Questions range from setting out the steps taken by the taxpayer to implement TOFA, to details of specific financial arrangements subsequently entered into by the taxpayer.
Outside of the Financial Services sector, the majority of the ‘large’ taxpayers affected by the TOFA rules have not adopted one of the elective methods and are therefore assessed under one of the default methods (i.e. the ‘accruals’ or ‘realisation’ methods).
In a large number of cases, the default methods provide a tax outcome that is consistent with the accounting treatment, but it is important to be wary that there are a number of scenarios when this may not be the case.
One such situation is where a taxpayer enters into a swap arrangement with one counterparty that is subsequently novated to a new counterparty. In this scenario the economic position of the taxpayer may not change and from an accounting perspective there may be a continuation of the original swap.
However, where the novation is a cancellation of the existing, and creation of a new, agreement from a legal perspective, the taxpayer is likely to have a new financial arrangement under TOFA. As a result, a balancing adjustment event will occur on the original swap and a taxable gain/loss may arise depending on whether the swap was in or out of the money. This will not necessarily be offset by a corresponding gain/loss on the ‘new’ financial arrangement in the year of novation.
Given these nuances and the ATO’s focus, is it time to have a refreshed look at TOFA?