Appendix – sample tax hedging documentation

Under the hedging financial arrangement method, entities must have in place a record containing a description of the hedging financial arrangement, including the way gains and losses will be dealt with. Details of all hedging financial arrangement calculations should also be maintained.

Outlined below is a sample hedging policy for FI Co, as well as details of a hedge entered into by the entity.

Sample hedging policy

FI Co issues Australian dollar (A$) floating rate notes and often hedges its interest rate risk. The following is sample policy wording for fully effective (100%) hedges that could be used to meet the terms of the determination under paragraph 230-355(1)(c).

This sample wording could be used where the financial accounting treatment of the gains and losses in relation to a hedged item fairly and reasonably corresponds with the income tax law treatment. FI Co has satisfied itself that this is the case.

Basis for allocating gains and losses from hedging financial arrangements

For the purposes for paragraph 230-355(1)(c) of the ITAA 1997, FI Co makes the following determination under section 230-360 of the ITAA 1997. The determination relates to its hedging financial arrangements that are fully effective cash flow hedges for financial accounting purposes.

Gains or losses from such a hedging financial arrangement will be allocated to an income year or income years on the same basis on which gains and losses on the hedging instrument are recognised in profit and loss for financial accounting purposes.

This allocation fairly and reasonably corresponds with the tax treatment of the gains and losses from the hedged item, being an A$ floating rate note. Having regard to the elections made under TOFA, and Subdivisions 230-B and 230-G of the ITAA 1997, gains and losses on the hedged item will be recognised under the income tax law in a way that fairly and reasonably corresponds with the financial accounting treatment of the hedged item.

The financial accounting treatment of the hedging instrument is [name of accounting policy].

The financial accounting treatment of the hedged item is [name of accounting policy].

For the purposes of subparagraph of the 230-360(2)(c)(ii) of the ITAA 1997, a hedged item for which this determination applies, is expected to produce either or both of the following:

• ordinary income or statutory income from an Australian source
• losses made or outgoings incurred in gaining or producing such income.

Cash flow hedge details

FI Co enters into a swap to hedge its interest rate risk for an Australian dollar (A$) floating rate note that it issued and swapped into A$ fixed. A hedging financial arrangement election has been made and is in force.

The following FI Co cash flow hedge tables show the details and calculations recorded by FI Co.

Table: A$ floating rate note (FRN) issue

Issuer	FI Co
Issue amount	$100,000,000
Currency	A$
Term	3 years
Rate	Bank Bill Swap Rate (BBSW) flat
Payments	Semi annual
Day basis	Actual/365
Issue date	1 July 20X1
Maturity date	30 June 20X4

Table: A$ three-year interest rate swap (IRS) – fixed/floating

Counterparty	Bank Co
Notional amount	$100,000,000
Currency	A$
Term	3 years
Rate	Fixed – 5.00% p.a. s.a effective Floating – BBSW flat
Resets	Semi-annual, payment in arrears
Day basis	Actual/365
Effective date	1 July 20X1
Maturity date	30 June 20X4

Table: Payment/reset dates – BBSW rates

Payment/reset dates	BBSW rates
01 Jul 20X1	4.00%
31 Dec 20X1	4.50%
30 Jun 20X2	5.00%
31 Dec 20X2	5.50%
30 Jun 20X3	6.00%
31 Dec 20X3	6.50%

Table: Payments/receipts – IRS

Payments/receipts	Floating	Fixed	Accrual
1 Jul 20X1	4.00%	5.00%	($501,370)
31 Dec 20X1	4.50%	5.00%	($247,945)
30 Jun 20X2	5.00%	5.00%	$0
31 Dec 20X2	5.50%	5.00%	$247,945
30 Jun 20X3	6.00%	5.00%	$504,110
31 Dec 20X3	6.50%	5.00%	$747,945

Table: Calculations – IRS and FRN

Calculations	IRS	FRN	Total
30 June 20X2	($749,315)	($4,236,986)	($4,986,301)
30 June 20X3	$247,945	($5,247,945)	($5,000,000)
30 June 20X4	$1,252,055	($6,265,753)	($5,013,699)

Calculation basis

In this example, the determination of the basis for the allocation of the gain or loss under section 230-360 would be consistent with the allocation under the existing accounting approach, provided that the requirements of Subdivision 230-E are met.

Assumptions (for illustrative purposes)

• The cash flow hedge is expected to be, and remains, fully effective for the life of the hedge.
• The hedge is not revoked and continues until the maturity of the FRN and IRS.
• There is no change in the credit quality of the issuer or counterparty.
• FI Co accounting systems accrue the payments under the FRN and floating rate receipts under the IRS on a compounding accruals basis or a method whose results approximate those obtained using compounding accruals. In this case, outcomes under accruals and realisation will align at year-end (whether December or June balancer). The one-day difference is ignored for the purpose of this example.
• The IRS has a zero fair value at inception. Changes in the fair value of the HFA are recognised through other comprehensive income (OCI).
• The application is in the context of international accounting standards (A-IFRS). There are no changes in the application of international accounting standards (A-IFRS) that would affect the result of this example.

The allocation basis set out in section 230-360 may be displaced if an event listed in the table in section 230-305 occurs in relation to the hedged item or items.

Guide to the taxation of financial arrangements (TOFA) rules.