Entities are required to apply the taxation of financial arrangement (TOFA) rules if they meet certain asset and aggregated turnover thresholds or have chosen to use the TOFA rules.
The TOFA rules contained in Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) determine TOFA entities' tax treatment of gains and losses from financial arrangements.
TOFA taxpayers must complete the following specific TOFA labels:
- Total TOFA gains
- Total TOFA losses.
TOFA taxpayers must also include TOFA gains and losses that are assessable or deductible in an income year in the relevant income or expense labels.
This guide is based on the 2016 income tax returns.
Example: reporting TOFA gains and losses
Simon Ltd has the following gains and losses from its financial arrangements for the income year ended 30 June 2016:
- term deposit entered into on 10 August 2014 - interest income - $205,000
- loan entered into on 20 January 2015 - interest expense - $150,000
- loan entered into on 1 July 2015 - interest expense - $320,000.
In completing its 2016 tax return, Simon Ltd should include the following:
6F |
Gross interest |
$205,000 |
6V |
Interest expenses within Australia |
$470,000 |
8T |
Total TOFA gains |
$205,000 |
8U |
Total TOFA losses |
$470,000 |
Where Total TOFA gains and Total TOFA losses are not completed correctly, an incorrect pay as you go (PAYG) instalment rate may be issued. The tax return instructions identify how to complete the TOFA labels correctly.
End of exampleCompany tax returns
Companies that have gains or losses from financial arrangements in an income year should record their TOFA gains and TOFA losses as follows:
TOFA labels
Reconciliation |
|
|---|---|
7E |
TOFA income from financial arrangements not included at item 6 |
7W |
TOFA deductions from financial arrangements not included at item 6 |
Financial information |
|
8T |
Total TOFA gains |
8U |
Total TOFA losses |
8S |
TOFA gains from unrealised movements in the value of financial arrangements |
Relevant income and expense labels
Income |
|
|---|---|
6D |
Gross distribution from partnerships |
6E |
Gross distribution from trusts |
6F |
Gross interest |
6H |
Total dividends |
6J |
Unrealised gains on revaluation of assets to fair value |
6R |
Other gross income |
Expenses |
|
6E |
Bad debts |
6V |
Interest expenses within Australia |
6J |
Interest expenses overseas |
6G |
Unrealised losses on revaluation of assets to fair value |
6S |
All other expenses |
Partnership and trust tax returns
Partnerships and trusts that have gains and losses from financial arrangements in an income year should record their TOFA gains and TOFA losses as follows:
TOFA labels
Taxation of financial arrangements |
|
|---|---|
31M |
Total TOFA gains |
31N |
Total TOFA losses |
Relevant income and expense labels
Business income and expenses - Income |
|
|---|---|
5G |
Other business income - Primary production |
5H |
Other business income - Non-primary production |
Business income and expenses - Expenses |
|
5F |
Bad debts |
5I |
Total interest expenses |
5N |
All other expenses |
Reconciliation items |
|
5A |
Income reconciliation adjustments |
5B |
Expense reconciliation adjustments |
Partnerships and trusts - Primary production |
|
8A |
Distribution from partnerships |
8Z |
Share of net income from trusts |
8S |
Deductions relating to amounts shown at A and Z |
Partnerships and trusts - Non-primary production |
|
8B |
Distribution from partnerships, less foreign income |
8R |
Share of net income from trusts, less capital gains, foreign income and franked distributions |
8T |
Deductions relating to amounts shown at B and R |
Rent |
|
9G |
Interest deductions |
Gross interest |
|
11J |
Gross interest |
Dividends |
|
12K |
Unfranked amount |
Other assessable foreign source income |
|
23B |
Gross |
Fund income tax return
Funds that have gains and losses from financial arrangements in an income year should record their TOFA gains and TOFA losses as follows:
TOFA labels
Taxation of financial arrangements |
|
|---|---|
16H |
Total TOFA gains |
16I |
Total TOFA losses |
Relevant income and expense labels
Section B: Income |
|
|---|---|
10C |
Gross interest |
10D |
Net foreign income |
10D1 |
Gross foreign income |
10I |
Gross distributions from partnerships |
10J |
Unfranked dividend amount |
10N |
Trust distributions unfranked amount |
10Q |
Trust distributions other amounts |
10G |
Foreign exchange gains |
10S |
Other income |
Section C: Deductions |
|
11A |
Interest expenses within Australia |
11B |
Interest expenses overseas |
11R |
Foreign exchange losses |
11L |
Other deductions |
Self-managed superannuation fund annual return
Self-managed superannuation funds that have gains and losses from financial arrangements in an income year should record their TOFA gains and TOFA losses as follows:
Specific TOFA labels
Taxation of financial arrangements |
|
|---|---|
17H |
Total TOFA gains |
17I |
Total TOFA losses |
Other labels in which to include TOFA amounts
Section B: Income |
|
|---|---|
11C |
Gross interest |
11D |
Net foreign income |
11D1 |
Gross foreign income |
11I |
Gross distributions from partnerships |
11J |
Unfranked dividend amount |
11M |
Gross trust distributions |
11S |
Other income |
Section C: Deductions |
|
12A1 |
Interest expenses within Australia |
12B1 |
Interest expenses overseas |
12L1 |
Other amounts |
Disclosing TOFA gains and losses on gross or net basis
This information explains whether TOFA gains and TOFA losses should be reported in the relevant labels of income tax returns on a gross or net basis.
