Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES

PART 3-10 - FINANCIAL TRANSACTIONS

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Division 230 - Taxation of financial arrangements

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History

Div 230 inserted by No 15 of 2009 , s 3 and Sch 1 item 1, effective 26 March 2009. No 15 of 2009 (as amended by No 85 of 2013, No 99 of 2012 and No 136 of 2010 ), s 3 and Sch 1 items 102 to 105 contain the following application provisions:

102 Definitions
102
In this Part:
financial arrangement amendments
means the amendments made by Parts 1 and 2 of this Schedule [ CCH Note: ie of No 15 of 2009 ].

first applicable income year
means the first income year for which the financial arrangement amendments apply to you under item 103.

lodgment date
means the due date for you to lodge an income tax return.
103 Application of financial arrangement amendments (income years)
(1)
Subject to subitem (2), the financial arrangement amendments apply to you for income years commencing on or after 1 July 2010.

(2)
The financial arrangement amendments apply to you for income years commencing on or after 1 July 2009 if you elect to have this subitem apply to you.
Note:

For a consolidated group, it is the head entity that would make the election.

(3)
An election under subitem (2) must be made on or before the first lodgment date that occurs on or after the start of your first income year commencing on or after 1 July 2009.
104 Application of financial arrangement amendments (financial arrangements)
Future financial arrangements

(1)
The financial arrangement amendments apply to financial arrangements that you start to have in the first applicable income year or a later income year.

Existing financial arrangements

(2)
The financial arrangement amendments apply to all financial arrangements that:

(a) you started to have before the start of the first applicable income year; and

(b) you have at the start of that income year;
only if you elect to have this subitem apply to you.

(3)
The financial arrangement amendments do not apply under subitem (2) to a financial arrangement that arose from a disposal of property (including a disposal of a capital asset, a revenue asset, a depreciating asset or trading stock).

(4)
The financial arrangement amendments do not apply under subitem (2) to a financial arrangement if:

(a) the election is made by the head company of a consolidated group or MEC group; and

(b) the election specifies that the election is not to apply to financial arrangements in relation to life insurance business carried on by a member of the consolidated group or MEC group; and

(c) the arrangement is one that relates to the life insurance business carried on by a member of the consolidated group or MEC group.

(5)
An election under subitem (2) must:

(a) be made on or before the first lodgment date that occurs on or after the start of the first applicable income year; and

(b) be notified to the Commissioner on or before the lodgment date referred to in paragraph (a).
Note:

The Commissioner may, in limited circumstances, extend the time on or before which the election must be notified to the Commissioner. See item 104A.

(6)
If you make an election under subitem (2), treat subsection 230-455(7) of the Income Tax Assessment Act 1997 as allowing you to make an election under that subsection that applies to:

(a) in any case - all of the financial arrangements that you start to have in the income year in which the election is made or a later income year; or

(b) if you make the election at the same time as you make the election under subitem (2) - all of your financial arrangements to which the financial arrangements amendments apply.

(7)
If you make an election under subitem (2), treat section 230-150 of the Income Tax Assessment Act 1997 as allowing you to make an election under that section that, despite paragraphs 230-160(1)(b) and 230-165(1)(b) , applies to a financial arrangement that:

(a) you started to have before the start of the first applicable income year; and

(b) you have at the start of that income year.

(7A)
An election that you make under section 230-150 of the Income Tax Assessment Act 1997 extends to a financial arrangement referred to in subitem (2) only if:

(a) that election is made on or before the first lodgment date that occurs after the start of the first applicable income year; and

(b) for financial arrangements to which section 230-160 of that Act applies:

(i) at the time you make the election, you made determinations that satisfy the requirements of subsections 230-160(3) and (4) (other than paragraphs 230-160(3)(b) and (4)(b) ); and

(ii) at, or soon after, the time you make the election, you have in place records in relation to the arrangement that satisfy the requirements of paragraphs 230-160(3)(b) and (4)(b) ; and

(c) for financial arrangements to which section 230-165 of that Act applies:

(i) at the time you make the election, you made determinations that satisfy the requirements of subsections 230-165(3) and (4) (other than paragraphs 230-165(3)(b) and (4)(b) ); and

(ii) at, or soon after, the time you make the election, you have in place records in relation to the arrangement that satisfy the requirements of paragraphs 230-165(3)(b) and (4)(b) .

