Interactions between TOFA labels and PAYG instalment rate

TOFA reporting impact on the PAYG instalment rate

The way you report TOFA gains and losses in your income tax return (ITR) can affect your pay as you go (PAYG) instalment rate calculation. Correctly capturing and disclosing TOFA gains and losses in your ITRs can be challenging if you're subject to the TOFA rules with a large volume of financial arrangements. However, incorrectly reporting the TOFA gains and losses can result in an inappropriate PAYG instalment rate.

The example uses company income tax return labels. However, the key reporting principles equally apply to trust and partnership income tax returns.

How the PAYG instalment rate is calculated

If you've been issued with a PAYG instalment rate, the instalment rate calculation is (Notional tax ÷ base assessment instalment income) × 100 where:

notional tax is adjusted tax on adjusted taxable income reduced by adjusted tax on adjusted withholding income of the base year – note that the base year generally refers to the most recent income tax return lodged year
for non-TOFA entities, Base Assessment Instalment Income (BAII) = ordinary income earned from business and investment activities as reported in the base year
for TOFA entities, BAII = ordinary income earned from business and investment activities in the base year
- minus Total TOFA gains
- plus Net TOFA income
- where Net TOFA income = Total TOFA gains − Total TOFA losses.

The PAYG instalment rate formula has 2 main components consisting of notional tax and BAII. Both components are usually derived from the relevant labels of the most recently lodged ITR. If either component is 0 or less, the instalment rate will default to 0.

For TOFA entities, there is an extra step within the calculation of the TOFA entity’s BAII which involves deducting all income attributable to TOFA from ordinary income earned from business and investment activities and adding back net income attributable to TOFA.

TOFA labels impacting the PAYG instalment rate

Where Total TOFA gains and Total TOFA losses aren't reported correctly in the tax return, an incorrect PAYG instalment rate may be issued, and tax payments may be inappropriately deferred.

See which labels will impact the PAYG instalment rate calculation.

Base assessment instalment income

BAII is calculated using the following labels:

6S Total income
6J Unrealised gains on revaluation of assets to fair value
6D Gross distributions from partnerships (if <0) (see Note 1)
6R Other gross income (if <0) (see Note 2)

BAII is calculated as follows:

6S − 6J − 6D (if < 0) − 6R (if < 0)

Note 1: Gross distributions from partnerships (label 6D) are only deducted in the calculation of ordinary BAII when the reported label is a negative amount, meaning when 6D is less than zero. If the amount is a positive amount (when 6D is greater than zero), it's not deducted in the calculation of ordinary BAII.

Note 2: Other gross income (label 6R) is deducted in the calculation of ordinary BAII only when the reported label is a negative amount, meaning when 6R is less than zero. If the amount is a positive amount (when 6R is greater than zero), it's not deducted in the calculation of ordinary BAII.

TOFA method BAII

TOFA method BAII is calculated using the following additional labels:

7E TOFA income from financial arrangements not included in item 6
8S TOFA 3&4 gains from unrealised movements in the value of financial arrangements
8T TOFA gains
8U TOFA losses.

TOFA method BAII is calculated as follows:

BAII + 7E + 8S – 8T + (8T − 8U)

The formula also uses BAII which is calculated from other labels from the income tax return.

Example: how company ITR labels are reflected in the PAYG instalment rate calculation

Bank A enters into a financial arrangement with an external party on 1 October 2021. The fair value of the financial arrangement at the time of entering into the arrangement was $99 million.

Bank A has elected to use all TOFA methods. Bank A's financial year and substituted accounting period ends on 31 December.

Bank A sells the financial arrangement on 31 January 2022 for its fair value at the time of $100 million.

The fair value of the financial arrangement for the relevant dates are as follows:

$99.75 million on 31 December 2021, and
$100 million on 31 January 2022.

In addition, Bank A is required to use the instalment rate method of calculating the amount of PAYG instalment payable for each period.

Accounting journal entries during the year ended 31 December 2021 attributable to the financial arrangement
Date	Account name	Debit	Credit
1 October 2021	Financial Arrangement	$99,000,000	-
1 October 2021	Cash	-	$99,000,000
31 December 2021	Revaluation of financial arrangement	$750,000	-
31 December 2021	Fair value gains (P&L)	-	$750,000

During the income year ended 31 December 2021, Bank A also derived interest income of $4 million on 31 December 2021. The TOFA rules are also applicable on the entire amount.

Accounting journal entries during the year ended 31 December 2021 attributable to the interest income
Date	Account name	Debit	Credit
31 December 2021	Cash	$4,000,000	-
31 December 2021	Interest	-	$4,000,000

During the income year ended 31 December 2021, Bank A revalued a piece of land that it owns for a more accurate representation of its financials in the statement of financial position. The land was revalued, resulting in a gain of $2 million which is in this instance reflected in its Profit & Loss (P&L) account, as the land was previously revalued resulting in a $2.5 million loss. Note that the gain in relation to the revaluation of land is not subject to the TOFA rules.

