Overview
Companies that have gains or losses from financial arrangements in an income year should record their TOFA gains and TOFA losses in the following labels of the company tax return.
Company income tax return labels are used throughout this page to illustrate how TOFA gains and losses should be recorded. However, the key reporting principles equally apply to trust and partnership income tax returns.
Label 6 Income
D – Gross distribution from partnerships
Label 6D is the gross distributions from all partnerships, including any share of franking credits attributable to dividends paid by an Australian company.
If TOFA rules apply, Label 6D would show the total distributions from partnerships, which includes all amounts from financial arrangements subject to the TOFA rules.
Example: gross distribution from partnerships
Company A carries on a business in partnership with another party. The partners have agreed to share profits and losses equally.
During the income year, the partnership derives interest income of $10,000 from the partnership business account. TOFA rules apply to this financial arrangement generating the interest income. There were no other income or losses derived by the partnership, meaning that the net income of the partnership for the income year is $10,000. This was equally distributed to the partners during the income year.
Company A includes $5,000 of the distribution from the partnership in Label 6D of the company income tax return, and this amount will also be included in Label 8T Total TOFA gains.
End of exampleE – Gross distribution from trusts
Label 6E is the total amount of gross distributions received from trusts, including any share of franking credits attributable to dividends paid by an Australian company as advised by the trustee.
If TOFA rules apply, Label 6E would show the total distribution received from trusts which includes all amounts from financial arrangements subject to the TOFA rules.
Example: gross distribution from trusts
Company B is a beneficiary of a discretionary trust.
During the income year, the trust derived net interest income of $50,000. At the end of the income year, the trustee decided to distribute 20% of the trust’s income to Company B.
In this case, Company B will be assessed on $10,000 net interest income received from the trust. TOFA rules apply to the financial arrangement on which interest income was derived and received by Company B from the trust.
Company B will include the $10,000 interest income in Label 6E of their company income tax return, and this respective amount will also be included in Label 8T Total TOFA gains.
End of exampleF – Gross interest
Label 6F is the total interest from all sources, including interest received from or credited by an associate, a shareholder, or an associate of a shareholder. This amount can't be a loss.
If TOFA rules apply, Label 6F would show all interest received or credited to it, which includes all amounts from financial arrangements subject to the TOFA rules
Example: gross interest
At the start of the current income year, Company C provides a loan of $1,000,000 to Company D and the interest on the loan is 5% per annum.
At the end of the income year, the interest accrued and paid by Company D to Company C is $50,000. TOFA rules apply to this financial arrangement, which gave rise to the interest income of $50,000.
Company C will include $50,000 of gross interest in Label 6H of their company income tax return and this amount will also be included in Label 8T Total TOFA gains.
End of exampleH – Total dividends
Label 6H is the total dividends, including:
- all dividends and non-share dividends (franked or unfranked)
- foreign source dividends
- dividends applied under dividend reinvestment plans
- deemed dividends
- liquidators’ and other company distributions.
This amount can't be a loss.
If TOFA rules apply, Label 6H would include all unfranked dividends that were paid or credited to it from all sources, which include unfranked dividends from financial arrangements subject to the TOFA rules.
Example: total dividends
Company E holds 200 shares in Company F, an unrelated third party.
At the end of the income year, Company F declared unfranked dividends to be distributed to its shareholders at $3 per share. Shares constitute a financial arrangement, so TOFA rules apply to determine the tax timing of the dividends paid by Company F to Company E.
Company E will include $600 of total dividends received in Label 6H of their company income tax return, and this amount will also be included in Label 8T Total TOFA gains.
End of exampleJ – Unrealised gains on revaluation of assets to fair value
Label 6J is the total amount of unrealised gains made on the revaluation of assets and liabilities to fair value that may arise as a result of the adoption of Australian equivalents to the international financial report standards.
If TOFA rules apply, Label 6J includes all unrealised gains on the revaluation of financial arrangements to fair value assessable under the TOFA rules.
Example: unrealised gains on revaluation of assets to fair value
Company G purchased a financial arrangement from an external party at the start of the income year. The fair value of the financial arrangement at the time of purchase was $900,000.
At the end of the income year the financial arrangement was revalued for a more accurate representation of Company G’s financials in its statement of financial position. As a result, the financial arrangement’s fair value increased to $950,000. TOFA rules apply to the fair value gain in relation to the financial arrangement held by Company G.
