Reporting TOFA gains and losses on a gross or net basis

Meaning of 'gross' versus 'net'

The TOFA tax return labels – quick reference guide provides taxpayers with an option to report TOFA gains and TOFA losses on a 'net' basis. This is taking into account that reporting on a "gross" basis could be a compliance burden in separating the financial arrangement gains from the losses for certain types of financial arrangements like derivatives.

In the quick reference guide, reporting on a gross basis means that taxpayers don't net off the expense from the income from the same type of financial arrangement. This is particularly relevant for financial arrangements like loans. The quick reference guide provides a specific example stating that interest income and interest expense should be reported on a gross basis. As an example, $100,000 interest income and $40,000 of interest expense in Australia is reported as:

• Gross basis
  • $100,000 in Label 6F Gross interest; and
  • $40,000 in Label 6V interest expenses in Australia.
• Net basis:
  • $60,000 in Label 6F Gross interest.

In contrast, throughout the rest of this page, unless otherwise specified, 'gross' basis is referring to a practice among some taxpayers, involving the inclusion of the value of the notional principal amounts as a TOFA gain or loss, and 'net' basis is referring to situations involving the inclusion of the actual income or expense – actual gain or loss arising from the financial arrangement, rather than the value of the notional principal amounts associated with the financial arrangements.

Choosing to report on a 'gross' or 'net' basis

We strongly advise taxpayers to report on a net basis in the relevant labels of the income tax returns to:

• avoid income or expenses being significantly inflated unnecessarily and inappropriately.
• ensure a consistent approach to reporting being adopted by taxpayers.

When considering whether to report on a gross or net basis, taxpayers should be aware of other potential implications – even though the choice may not impact the tax payable figure.

How the data can be used

We use the profit and loss information in the company tax return for data analysis purposes, including comparative analysis for risk assessment purposes.

In some cases, we may look at various financial ratios including tax payable relative to total income to analyse a benchmark across an industry.

The total income figure in the company tax return is also reported in the annual corporate tax transparency report which is published on our website. This report is subject to public scrutiny and can lead to incorrect inferences where taxpayers have reported notional principal amounts in total income.

In addition, on 22 June 2023 the Australian Parliament passed legislation establishing the Financial Services Compensation Scheme of Last Resort (CSLR). This scheme is designed to make payments on a last-resort basis to eligible consumers where determinations by the Australian Financial Complaints Authority (AFCA) for compensation remain unpaid in the financial sub-sectors specified in the legislation.

The one-time levy came from the 10 largest banking and insurance groups determined by income reported to us for the 2022 income year. This means ASIC identified the 10 largest banking and insurance groups using the corporate tax transparency report data on total income with the levy being imposed on total income as originally reported in the company income tax return.

Various provisions in the income tax legislation including reporting obligations are dependent on the value of total income, including but not limited to the following:

• the significant global entity concept which defines:
  • the population subject to the multinational anti-avoidance law (MAAL) and country-by-country (CBC) reporting,
  • the entities required to give the Commissioner a general purpose financial statement
  • the entities that may be subject to the diverted profits tax and increased administrative and other penalties
• whether you are considered a small business entity
• whether you are required to pay PAYG instalments on a monthly basis
• whether you are required to complete the Reportable tax position (RTP) schedule
• the R&D tax incentive offset rate for eligible entities.

Use a consistent method

Whether you report using the gross or net basis, you must use the same method consistently throughout the income tax return.

To ensure the method applied remains consistent, we strongly advised that accounting systems be mapped such that:

• The total TOFA gains reported at item 6 and label 7E TOFA income from financial arrangements not included at Item 6 should match the amount reported at label 8T Total TOFA gains
• The total TOFA losses reported at item 6 and label 7W TOFA deductions not included at item 6 should match the amount reported at item 8U Total TOFA losses
• The total TOFA gains reported at item 6 as a result of unrealised movements in the value of financial arrangements should match the amount reported at label 8S TOFA gains from unrealised movements in the value of financial arrangements.

How to report on a net basis

Examples of common types of financial arrangements

The following are examples of how a company should disclose the gains and losses from a financial arrangement depending on the tax-timing method applicable to the financial arrangement.

You should follow priority rules in section 230-40 of the ITAA 1997 to determine which tax-timing method takes priority where more than one tax-timing method apply to a financial arrangement.

The following examples are intended to illustrate the implications to the disclosures in the income tax return depending on the different tax-timing method.

Foreign currency denominated loan – Foreign exchange retranslation method

Options – Fair value method

Multiple financial arrangements – Reliance on financial reports method