House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 4 - Commissioner's discretion to extend time for notifying taxation of financial arrangements transitional elections

Outline of chapter

4.1 Schedule 4 to this Bill amends the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (TOFA Act) to give the Commissioner of Taxation (Commissioner) a limited discretion to extend the time for a taxpayer to notify the Commissioner of the making of the transitional election to apply Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) and related consequential and transitional amendments (TOFA provisions) to its existing financial arrangements.

Context of amendments

4.2 The TOFA Act received Royal Assent on 26 March 2009. The TOFA Act introduced Division 230 into the ITAA 1997. Division 230 defines what a financial arrangement is and sets out the methods under which gains and losses from financial arrangements are brought to account for tax purposes. The two objectives underpinning the Division are greater efficiency and the lowering of compliance costs.

4.3 The TOFA provisions generally have prospective application. They apply to financial arrangements a TOFA taxpayer starts to have during income years commencing on or after 1 July 2010 on a mandatory basis and during income years commencing on or after 1 July 2009 on an elective basis (first TOFA applicable income year). Existing financial arrangements that a TOFA taxpayer starts to have prior to the taxpayer's first TOFA applicable income year are not subject to the application of the TOFA provisions, unless the taxpayer elects to have the TOFA provisions apply to those arrangements.

4.4 To reduce compliance costs by relieving taxpayers of the burden of complying with two sets of income tax rules for financial arrangements, taxpayers may, in certain circumstances, make a one off election under the transitional provisions to apply the TOFA provisions to their existing financial arrangements.

4.5 The transitional election, and the notification of it, must be made on or before the first lodgment date that occurs on or after the start of the taxpayer's first TOFA applicable income year. This is an integrity measure designed to prevent taxpayers from waiting until the end of their first TOFA applicable income year to 'pick and choose' favourable tax outcomes once an ex-post analysis has been made in respect of their existing financial arrangements.

4.6 Since the commencement of the TOFA provisions, the Australian Taxation Office (ATO) has identified a number of taxpayers who, despite electing to bring their existing financial arrangements into the TOFA regime by the due date for the making of the election, inadvertently failed to notify the Commissioner of the election by the due date. The failure to notify the transitional election by the due date invalidates the election and therefore prevents the TOFA provisions from applying to existing financial arrangements which may result in significant compliance consequences.

4.7 To address this issue, the Assistant Treasurer and Minister for Financial Services and Superannuation announced on 29 November 2010 that the Commissioner would be given a limited discretion to specify a later notification due date in certain circumstances.

Summary of new law

4.8 This Schedule introduces a new item 104A to Part 3 of Schedule 1 to the TOFA Act. Under this item, the Commissioner is given a discretion to extend the time (for a maximum period of three months) for the notification of the making of a transitional election to apply the TOFA provisions to existing financial arrangements in either of the following circumstances:

•

the taxpayer did not notify the Commissioner by the due date because of circumstances beyond the control of the taxpayer (or taxpayer's agent) and the taxpayer (or the taxpayer's agent) has taken reasonable steps to mitigate the effects of those circumstances; or

•

the taxpayer did not notify the Commissioner by the due date because of an honest mistake or an inadvertent omission by the taxpayer (or the taxpayer's agent).

4.9 These amendments commence the day after Royal Assent and apply to lodgment dates mentioned in paragraph 104(5)(b) of the TOFA Act.

Comparison of key features of new law and current law

Detailed explanation of new law

4.10 This Schedule inserts a new item 104A into Part 3 of Schedule 1 to the TOFA Act. Where a taxpayer has made the transitional election to apply the TOFA provisions to its existing financial arrangements in accordance with subitem 104(2), but has failed to notify the Commissioner of the election by the first lodgment date that occurs on or after the start of their first TOFA applicable income year, the new item gives the Commissioner a discretion to specify a later notification date (that occurs no later than three months after the first lodgment date) in limited circumstances. [Schedule 4, item 2 ]

4.11 Under the current law, the taxpayer must make and notify the Commissioner of its transitional election on or before the first lodgment date that occurs on or after the start of the first TOFA applicable income year. Not satisfying these requirements renders the election ineffective and therefore prevents the taxpayer from applying the TOFA provisions to its existing financial arrangements.

4.12 These amendments give the Commissioner a limited discretion to extend the time for the notification of a transitional election only; the taxpayer must still have made the transitional election under subitem 104(2) of the TOFA Act by the first lodgment date that occurs on or after the start of the taxpayer's first TOFA applicable income year.

4.13 The discretion to be exercised by the Commissioner is intended to allow a certain degree of administrative flexibility while not compromising the integrity of the requirements.

4.14 The Commissioner can only extend the notification time by a maximum period of three months.

4.15 The Commissioner may specify a later notification due date if he (or she) is satisfied that he (or she) was not notified of the transitional election by the required date due to an honest mistake or an inadvertence by the taxpayer (or the taxpayer's agent).

