House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 13 Commencement, transitional and implementation issues

Outline of chapter

13.1 This chapter explains:

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when the provisions of Division 230 begin to have effect;

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how financial arrangements that a taxpayer has at the time Division 230 begins to have effect may be treated under this Division; and

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how relevant arrangements that are not Division 230 financial arrangements that a taxpayer has at the time Division 230 first applies may be treated under Subdivision 775-F.

Overview of commencement, transitional and implementation issues

Application of Division 230

13.2 Division 230 will apply to all financial arrangements that a taxpayer starts to have during income years commencing on or after 1 July 2010.

13.3 The general rule is Division 230 will not apply to financial arrangements a taxpayer starts to have in an income year prior to one commencing on or after 1 July 2010 and the arrangement is still on hand on commencement of Division 230. However, under a transitional election, a taxpayer can choose that Division 230 applies to their existing financial arrangements.

13.4 Taxpayers are also able to elect to apply Division 230 early, that is to income years commencing on or after 1 July 2009. In this situation, they will also be able to make the transitional election in relation to their existing financial arrangements.

Application of Subdivision 775-F

13.5 Where a foreign exchange retranslation election (the 'general retranslation election') has been made under Subdivision 230-D to apply the retranslation method to relevant financial arrangements, the election also applies to those arrangements subject to Subdivision 775-F of the ITAA 1997. Subdivision 775-F will apply to relevant arrangements (Subdivision 775-F arrangements) in the same way that Subdivision 230-D applies to financial arrangements. This similar treatment extends to allowing existing arrangements to be brought within the scope of Subdivision 775-F where a transitional election is made. For further information on what arrangements are subject to Subdivision 775-F, refer to Chapter 7.

Consequences of making transitional election

13.6 Where a taxpayer makes an election to bring in their existing financial arrangements (the transitional election) a transitional balancing adjustment is made. The transitional balancing adjustment compares the amounts already subject to tax under the existing tax law with amounts that would have been brought to account under Division 230.

13.7 Similarly, the transitional election may also apply to Subdivision 775-F arrangements that are not Division 230 financial arrangements.

13.8 If the transitional balancing adjustment is positive, a quarter of this amount will be included in the taxpayer's assessable income for the first income year that Division 230 applies and each of the next three income years. Conversely, if the transitional balancing adjustment is negative, a quarter of this amount may be allowed as a deduction for the first income year that Division 230 applies and each of the next three income years.

Deferred tax liabilities and deferred tax assets

13.9 Where a taxpayer has:

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elected to rely on their financial reports for Division 230 purposes; and

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has a deferred tax asset or tax liability amount in respect of a Division 230 financial arrangement to which the financial reports method applies,

the amount, as determined immediately before the start of the first income year that Division 230 applies, is to be used for the purposes of determining the transitional balancing adjustment amount. This is to reduce compliance costs compared to undertaking individual calculations for all existing financial arrangements.

13.10 A deferred tax asset or a deferred tax liability is recorded in a taxpayer's financial reports where the financial year in which a taxpayer recognises an amount of income or an expense for tax purposes is different to the year in which the taxpayer entity recognises the income or expense for financial accounting purposes.

PAYG transitionals

13.11 Where the taxpayer has a balancing adjustment amount, the amount must be spread evenly over the first four income years for instalment income purposes. During each instalment quarter they will be taken to have made a gain or loss that is equal to one quarter of the annual balancing adjustment amount, that is, one sixteenth of the total balancing adjustment amount.

Offshore banking units

13.12 An offshore banking unit will not be taken to have breached the rule limiting its use of non-offshore banking money where it has made a transitional election to have Division 230 apply to all of the financial arrangements it has at the start of the first applicable income year and a balancing adjustment arises under those provisions.

Context of amendments

13.13 Division 230 will apply to income years commencing on or after 1 July 2010. Taxpayers are also able to elect to apply Division 230 to income years commencing on or after 1 July 2009.

13.14 At the time Division 230 first applies, taxpayers may have financial arrangements on hand which in earlier years were subject to the existing law. Generally, financial arrangements which a taxpayer has prior to the commencement of Division 230 will continue to be subject to the current law (and not be subject to the provisions of the Division). An exception to this general rule is where a taxpayer elects to have Division 230 apply to all financial arrangements (and, where relevant, to have Subdivision 775-F apply to Subdivision 775-F arrangements) they have at the time the Division commences.

