbitrage.

Fair value

AASB 139/IAS 39 focus on the use of fair value treatment for financial accounting for financial instruments. Fair value (often referred to as mark-to-market) recognises gains and losses on an unrealised basis. The financial accounting authorities see this as an important way of exposing the risks in financial instruments, particularly derivatives.

In a number of instances, AASB 139/IAS 39 adopt fair value as the default treatment for financial instruments.

However, taxing significant unexpected unrealised gains which may never be realised may cause significant liquidity problems for taxpayers. This is particularly so given that the income tax law does not have loss carry-back rules. In this light, the TOFA proposals do not mandate broad fair value treatment for tax purposes. At the same time, expansion of accruals rules is seen as important in addressing undue tax deferral and tax arbitrage.

Further, unrestricted access to fair value treatment for tax purposes could lead to claims for deductions for unrealised losses on a selective basis, with a potentially significant cost to revenue relative to the current tax law. Accordingly, appropriate restrictions on the availability of such treatment would be necessary.

On this basis, there are likely to be differences between tax and financial accounting outcomes, particularly for entities that do not elect fair value treatment for tax purposes.

At the same time, the TOFA proposal is that certain entities can, subject to operational safeguards, elect fair value treatment for tax purposes for all the financial assets and liabilities that are fair valued in their financial accounting profit and loss statement. Thus, to this extent, this proposal offers the prospect of aligning the scope of fair value treatment in the profit and loss statement of the financial accounts and the tax return.

AASB 139/IAS 39 set out principles for determining the fair value of a financial instrument when prices are quoted in an active market and when they are not. Where these values can be adopted for tax purposes in respect of the instruments for which taxpayers elect fair value under TOFA, it will reduce compliance and administrative costs.

Similar comments apply to proposed retranslation rules for TOFA. In this case, the relevant international accounting standard is IAS 21.

Hedge accounting rules

Financial instruments are sometimes used to reduce or manage risk in relation to another asset or liability (or net position comprising a group of assets or liabilities or both), an action sometimes referred to as ‘hedging’.

AASB 139/IAS 39 in principle accept hedge accounting, which involves a departure from the normal accounting treatment in order to match, or enable consistency between, the treatment of the risk management/reduction instrument (the ‘hedge’ instrument) and the position being hedged (the ‘hedged item’). While this treatment can have the effect of reducing volatility in the accounting results, without safeguards it can allow the entity to selectively change the accounting from what it would otherwise be and, for example, defer the recognition of losses or accelerate the recognition of gains.

To prevent this ability to freely determine when to recognise gains and losses, AASB 139/IAS 39 impose a discipline over the use of hedge accounting. This entails requiring that the hedging relationship be defined by designation and documentation, is reliably measurable and is actually effective. TOFA could adopt similar requirements in relation to commodity hedging rules, particularly to prevent deferral of gains and acceleration of losses. Again, this offers the prospect of reducing compliance and administrative costs.

Accrual methodologies

AASB 139/IAS 39 require accrual accounting, using the effective interest method, for loans and receivables and held-to-maturity instruments. Application of the same accruals methodology for income tax purposes should lead to compliance cost and administrative cost savings, particularly compared to the accruals methodology set out in Division 16E of the Income Tax Assessment Act 1936.

To the extent that AASB 139/IAS 39 will allow for simpler approximations of the effective interest method, the TOFA rules may, subject to appropriate anti-deferral parameters, be able to adopt similar approaches. However, at this stage it is not clear whether such approximations (eg straight line accruals) will be available under the pending financial accounting standards.

Disposal

Tax rules for dealing with the disposal and partial disposal of financial instruments is relatively undeveloped, particularly for liabilities. AASB 139/IAS 39 contain developed economic substance based rules in this regard. There is considerable scope for using these financial accounting rules for tax purposes.

Disaggregation

AASB 139/IAS 39 require complex instruments to be bifurcated or disaggregated into their derivative and non-derivative components. A primary reason for this is to fair value derivatives that do not meet the hedge criteria. While the TOFA proposals provide elective rather than mandatory fair value rules, the disaggregation mechanism provides a basis for ensuring that derivatives are appropriately distinguished for tax purposes from financing arrangements.


1 Division 775 and Subdivisions 960-C and 960-D of the Income Tax Assessment Act 1997 (ITAA 1997).

2 Division 974 of the ITAA 1997.

3 Parts 3-1 and 3-3 of the ITAA 1997.