Gross basis
Where a TOFA entity reports gains and losses from financial arrangements on a gross basis for accounting purposes, they should reflect these gains and losses on a gross basis in their income tax return. Gross TOFA gains and gross TOFA losses must be separately reported in both the:
- relevant income and expenses labels
- total TOFA gains and total TOFA losses labels.
An example of amounts that should be reported on a gross basis is interest income and interest expense. These will be recognised separately in a TOFA entity's accounting system and in their books of account. Consequently, they will also be separately reported in the income tax return in both the:
- relevant interest income and interest expense labels
- total TOFA gains and total TOFA losses labels.
Net basis
Where a TOFA entity reports gains and losses from financial arrangements on a net basis for accounting purposes, it could be a compliance burden to separate the financial arrangement gains from the losses. Consequently, where these gains and losses are also TOFA gains and TOFA losses, the entity may report a 'net' TOFA gain or 'net' TOFA loss from these financial arrangements in their income tax return in both the:
- relevant income and expenses labels
- total TOFA gains and total TOFA losses labels.
Examples
The following examples are provided to guide how TOFA gains and TOFA losses should be reflected on a gross and net basis in income tax returns.
Example 1: Company tax return
CHW Ltd is a TOFA entity whose tax and accounting year ends on 30 June. The company previously made a TOFA fair value method election. During the income year ending 30 June 2016, it had the following gains and losses from its financial arrangements:
- an overall assessable net gain of $8,000,000 from its forward exchange contracts (unrealised gain on forward exchange contracts which are fair valued through profit and loss for accounting purposes)
- interest income of $150,000 from its bank account
- interest expense of $400,000 from its Australian bank loan.
CHW Ltd's accounting system records all the gains or losses from the forward exchange contracts it enters into during the income year on a net basis, whilst the interest income and interest expense amounts are separately recorded in its accounting system.
The forward contracts, bank account and loan are financial arrangements to which the TOFA rules apply.
CHW Ltd will complete its Company tax return 2016 as follows:
- $150,000 at label F Gross Interest in item 6
- $8,000,000 at label J Unrealised gains on revaluation of assets to fair value in item 6
- $400,000 at label V Interest expenses with Australia in item 6
- $8,150,000 at label T Total TOFA gains in item 8
- $400,000 at label U Total TOFA losses in item 8.
Example 2: Trust tax return
GGM Trust is a TOFA entity. It buys deferred interest securities and government bonds, which it generally holds to maturity. It had $520,000 of gross interest from the securities it had during the income year ending 30 June 2016.
GGM Trust also entered into a number of derivative contracts which are fair valued through profit and loss for accounting purposes. The gains and losses from the derivative contracts are recorded on a net basis in its accounting system. For the income year ending 30 June 2016, it had a net loss of $1,500,000 from its derivative contracts.
All the securities, bonds and derivative contracts that GGM Trust had during the income year are TOFA financial arrangements. The trust has previously also made a TOFA fair value method election.
GGM Trust will complete its Trust tax return 2016 as follows:
- $1,500,000 at label N All other expenses in item 5
- $520,000 at label J Gross interest in item 11
- $520,000 at label M Total TOFA gains in item 31
- $1,500,000 at N Total TOFA losses in item 31.
Further information
For more detailed information on how to complete TOFA labels, refer to:
- Company tax return instructions 2016
- Partnership tax return instructions 2016
- Trust tax return instructions 2016
- Fund income tax return instructions 2016
- Self-managed superannuation fund annual return instructions 2016