Summary of new law

13.15 Division 230 will apply to income years commencing on or after 1 July 2010. Taxpayers are also able to elect to apply Division 230 to income years commencing on or after 1 July 2009.

13.16 Division 230 will apply to financial arrangements a taxpayer first starts to have in an income year commencing on or after 1 July 2010 or, on an elective basis, to financial arrangements first held in income years commencing on or after 1 July 2009.

13.17 A taxpayer may elect to have Division 230 apply to financial arrangements that would otherwise be the subject of the Division, that were entered into prior to the first income year in which the Division applies, and that the taxpayer holds at the start of that year. In respect of such existing arrangements, a transitional 'balancing adjustment' will be calculated and spread evenly over the first applicable income year (the taxpayer's first income year commencing on or after 1 July 2010 - or on or after 1 July 2009 as appropriate) and the following three income years.

13.18 Similarly, where a general retranslation election has been made on or before the first lodgment date that occurs in the first applicable income year, Subdivision 775-F will apply to existing Subdivision 775-F arrangements.

Comparison of key features of new law and current law

Detailed explanation of new law

Commencement date

13.19 Division 230 will apply on a mandatory basis to all income years commencing on or after 1 July 2010 [ Schedule 1, subitem 103(1 )]. This means that for a taxpayer with a substituted accounting period ending on 31 December, Division 230 will apply on a mandatory basis for the substituted accounting period commencing on 1 January 2011.

13.20 Taxpayers are also able to elect to apply Division 230 to income years commencing on or after 1 July 2009. This means that a taxpayer with a substituted accounting period ending on 31 December will be able to elect to apply Division 230 for the substituted accounting period starting on 1 January 2010. For consolidated groups it is the head company that makes this election. Where a taxpayer makes this election, they must do so on or before the first lodgment date that occurs on or after 1 July 2009. [ Schedule 1, subitems 103(2) and (3 )]

13.21 In respect of taxpayers with a substituted accounting period ending on 31 December, the income year to which Division 230 will first apply will be to income years beginning on 1 January 2011, that is, to the 2011-12 income year.

13.22 Where an election is made under subitem 103(2), Division 230 will apply to income years beginning on 1 January 2010, that is, to the 2010-11 income year.

Example 13.1 : Commencement date

BJ Investments Co is an investment company whose income year ends on 31 December in lieu of 30 June. As Division 230 applies to income years commencing on or after 1 July 2010 (or 1 July 2009 where an election is made under subitem 103(2)), the first income year to which BJ Investments Co will be required to apply Division 230 will commence on 1 January 2011 (or 1 January 2010 if an election is made under subitem 103(2)).

Application to new financial arrangements

13.23 Division 230 applies to all financial arrangements (that are subject to the Division) that the taxpayer starts to have in the income year in which the Division first applies to the taxpayer, and to financial arrangements the taxpayer starts to have in any subsequent income year. [ Schedule 1, subitem 103(1 )]

Application to existing financial arrangements

13.24 A taxpayer may elect that Division 230 also apply to all financial arrangements that they started to have prior to the first income year in which the Division applies to the taxpayer, and which the taxpayer still has at the time the Division first applies to the taxpayer ('existing financial arrangements') [ Schedule 1, subitem 104(2 )]. Similarly, the transitional election may also apply to existing arrangements that are not Division 230 financial arrangements.

13.25 The election to bring existing financial arrangements within the scope of Division 230:

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will apply to all financial arrangements a taxpayer starts to have prior to the time the Division first applies to the taxpayer and which the taxpayer still has at that time, other than financial arrangements (typically a deferred settlement) which are in existence at that time and arose from a disposal of property, including a disposal of a capital asset, revenue asset, depreciating asset or trading stock [ Schedule 1, subitems 104(2) and (3 )]; and

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must be made by the taxpayer and notified to the Commissioner of Taxation (Commissioner) on or before the first date for lodgment of an income tax return of the taxpayer (lodgment date) that occurs on or after the start of the first applicable income year to which the Division applies [ Schedule 1, sub-subitems 104(5)(a) and (b )].