So Company G will include $50,000 of total unrealised gains on revaluation of its financial arrangement to fair value in Label 6J of its company income tax return and this respective amount will also be included in Label 8T Total TOFA gains and Label 8S TOFA gains from unrealised movements in the value of financial arrangements.
End of exampleR – Other gross income
Label 6R is the total amount of other gross income not already included in other item 6 Income labels.
If TOFA rules apply, Label 6R includes all assessable gains from the company’s financial arrangements to which the TOFA rules apply, where they haven't already been included in other item 6 Income labels.
Example: other gross income
Company H purchased a financial arrangement from an external party at the start of the income year. The fair value of the financial arrangement at the time of purchase was $980,000.
At the end of the income year, Company H disposed of the financial arrangement to another external third party for $1,000,000. TOFA rules apply to the financial arrangement.
As such, Company H will include $20,000 of other gross income in Label 6R of its company income tax return to reflect the realised gain on disposal of its financial arrangement and this amount will also be included in Label 8T Total TOFA gains.
End of exampleLabel 6 Expenses
E – Bad debts
Label 6E is the bad debt expense incurred for the income year excluding accounting provisions for doubtful debts. A deduction for bad debts is allowable only if the bad debt has previously been included in assessable income, or for money lent in the ordinary course of the business of lending money by a company carrying on that business.
If TOFA rules apply, Label 6E would include all of the company’s deductible bad debts which includes amounts from financial arrangements subject to the TOFA rules.
Example: bad debts
Company U is an Authorised Deposit-taking Institution and lends money in the ordinary course of its business.
At the beginning of the income year, Company U provided a loan of $100,000 to a third party, Company U expects to receive the full amount of this loan at maturity, which is the end of the income year, plus interest of 8% per annum.
During the income year, it was discovered that the third party had cashflow problems and the loan would be impaired. At maturity, Company U was only able to recover 70% of the total loan amount, and the $8,000 representing interest accrued in respect of the loan. After taking reasonable steps to determine that the debt can't be recovered, Company U has written off the 30% portion of the principal loan amount as 'bad' in its accounting records.
As Company U satisfies paragraph 25-35(3)(b) in relation to claiming a deduction for bad debts and the TOFA rules also apply to this financial arrangement. Company U will include $30,000 as a bad debt expense in label 6E of its company income tax return and this amount will also be included in Label 8U Total TOFA losses.
End of exampleV – Interest expenses within Australia
Label 6V is the interest expense incurred on money borrowed from Australian sources.
If TOFA rules apply, Label 6V would include all interest expense incurred by the company on money borrowed from Australian sources, which includes interest on financial arrangements subject to the TOFA rules.
Example: interest expenses within Australia
Company J obtained a loan from an external third party based in Australia in the previous income year. The principle of the loan is $100,000 and interest payable on the loan is 8% per annum.
During the current income year, interest expense incurred by Company J in relation to this loan is $8,000. TOFA rules apply to the loan, being a financial arrangement.
Company J will include $8,000 representing interest expenses within Australia in Label 6V of its company income tax return. The amount will also be included in Label 8U Total TOFA losses.
End of exampleJ – Interest expenses overseas
Label 6J is the interest expense incurred on money borrowed from overseas sources.
If TOFA rules apply, Label 6J would include all interest expense incurred by the company on money borrowed from overseas sources, which includes interest on financial arrangements subject to the TOFA rules.
Example: interest expenses overseas
Company K obtained a loan from an external third party based in the US. The principle of the loan is $100,000 and is denominated in AUD. The interest payable on the loan is 10% per annum.
During the current income year, interest expense incurred by Company K in relation to this loan is $10,000. TOFA rules apply to the loan, being a financial arrangement.
Company K will include $10,000 representing interest expenses overseas in Label 6J of its company income tax return. The amount will also be included in Label 8U Total TOFA losses.
End of exampleG – Unrealised losses on revaluation of assets to fair value
Label 6G is the total amount of unrealised losses made on the revaluation of assets and liabilities to fair value that may arise as a result of the adoption of Australian equivalents to the international financial report standards.
If TOFA rules apply, Label 6G includes all unrealised losses on the revaluation of a financial arrangement to fair value deductible under the TOFA rules.