Example 4.17 : Honest mistake

David Co was required to apply the TOFA provisions to the income year commencing 1 July 2010. David Co's first lodgment date after the start of its first TOFA applicable income year is 17 January 2011 - the lodgment date for David Co's 2009-10 income tax return. On 14 January 2011, David Co made the transitional election under subitem 104(2) of the TOFA Act to apply the TOFA provisions to all its financial arrangements, including those financial arrangements that it started to have prior to 1 July 2010 and still held as at 1 July 2010. However, David Co did not notify the Commissioner of the election until 19 January 2011.

Thus, the transitional election was ineffective because the requirement to notify the Commissioner of the election by 17 January 2011 was not met.

David Co requests that the Commissioner exercise the discretion under item 104A of the TOFA Act to specify 19 January 2011 as the due date for the notification of the making of the transitional election on the basis that the failure to notify the election on time was due to its honest mistake.

David Co informs the Commissioner that the notification was late because there was a communication error where one employee mistakenly thought that another employee was notifying the Commissioner of the election, however that other employee did not receive the instruction. The election was notified to the Commissioner as soon as the first employee realised the mistake.

Based on these facts, the Commissioner specifies a later notification due date of 19 January 2011 on the basis that he (or she) is satisfied that the notification delay was due to David Co's honest mistake.

Example 4.18 : Inadvertence

Jonathan Co was incorporated 1 July 2005 and the first income year to which Jonathan Co was required to apply the TOFA provisions commenced on 1 July 2010.

On 14 January 2011, Jonathan Co's tax agent signed the transitional election form and attempted to notify the Commissioner of the election using the ATO Tax Agent Portal. However the tax agent inadvertently omitted to attach the transitional election form to the message. On 20 February 2011 the tax agent realised his error and resent a message using the ATO Tax Agent Portal with the form attached. The Commissioner therefore receives notification on 20 February 2011.

While Jonathan Co made the transitional election on 14 January 2011, it did not notify the Commissioner of the election by its first lodgment date on or after the start of its first TOFA applicable income year, which was 17 January 2011. The transitional election is therefore ineffective.

Jonathan Co requests that the Commissioner exercise the discretion under item 104A of the TOFA Act to specify 20 February 2011 as the due date for the notification of the making of the transitional election because of the inadvertent omission of its agent.

Based on these facts, the Commissioner specifies a later notification due date of 20 February 2011 on the basis that he (or she) is satisfied that the delay in notifying the transitional election was due to Jonathan Co's tax agent's inadvertence.

4.16 The Commissioner may also specify a later notification due date if he (or she) is satisfied that the taxpayer did not notify the Commissioner of the transitional election by the due date because of circumstances beyond the control of the taxpayer (or taxpayer's agent) and the taxpayer (or the taxpayer's agent) took all reasonable steps to notify the Commissioner by the due date.

Example 4.19 : Circumstances beyond the taxpayer's control

Russell Co was incorporated 1 July 2005 and the first income year to which Russell Co was required to apply the TOFA provisions commenced on 1 July 2010.

On 12 January 2011, Russell Co's Public Officer completed and signed Russell Co's transitional election form. However, later that day the Public Officer's office building was evacuated and could not be re-occupied until 19 January 2011. On returning to the office the Public Officer immediately delivered the election form to the Commissioner.

Russell Co's first lodgment date on or after the start of its first TOFA applicable income year was 17 January 2011, but because Russell Co only notified the Commissioner of the making of the transitional election on 19 January 2011, the transitional election is ineffective.

Russell Co requests that the Commissioner exercise the discretion under item 104A of the TOFA Act to specify 19 January 2011 as the due date for the notification of the making of the transitional election because circumstances outside of its control prevented it from notifying the Commissioner of its election by its first lodgment date.

Based on these facts, the Commissioner specifies a later notification due date of 19 January 2011 on the basis that he (or she) is satisfied that the delay in notifying the transitional election was the result of circumstances outside the taxpayer's control and that the taxpayer had taken all reasonable steps to notify the Commissioner of the election.

Application and transitional provisions

4.17 These amendments commence the day after Royal Assent and apply in relation to lodgment dates mentioned in paragraph 104(5)(b) of the TOFA Act, whether the lodgment dates occur before, on, or after the commencement of the item. [Schedule 4, item 4 ]

Consequential amendments

4.18 Item 1 of this Schedule inserts a note under subitem 104(5) to direct the reader to the new item. [Schedule 4, item 1 ]

4.19 Item 3 ensures that the Commissioner's specified later notification due date also applies in relation to Subdivision 775-F (of the ITAA 1997) arrangements under item 105 of the TOFA Act. [Schedule 4, item 3 ]