13.26 Taxpayers who are excluded from Division 230 as a result of the application of subsections 230-455(1) to (5) are able to elect to have Division 230 apply to all their financial arrangements (subsection 230-455(7)). Where a valid election is made under subsection 230-455(7) the taxpayer is also able to elect to have Division 230 apply to all their existing financial arrangements. [ Schedule 1, subitem 104(6 )]

13.27 Financial arrangements which are brought within the scope of Division 230 through the transitional election will be subject to the various tax-timing methods within the Division (including the elective methods of fair value, foreign exchange retranslation and relying on financial reports) where the taxpayer has made the necessary elections by the first lodgment date that occurs on or after the start of the first income year that Division 230 applies to the taxpayer [ Schedule 1, subitem 104(8 )]. In such situations it is intended that before taxpayers can have any of the elective tax-timing methods apply to these 'existing arrangements', they must have made the transitional election. It is only by making a transitional election that the taxpayer can bring their 'existing financial arrangements' within the scope of an elective tax-timing treatment [ Schedule 1, subitem 104(2 )].

13.28 Similarly, where a taxpayer has made an election for portfolio treatment of premiums, discounts and fees in accordance with section 230-150 by the first lodgment date that occurs on or after the applicable income year, the portfolio treatment will extend to existing financial arrangements that are part of a portfolio of similar financial arrangements. [ Schedule 1, Part 3, subitem 104(7 )]

13.29 Taxpayers can also elect to apply the hedging financial arrangements election method (in Subdivision 230-E) to certain financial arrangements ('existing hedges') if:

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the hedging financial arrangements election is made by the first lodgment date that occurs after the start of the first income year that Division 230 applies to the taxpayer [ Schedule 1, sub-subitem 104(9)(a )];

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at the time the existing hedge was created, acquired or applied, it satisfied the definition of a 'hedging financial arrangement' in section 230-335 (as explained in Chapter 8) [ Schedule 1, sub-subitem 104(9)(b )];

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at, or soon after the time when Division 230 commences, the taxpayer's records in relation to the existing hedge satisfy the relevant record-keeping requirements in sections 230-355 and 230-360 (ignoring subparagraph 230-360(2)(c)(ii)) explained in Chapter 8 [ Schedule 1, sub-subitem 104(9)(c )]; and

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all the effectiveness requirements set out in section 230-365 (explained in Chapter 8) have been met at all times since the existing hedge was first created, acquired or applied for the purpose of hedging a risk in relation to a hedged item [ Schedule 1, sub-subitem 104(9)(d )].

13.30 However, for existing hedges, the hedging election will only extend to tax-timing matching. Tax-status matching cannot, as a result of the transitional election, extend to existing hedges. That is to say, tax-status matching (contained in subsection 230-310(4)) can only apply to new hedging matching arrangements entered into in the income year, or later income years, in which Division 230 first applies to the taxpayer.

13.31 The result of a taxpayer making an election in accordance with subitem 103(2) in respect of hedging financial arrangements, and given that subsection 230-310(4) will not apply to existing financial arrangements, is that gains and losses from these hedging financial arrangements will be recognised as 'revenue gains' and 'revenue losses'. [ Schedule 1, subitem 104(10 )]

13.32 Where an election has been made to bring existing financial arrangements within the scope of Division 230 and where a valid election have been made under any of the elective Subdivisions (as explained in Chapter 5), the elective Subdivision(s) will apply to the taxpayer's existing financial arrangements notwithstanding the fact that the election under the elective Subdivisions was not made in the income year in which the taxpayer first started to hold the existing financial arrangement. [ Schedule 1, subitem 104(11 )]

13.33 Where a taxpayer has financial arrangements that were in existence at the time the Division first commences to apply, and does not make a transitional election, then those financial arrangements will continue to be brought to account under the other provisions of the tax law.

Transitional balancing adjustment

13.34 Where a taxpayer makes an election to bring existing arrangements into Division 230, a transitional 'balancing adjustment' is calculated using the 'method statement' contained in subitem 104(13), at the time the election takes effect (the time when Division 230 first applies to the taxpayer) [ Schedule 1, subitem 104(12 )]. The balancing adjustment, which is designed to compare the amounts which have been brought to account under the existing law with amounts that would have been brought to account under Division 230 if it had applied, is calculated as follows:

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a notional assessable amount (the total of all the amounts relating to the financial arrangements that would be assessable under Division 230, if it (and any relevant elections) applied from the time the taxpayer started to have the arrangements) [ Schedule 1, subitem 104(13), step 1 and subitem 104(18 )];

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a notional deductible amount (the total of all the amounts relating to the financial arrangements that would be allowable as deductions under Division 230 if it (and any relevant elections) applied from the time the taxpayer started to have the arrangements) [ Schedule 1, subitem 104(13), step 2 and subitem 104(18 )];