Example: unrealised losses on revaluation of assets to fair value
Company L purchased a financial arrangement from an external party at the start of the income year. The fair value of the financial arrangement at the time of purchase was $900,000.
At the end of the income year the financial arrangement was revalued for a more accurate representation of Company L’s financials in its statement of financial position, As a result, the financial arrangement’s fair value decreased to $850,000. TOFA rules apply to the fair value loss in relation to the financial arrangement held by Company L.
So Company L will include $50,000 of total unrealised losses on revaluation of its financial arrangement to fair value in Label 6G of its company income tax return. The amount will also be included in Label 8U Total TOFA losses.
End of exampleS – All other expenses
Label 6G is the total amount of unrealised losses made on the revaluation of assets and liabilities to fair value that may arise as a result of the adoption of Australian equivalents to the international financial report standards.
If TOFA rules apply, Label 6S includes any deductible losses from the company’s financial arrangements to which the TOFA rules apply, where they haven't already been included in other item 6 Expense labels.
Example: all other expenses
Company M purchased a financial arrangement from an external party at the start of the income year. The fair value of the financial arrangement at the time of purchase was $920,000.
At the end of the income year, Company M disposed of the financial arrangement to another external third party for $900,000 due to operational needs. TOFA rules apply to the financial arrangement.
As such, Company M will include $20,000 in Label 6S All other expenses of its company income tax return to reflect the loss on disposal of its financial arrangement. This amount will also be included in Label 8U Total TOFA losses.
End of exampleLabel 7 Reconciliation to taxable income or loss
E – TOFA income from financial arrangements not included at item 6
Label 7E is a reconciliation label used to ensure that the total TOFA gains label (8T) is equivalent to the total amounts from financial arrangements subject to the TOFA rules included in Item 6 Income labels (6D, 6E, 6F, 6H, 6J and 6R).
If TOFA rules apply, Label 7E includes any additional assessable gains from financial arrangements not already included in Item 6 Income labels.
Example: TOFA income from financial arrangements not included at item 6
Company N owns a depreciating asset which it intends to sell in the near future. Due to concerns around the market value of the depreciating asset falling, it enters into a forward contract to sell the depreciating asset for $100,000 where the depreciating asset is to be delivered in 9 months-time and the $100,000 is payable in 12 months-time.
When the depreciating asset is delivered by Company N to the purchaser, the market value of the depreciating asset was $93,000. The application of the TOFA rules mean that at the time of delivery, Company N starts to have a financial arrangement being the right to receive $100,000 in 3 months’ time.
Additionally, at the time of delivery, Company N is taken to have received an amount equal to the market value of the depreciating asset. So the termination value of the depreciating asset is $93,000 and its adjustable value is $90,000, given by its initial cost less any decline in value.
In 3 months-time, Company N receives the $100,000 as part of the contract. In this case, Company N has elected to use the hedging tax-timing method, and the TOFA rules apply to the financial arrangement in relation to the right to receive $100,000 after the delivery of the depreciating asset.
So Company N will include the $7,000 gain ($100,000 minus $93,000) in relation to the contract in label 7E of its income tax return in the income year the depreciating asset was delivered and this amount will also be included in label 8T Total TOFA gains.
For completeness, there is also a $3,000 gain ($93,000 minus $90,000), that is attributable to the depreciating asset’s termination value that is greater than its adjustable value at the time of delivery, which is a balancing adjustment under the TOFA rules. This amount is recorded separately in Company N’s income tax return in Label 7B Other assessable income.
End of exampleW – TOFA deductions from financial arrangements not included at item 6
Label 7W is a reconciliation label used to ensure that the total TOFA losses label (8U) is equivalent to the total amounts from financial arrangements subject to the TOFA rules included in Item 6 Expense labels (6E, 6V, 6J, 6G and 6S).
If TOFA rules apply, Label 7W includes all additional losses allowable from financial arrangements not already included in Item 6 Expenses labels.
Example: TOFA deductions from financial arrangements not included at item 6
Company O owns a depreciating asset which it intends to sell in the near future. Due to concerns around the market value of the depreciating asset falling, it enters into a forward contract to sell the depreciating asset for $50,000 where the depreciating asset is to be delivered in 9 months-time and the $50,000 is payable in 12 months-time.
When the depreciating asset is delivered by Company O to the purchaser, the market value of the depreciating asset was $60,000. The application of the TOFA rules mean that at the time of delivery, Company O starts to have a financial arrangement being the right to receive $50,000 in 3 months’ time.