(8)
An election that you make under Subdivision 230-C , 230-D or 230-F of the Income Tax Assessment Act 1997 extends to financial arrangements referred to in subitem (2) only if that election is made on or before the first lodgment date that occurs after the start of the first applicable income year.

(9)
An election that you make under Subdivision 230-E of the Income Tax Assessment Act 1997 extends to a financial arrangement referred to in subitem (2) only if:

(a) that election is made on or before the first lodgment date that occurs after the start of the first applicable income year; and

(b) the requirements of section 230-335 were satisfied in relation to the arrangement at the time the arrangement was created, acquired or applied; and

(c) at, or soon after, the time you make the election, you have in place records in relation to the arrangement that satisfy the requirements of section 230-355 and section 230-360 (other than subparagraph 230-360(2)(c)(ii) ); and

(d) the requirements of section 230-365 have been satisfied at all times since the arrangement was created, acquired or applied for the purpose of hedging a risk in relation to a hedged item.

(10)
To avoid doubt, subsection 230-310(4) does not apply to a financial arrangement that you started to have before the start of the first applicable income year and that you have at the start of that income year.

(11)
To avoid doubt, the election referred to in subitem (8) or (9) applies to the financial arrangements referred to in subitem (2) even though you started to have the arrangements before the election is made.

(12)
If you make an election under subitem (2), balancing adjustments must be made under subitem (13).

(13)
Use the following method statement to make the balancing adjustments under this subitem: Balancing adjustment method statement

Step 1.
Work out the total of all the amounts that relate to the financial arrangements and that would have been included in your assessable income if Division 230 of the Income Tax Assessment Act 1997 had applied to gains and losses from the arrangements from the time when you started to have them: the result is the notional assessable amount .

Step 2.
Work out the total of all the amounts that relate to the financial arrangements and that would have been allowable to you as deductions if that Division had applied to gains and losses from the arrangements from the time when you started to have them: the result is the notional deductible amount .

Step 3.
Work out the total of all the amounts that relate to the financial arrangements and have been included in your assessable income from the time when you started to have them: the result is the actual assessed amount .

Step 4.
Work out the total of all the amounts that relate to the financial arrangements and that have been allowable as deductions for you from the time when you started to have them: the result is the actual deducted amount .

Step 5.
Add the notional assessable amount to the actual deducted amount: the result is the step 5 amount .

Step 6.
Add the actual assessed amount to the notional deductible amount: the result is the step 6 amount .

Step 7.
Compare the step 5 amount with the step 6 amount. If the step 5 amount exceeds the step 6 amount, the excess is included in your assessable income as a balancing adjustment. If the step 6 amount exceeds the step 5 amount, the excess is allowable as a deduction as a balancing adjustment. If the step 5 amount and the step 6 amount are equal there is no balancing adjustment.

(14)
If:

(a) an amount is recorded in a deferred tax asset account in accordance with:

(i) accounting standard AASB 112 (or another accounting standard prescribed by the regulations for the purposes of this paragraph); or

(ii) if that standard does not apply to the preparation of your financial reports - a comparable accounting standard that applies to the preparation of your financial reports under a foreign law;
immediately before the start of the first applicable income year; and

(b) the whole or a part of that amount (the attributable assessable amount ) is attributable to a financial arrangement referred to in subitem (2); and

(c) the method of relying on financial reports provided for in Subdivision 230-F applies to take account of a gain or loss you make from the financial arrangement; and

(ca) the attributable assessable amount represents the whole of the deferred tax effect of a gain or loss from the financial arrangement that has been recognised in profit or loss in accordance with the accounting principles mentioned in paragraph 230-395(2)(a) of the Income Tax Assessment Act 1997 ;
the following provisions have effect:

(d) the financial arrangement is to be disregarded for the purposes of steps 1 to 4 of the method statement in subitem (13); and

(e) the attributable assessable amount is to be reduced to the extent to which it represents unused tax credits and then grossed up under subitem (16); and

(f) the step 6 amount is to be increased by the amount obtained under paragraph (e).
Note:

The deferred tax effect to be taken into account for the purposes of paragraph (ca) might be affected by a later assessment, the amendment of an assessment or a law that applies retrospectively.