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an actual assessed amount (the total of all the amounts relating to the financial arrangements that have been included in assessable income from the time the taxpayer started to have the arrangements) [ Schedule 1, subitem 104(13), step 3 ];

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an actual deducted amount (the total of all the amounts relating to the financial arrangements that have been allowed as deductions from the time the taxpayer started to have the arrangements) [ Schedule 1, subitem 104(13), step 4 ];

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the step 5 amount (add the notional assessable amount to the actual deducted amount) [ Schedule 1, subitem 104(13), step 5 ]; and

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the step 6 amount (add the actual assessed amount to the notional deductible amount) [ Schedule 1, subitem 104(13), step 6 ].

13.35 The final calculation involves a comparison between the step 5 amount and the step 6 amount. A positive amount, which will occur if the step 5 amount exceeds the step 6 amount, is included in assessable income as a balancing adjustment while a negative amount, which will occur if the step 6 amount exceeds the step 5 amount, is allowable as a deduction as a balancing adjustment. Where the step 5 amount and the step 6 amount are equal, there is no balancing adjustment, that is, no amount is included in assessable income and no amount is allowable as a deduction. [ Schedule 1, subitem 104(13), step 7 ]

13.36 The result from the calculation above (which must take into account all 'pre-existing financial arrangements' to which the transitional election applies) will be brought to account (as either assessable income where there is a positive amount or as an allowable deduction where there is a negative amount) in equal instalments over the first income year to which Division 230 applies to the taxpayer and the following three income years. That is, one quarter of the balancing adjustment is brought to account in each of these four years. [ Schedule 1, subitem 104(17 )]

13.37 The transitional election may also apply to existing arrangements that are not Division 230 financial arrangements. Where the transitional election applies to existing arrangements that are not Division 230 financial arrangements, the method statement in subitem 104(13) is modified (see paragraphs 13.56 to 13.58).

Application of the transitional balancing adjustment to financial arrangements

13.38 When undertaking a balancing adjustment in respect of existing financial arrangements, it is important to note that the values that are included at each step are positive numbers. That is, an amount that is included at steps 2 and 4 is not a negative amount because it is, or would be, allowable as a deduction.

13.39 Example 13.2 illustrates how a transitional balancing adjustment should be calculated.

Example 13.2 : Calculating a transitional balancing adjustment

Background

BJ Investments Co is an investment company whose tax and accounting year ends on 30 June. It holds two portfolios of shares, details of which are:

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Portfolio No. 1 contains 1,000 shares in Johnny Co. The shares were acquired for $5 per share, that is, the cost of this portfolio was $5,000. This portfolio of shares was acquired on 30 January 2007; and

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Portfolio No. 2 contains 2,000 shares in Buddy Co. The shares were acquired for $10 per share, that is, the cost of this portfolio was $20,000. This portfolio of shares was acquired on 30 March 2005.

Assumptions

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The shares are held on revenue account.

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No dividends are paid during the period in which BJ Investments Co holds the shares.

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Division 230 applies to BJ Investments Co from 1 July 2009.

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On 30 June 2009:

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BJ Investments Co makes an election under Subdivision 230-C to fair value Division 230 financial arrangements that are fair valued in its financial reports with effect from 1 July 2009;

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BJ Investments Co also makes an election to apply Division 230 to all existing financial arrangements that it has at the start of the income year in which Division 230 first applies to it;

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BJ Investments Co always satisfies the requirements of Subdivision 230-C to allow it to continue to apply the fair value election to relevant financial arrangements;

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the shares in Portfolio No. 1 and Portfolio No. 2 are fair valued in the financial reports of BJ Investments Co;

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the fair value of Portfolio No. 1 had increased to $7,500 - that is, $7.50 per share; and

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the fair value of Portfolio No. 2 had decreased to $8,000 - that is, $4 per share.

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On 20 June 2010 BJ Investments Co disposes of all shares in:

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Portfolio No. 1 for $8,000 - that is, $8 per share; and

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Portfolio No. 2 for $10,000 - that is, $5 per share.

Transitional balancing adjustment calculation

In light of the above facts, the balancing adjustment would be calculated as follows:

Step 1 - Amounts that would be included if Division 230 had applied from the time Portfolio No. 1 was acquired - that is, the fair value gain on Portfolio No. 1 as at 30 June 2008 ( notional assessable amount ).