Accounting journal entries during the year ended 31 December 2021 attributable to the revaluation surplus
Date	Account name	Debit	Credit
31 December 2021	Land	$2,000,000	-
31 December 2021	Gain on revaluation (P&L)	-	$2,000,000

Disclosures in Company Income Tax Return for the income year ended 31 December 2021
Income tax return label	Amount
6F Gross interest	$4,000,000
6J Unrealised gains on revaluation of assets to fair value	$2,750,000
6S Total income	$6,750,000
8T Total TOFA gains	$4,750,000
8S TOFA 3&4 gains from unrealised movements in the value of financial arrangements	$750,000

Calculating the PAYG instalment rate with the year ended 31 December 2021 as the base year

For the year ended 31 December 2021:

Bank A had a total income of $6,750,000
Assume that Bank A's notional tax is $800,000.

Working out base assessment instalment income (BAII)
Calculation element	Value
6S Total income	6,750,000
less 6J Unrealised gains on revaluation of assets	2,750,000
less 6D Gross distribution from partnerships, if 6D is less than zero (see Note 1)	0
less 6R Other gross income, if 6R is less than zero (see Note 2)	0
BAII	4,000,000

Note 1: When label 6D is a negative amount, the deduction of Gross distribution from partnerships in this formula effectively adds back the income otherwise reducing total income.

Note 2: When label 6R is a negative amount, the deduction of Other gross income in this formula effectively adds back the income otherwise reducing total income.

Working out TOFA BAII
Calculation element	Value
BAII	4,000,000
plus 7E TOFA income from financial arrangements not included in Item 6	0
plus 8S TOFA 3&4 gains from unrealised movements in the value of financial arrangements	750,000
less 8T Total TOFA gains	4,750,000
plus (8T Total TOFA gains less 8U Total TOFA losses)	=4,750,000
TOFA BAII	4,750,000

The PAYG instalment rate for Bank A is calculated using the following formula:

(Notional tax ÷ TOFA BAII) × 100
($800,000 ÷ $4,750,000) × 100

PAYG instalment rate therefore equals to 16.84%.

Accounting journal entries during the year ended 31 December 2022 attributable to the financial arrangement
Date	Account name	Debit	Credit
31 January 2022	Revaluation of financial arrangement	$250,000	-
31 January 2022	Fair value gains (P&L)	-	$250,000
31 January 2022	Cash	$100,000,000	-
31 January 2022	Financial arrangement	-	$100,000,000

During the income year ended 31 December 2022, Bank A also derived interest income of $5 million on 31 December 2022. The TOFA rules are also applicable on the entire amount.

Accounting journal entries during the year ended 31 December 2022 attributable to the interest income
Date	Account name	Debit	Credit
31 December 2022	Cash	$5,000,000	-
31 December 2022	Interest	-	$5,000,000

During the income year ended 31 December 2022, Bank A also derived rental income of $500,000 on 31 December 2022 for renting out the land that it owns. Note that the rental income is not subject to the TOFA rules.

Accounting journal entries during the year ended 31 December 2022 attributable to the rental income
Date	Account name	Debit	Credit
31 December 2022	Cash	$500,000	-
31 December 2022	Rent	-	$500,000

Disclosures in Company Income Tax Return for the year ended 31 December 2022
Income tax return label	Amount
6F Gross interest	$5,000,000
6G Gross rent and other leasing and hiring income	$500,000
6R Other gross income	$250,000
6S Total income	$5,750,000
8T Total TOFA gains	$5,250,000

Calculating the PAYG instalment rate with the year ended 31 December 2022 as the base year

For the year ended 31 December 2022:

Bank A had a total income of $5,750,000
Assume that Bank A's notional tax is $1,000,000.

Working out base assessment instalment income (BAII)
Calculation element	Value
6S Total income	5,750,000
less 6J Unrealised gains on revaluation of assets	0
less 6D Gross distribution from partnerships, if 6D is less than zero	0
less 6R Other gross income, if 6R is less than zero	0
BAII	5,750,000

Working out TOFA BAII
Calculation element	Value
BAII	5,750,000
plus 7E TOFA income from financial arrangements not included in Item 6	0
plus 8S TOFA 3&4 gains from unrealised movements in the value of financial arrangements	0
less 8T Total TOFA gains	5,250,000
plus (8T Total TOFA gains less 8U Total TOFA losses)	= 5,250,000 - 0 =5,250,000
TOFA BAII	5,750,000

The PAYG instalment rate for Bank A is calculated using the following formula:

(Notional tax ÷ TOFA BAII) × 100
($1,000,000 ÷ $5,750,000) × 100

PAYG instalment rate therefore equals to 17.39%.

End of example

Company ITR labels relevant to TOFA gains and losses

Use these examples to complete labels in your return relevant to TOFA gains and losses.

Reporting TOFA gains and losses on a gross or net basis

Understand the differences between reporting TOFA gains and TOFA losses on a gross or net basis and its implications.