Additionally, at the time of delivery, Company O is taken to have received an amount equal to the market value of the depreciating asset. So the termination value of the depreciating asset is $60,000 and its adjustable value is $49,000, determined by its initial cost less any decline in value.
In 3 months-time, Company O receives the $50,000 in relation to the contract. In this case, Company O has elected to use the hedging tax-timing method, and the TOFA rules apply to the financial arrangement in relation to the right to receive $50,000 after the delivery of the depreciating asset.
So Company O will include the $10,000 loss ($60,000 minus $10,000) in relation to the contract in label 7W of its income tax return in the income year the depreciating asset was delivered, and this amount will also be included in label 8U Total TOFA losses.
For completeness, there is also an $11,000 gain ($60,000 minus $49,000), that is attributable to the depreciating asset's terminating value less the adjustable value at the time of delivery, which is a balancing adjustment under the TOFA rules. This amount is recorded separately in Company O’s income tax return in Label 7B Other assessable income.
End of exampleLabel 8 Financial and other information
T – Total TOFA gains
Label 8T is the total of all assessable TOFA gains from financial arrangements already included in item 6 and item 7.
If TOFA rules apply, Label 8T should be equivalent to the total income from financial arrangements subject to the TOFA rules already included in labels 6D, 6E, 6F, 6H, 6J, 6R and 7E.
Example: total TOFA gains
Company P is an Authorised Deposit-taking Institution and lends money in the ordinary course of its business. Throughout the current income year, Company P had the following financial arrangements:
- provided a loan of $1,000,000 to an external third party within Australia and received interest income of $50,000 - this amount has been included as part of Label 6F Gross interest
- purchased a financial arrangement from an external party and made a gain of $100,000 on disposal at the end of the income year - this amount has been included as part of 6R Other gross income.
As TOFA rules apply to the financial arrangements. Company P will record its total income from financial arrangements being $150,000 in Label 8T Total TOFA gains.
End of exampleU – Total TOFA losses
Label 8U is the total of all allowable TOFA losses from financial arrangements already included in items 6 and item 7.
If TOFA rules apply, Label 8U should be equivalent to the total deductions from financial arrangements subject to the TOFA rules already included in labels 6E, 6V, 6J, 6G, 6S and 7W.
Example: total TOFA losses
Company Q is an Authorised Deposit-taking Institution and lends money in the ordinary course of its business. Throughout the current income year, Company A had the following financial arrangements:
- borrowed $1,000,000 via a loan from an external third party within Australia and incurred interest expense of $40,000 - this amount has been included as part of Label 6V Interest expenses within Australia
- purchased a financial arrangement from an external party and made a loss of $10,000 on disposal at the end of the income year - this amount has been included as part of Label 6S All other expenses.
As TOFA rules apply to the financial arrangements. Company Q will record its total losses from financial arrangements being $50,000 in Label 8U Total TOFA losses.
End of exampleS – TOFA gains from unrealised movements in the value of financial arrangements
Label 8S is the total of all TOFA gains included at item 6 as a result of unrealised movements in the value of financial arrangements.
If TOFA rules apply, Label 8S may apply if a company has financial arrangement subject to the TOFA rules and has made certain TOFA tax-timing method elections.
Example: TOFA gains from unrealised movements in the value of financial arrangements
Company R is mandatorily subject to the TOFA rules due to meeting the turnover threshold for the current and previous income years.
At the beginning of the current income year, Company R purchased the following financial arrangements from external parties:
- Financial arrangement 1 where the fair value at the time of purchase was $900,000.
- Financial arrangement 2 where the fair value at the time of purchase was $800,000.
At the end of the income year the financial arrangements were revalued for a more accurate representation of Company R’s financials in its statement of financial position. As a result, the fair value of the financial arrangements after revaluations were as follows:
- Financial arrangement 1 had a fair value of $930,000 at the end of the current income year.
- Financial arrangement 2 had a fair value of $820,000 at the end of the current income year.
TOFA rules apply to the fair value gain in relation to the financial arrangements held by Company R. So Company R will include $50,000 in Label 8S as the amount is from unrealised movements in the fair value of the financial arrangements.
Note that the $50,000 is also included in Label 6J Unrealised gains on revaluation of assets to fair value and Label 8T Total TOFA gains.
End of example