$2,500

Step 2 - Amounts that would be deductible if Division 230 applied from the time Portfolio No. 2 was acquired - that is, the fair value loss on Portfolio No. 2 as at 30 June 2008 ( notional deductible amount ).

$12,000

Step 3 - Amounts that have been included in assessable income from the time the taxpayer started to have the financial arrangement ( actual assessed amount ).

$0

Step 4 - Amounts that have been allowable as deductions from the time the taxpayer started to have the financial arrangement ( actual deducted amount ).

$0

Step 5 - Add the notional assessable amount to the actual deductible amount.

($2,500 + $0) = $2,500

Step 6 - Add the actual assessed amount to the notional deductible amount.

($0 + $12,000) = $12,000

Step 7 - Compare the step 5 amount with the step 6 amount.

As the step 6 amount exceeds the step 5 amount, the excess ($9,500) is allowable as a deduction as a balancing adjustment. The balancing adjustment is spread evenly over the first applicable income year and the next three years.

13.40 The effect of undertaking a balancing adjustment calculation in respect of financial arrangements held at the commencement of Division 230 is to place those financial arrangements in the same position that they would have been had they been subject to Division 230 from the time the taxpayer first held the financial arrangement. [ Schedule 1, subitem 104(13 )]

13.41 In Example 13.2 when BJ Investments Co disposes of the shares that comprise Portfolios No. 1 and 2 they make:

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an overall gain of $3,000 in respect of Portfolio No. 1. The gain is comprised of the $2,500 that was included in the transitional balancing adjustment and a further $500 that is the difference between the proceeds on disposal and the fair value of the portfolio at the start of the income year in which the disposal occurred; and

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an overall loss of $10,000 is respect of Portfolio No. 2. The loss is comprised of the $12,000 that was included in the transitional balancing adjustment and a $2,000 gain that is the difference between the proceeds on disposal and the fair value of the portfolio at the start of the income year in which the disposal occurred.

Deferred tax liabilities and deferred tax assets

13.42 Where the financial year in which an entity recognises an amount of income or an expense for tax purposes is different to the year in which the entity recognises the income or expense for financial accounting purposes, the entity will record in its financial reports a deferred tax asset or a deferred tax liability in accordance with Australian Accounting Standard AASB 112 Income Taxes (AASB 112).

13.43 Where:

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a taxpayer has made an election to rely on their financial reports (under Subdivision 230-F); and

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an amount in a deferred tax asset account or a deferred tax liability account is in respect of a Division 230 financial arrangement that is subject to Subdivision 230-F,

the taxpayer must, in respect of financial arrangements that are subject to the election in Subdivision 230-F, disregard steps 1 to 4 in the method statement in subitem 104(13) for the purposes of determining the balancing adjustment amount that is attributable to that financial arrangement and instead rely on the amount recorded in the financial reports, immediately before the first applicable income year, as a deferred tax asset or a deferred tax liability (and grossed up) in respect of those financial arrangements that are subject to Subdivision 230-F. [ Schedule 1, subitems 104(14) and (15 )]

13.44 Subitems 104(14) and (15) are designed to reduce the compliance costs of otherwise having to undertake individual calculations for all existing financial arrangements. The net deferred tax asset and deferred tax liability position of a taxpayer, adjusted for those financial arrangements not subject to Subdivision 230-F, is considered to provide a reasonable approximation of the amount that would be calculated as a result of the application of the transitional balancing adjustment method statement to all existing financial arrangements.

13.45 Under AASB 112:

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deferred tax assets are the amounts of income tax recoverable in future periods in respect of deductible temporary differences, the carry forward of unused tax losses, and the carry forward of unused tax credits;

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deferred tax liabilities are the amounts of income tax payable in future periods in respect of taxable temporary differences.

13.46 When identifying the relevant amounts of deferred tax assets and deferred tax liabilities, taxpayers are to have regard to their financial reports immediately before Division 230 is to apply to them, that is, immediately before their first application income year.

13.47 An amount that is recorded in a deferred tax asset account that is attributable to an existing financial arrangement is the attributable assessable amount [ Schedule 1, subitem 104(14 )]. Conversely, an amount that is recorded in a deferred tax liability account that is attributable to an existing financial arrangement is the attributable deductible amount [ Schedule 1, subitem 104(15 )].

