The Taxation of Financial Arrangements (TOFA) reforms were first publicly announced as part of the 1992 federal budget in which the government identified a need for reform of the taxation treatment of financial arrangements. The reforms were later taken up by the Ralph Review of Business Taxation, with the final report – A Tax System Redesigned (the Ralph report) – making various recommendations. Several concepts proposed in the Ralph report have been implemented progressively in stages.
Stage 1 was introduced in 2001 and contained rules to distinguish between debt and equity interests. This was in response to the growing number of hybrid financial arrangements in commercial practice.
Stage 2 was introduced in 2003 and contained new rules to bring to account foreign exchange gains and losses for tax purposes and rules around the translation of foreign denominated amounts.
Stages 3 and 4 were introduced in 2009. Stage 3 introduced hedging rules, under which the tax character and tax timing of gains and losses from a financial arrangement is able to be matched with the tax character and tax timing of gains and losses from a hedged item. Stage 4 provided a comprehensive framework for bringing to account gains and losses on other financial arrangements for tax purposes.
For the purposes of this guide, the term 'TOFA' refers to Stages 3 and 4 of the reforms, being the provisions contained in Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997), and the transitional provisions contained in Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (the TOFA Act).
TOFA aims to reduce the influence of tax considerations on how financial arrangements are structured. TOFA also aims to closer align the taxation recognition of gains and losses on financial arrangements with commercial recognition of gains and losses.
Although TOFA provides a comprehensive and overarching framework to address the economic substance of arrangements, it is not an exclusive code for the taxation of gains and losses from financial arrangements.
Unless otherwise specified, other provisions of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 still deal with gains or losses from financial arrangements where TOFA does not.
Note that:
- Legislative references in this guide are to provisions of the ITAA 1997 unless otherwise specified.
- Since the TOFA Act received royal assent, TOFA has been subject to multiple amendments. This guide is current as at December 2013. It is for informational purposes only, and does not represent binding advice.
- If you are seeking binding advice, consider applying for a private ruling.