13.48 Deferred tax asset and deferred tax liability amounts are recorded in the financial reports as the amount of the tax liability (or tax saving) and not as the amount of the gain or loss that is relevant for Division 230 purposes. Accordingly, the balancing adjustment operates such that it is the grossed up amount that is recorded in a deferred tax asset account or deferred tax liability account in the taxpayer's financial records which is relevant for the purposes of this provision. [ Schedule 1, subitems 104(14) and (15 )]

13.49 In respect of a financial arrangement that has an attributable assessable amount recorded in a deferred tax asset account, the attributable assessable amount is reduced to the extent that it represents unused tax credits and is then grossed up in accordance with subitem 104(13). The grossed up amount is to be added to the step 6 amount. [ Schedule 1, subitem 104(11 )]

13.50 In respect of a financial arrangement that has an attributable deductible amount recorded in a deferred tax liability account, the attributable deductible amount is reduced to the extent that it represents unused tax credits and is then grossed up in accordance with subitem 104(16). The grossed up amount is to be added to the step 5 amount. [ Schedule 1, subitem 104(15 )]

13.51 In calculating the grossed up amount under subitem 104(16), the tax rate taken into account in working out the attributable assessable amount or attributable deductible amount (the relevant tax rate), would usually be the tax rate prevailing on the day that the amounts in the deferred tax asset or deferred tax liability were calculated or subsequently adjusted because of a change in tax rates. Example 2 in Appendix B of AASB 112 illustrates how a change in tax rate is recorded in the deferred tax asset account or deferred tax liability account. Any calculations or adjustments made to these accounts are considered to have been made in working out the attributable assessable amount or attributable deductible amount. [ Schedule 1, subitem 104(16 )]

13.52 Where no amount of the deferred tax asset or deferred tax liability is in respect of a financial arrangement, the taxpayer must rely on the method statement to determine whether there is a notional assessable amount or a notional deductible amount. [ Schedule 1, subitem 104(13 )]

PAYG - transitional and application

13.53 The result from the calculation above (which must take into account all 'pre-existing financial arrangements' to which the transitional election applies) will be brought to account (as either assessable income where there is a positive amount or an allowable deduction where there is a negative amount) in equal instalments over the first income year to which Division 230 applies to the taxpayer and the following three income years. That is, one quarter of the balancing adjustment is brought to account in each of these four years.

13.54 Where the taxpayer has calculated the amount of the balancing adjustment that is to be included in their taxable income for an income year, they must spread this amount evenly over the relevant income year for instalment income purposes. That is, during each instalment quarter they are taken to have made a gain or loss that is equal to one quarter of the annual balancing adjustment amount - that is, equal to one sixteenth of the total balancing adjustment amount. [ Schedule 1, subitem 104(17 )]

Impact of the transitional balancing adjustment on offshore banking units

13.55 An offshore banking unit will not be taken to have breached the rule limiting its use of non-offshore banking money in section 121EH of the Income Tax Assessment Act 1936 where it has made a transitional election under subitem 104(2). Where the offshore banking unit makes this election, the balancing adjustment amount is brought to account as assessable income or an allowable deduction over the first four years of Division 230 applying to the offshore banking unit. Such additional assessable income could, in the absence of this special transitional rule, in various ways cause the offshore banking unit to breach the 10 per cent limit set in section 121EH. Any balancing adjustment is not to be taken into account in determining the effects of breaching the limit nor should it mean that the offshore banking unit would not breach the limit when it would otherwise do so. [ Schedule 1, subitem 104(19 )]

Application of transitional election to existing arrangements that are not Division 230 financial arrangements

13.56 If an election has been made to apply the general retranslation method to Division 230 financial arrangements and to those arrangements subject to Subdivision 775-F of the ITAA 1997, the transitional election also applies to existing arrangements that are not Division 230 financial arrangements in the same way as it applies to Division 230 financial arrangements. [ Schedule 1, subitem 105(1 )]

13.57 In working out the balancing adjustment where the transitional election has been made, the method statement applies to Subdivision 775-F arrangements as if the reference in step 1 in the method statement to 'Division 230' were a reference to 'Subdivision 775-F'. Also, the reference in step 2 in the method statement to 'Division' applies as if it is a reference to 'Subdivision'. [ Schedule 1, subitem 105(2 )]

13.58 The effect of this is that where the transitional election extends to Subdivision 775-F arrangements, the transitional balancing adjustment requires the taxpayer to also compare amounts which have been brought to account under the existing tax law with amounts that would have been brought to account if Subdivision 775-F of the ITAA 1997 had instead applied.