(15)
If:

(a) an amount is recorded in a deferred tax liability account in accordance with:

(i) accounting standard AASB 112 (or another accounting standard prescribed by the regulations for the purposes of this paragraph); or

(ii) if that standard does not apply to the preparation of your financial reports - a comparable accounting standard that applies to the preparation of your financial reports under a foreign law;
immediately before the start of the first applicable income year; and

(b) the whole or a part of that amount (the attributable deductible amount ) is attributable to a financial arrangement referred to in subitem (2); and

(c) the method of relying on financial reports provided for in Subdivision 230-F applies to take account of a gain or loss you make from the financial arrangement; and

(ca) the attributable deductible amount represents the whole of the deferred tax effect of a gain or loss from the financial arrangement that has been recognised in profit or loss in accordance with the accounting principles mentioned in paragraph 230-395(2)(a) of the Income Tax Assessment Act 1997 ;
the following provisions have effect:

(d) the financial arrangement is to be disregarded for the purposes of steps 1 to 4 of the method statement in subitem (13);

(e) the attributable deductible amount is to be reduced to the extent to which it represents unused tax credits and then grossed up under subitem (16);

(f) the step 5 amount is to be increased by the amount obtained under paragraph (e).
Note:

The deferred tax effect to be taken into account for the purposes of paragraph (ca) might be affected by a later assessment, the amendment of an assessment or a law that applies retrospectively.

(16)
An amount is to be grossed up for the purposes of subitems (14) and (15) by multiplying the amount by:

1

Tax rate taken into account in working out the attributable assessable amount or attributable deductible amount

(17)
A balancing adjustment under subitem (13) is to be spread evenly over the first applicable income year and the next 3 income years.

(18)
In applying steps 1 and 2 in the method statement in subitem (13) to financial arrangements, assume that any election that extends to the arrangements under subitem (6) had applied to those financial arrangements from the time when you started to have them.

(19)
In applying section 121EH of the Income Tax Assessment Act 1936 , disregard any balancing adjustment under subitem (13).
104A Application of financial arrangement amendments (financial arrangements) - late notices
(1)
A reference in paragraph 104(5)(b) to the lodgment date is to be treated, in relation to an election under subitem 104(2), as being a reference to a later date specified in a notice the Commissioner gives to you under this item, if the Commissioner gives you such a notice in relation to the election.

(2)
The Commissioner may give you a notice in relation to the election if:

(a) the Commissioner is satisfied that the election was not notified to the Commissioner on or before the lodgment date because of:

(i) an honest mistake of yours; or

(ii) an inadvertence of yours; or

(b) the Commissioner is satisfied that:

(i) the election was not notified to the Commissioner on or before the lodgment date because of circumstances outside of your control; and

(ii) you took all reasonable steps to notify the Commissioner of the election on or before the lodgment date, or there were no such steps you could have taken.

(3)
The later date specified in the notice must be a date that occurred no later than 3 months after the lodgment date mentioned in paragraph 104(5)(b) (disregarding this item).
104B Asset or liability of entity joining pre-TOFA consolidated group etc.
(1)
This item applies in relation to an asset or liability if:

(a) an entity (the joining entity ) becomes a subsidiary member of a consolidated group or MEC group at a time (the joining time ); and

(b) the asset or liability becomes that of the head company of the group because subsection 701-1(1) of the Income Tax Assessment Act 1997 (the single entity rule) applies when the joining entity becomes a subsidiary member of the group; and

(c) the asset or liability is, or is part of, a financial arrangement at the start of the head company ' s first applicable income year; and

(d) the head company ' s first applicable income year starts after the joining time; and

(e) the head company has the asset or liability (whether or not because of subsection 701-1(1) of the Income Tax Assessment Act 1997 (the single entity rule)) throughout the period:

(i) starting at the joining time; and

(ii) ending at the start of the head company ' s first applicable income year; and

(f) the head company elects to have subitem 104(2) apply to itself; and

(g) the joining entity is not a chosen transitional entity (within the meaning of Division 701 of the Income Tax (Transitional Provisions) Act 1997 ).
Note:

Item 104C prevents the application of this item in relation to certain assets and liabilities.

(2)
For the purposes of subitem 104(13) and Division 230 of the Income Tax Assessment Act 1997 :

(a) in the case of an asset - assume that subsection 701-55(5A) of that Act applies in relation to the asset at the joining time; and

(b) in the case of a liability - assume that section 715-375 of that Act applies as if the liability is, or is part of, a Division 230 financial arrangement at the joining time.

(3)
Subitems 104(14) and (15) do not apply in relation to the asset or liability.

(4)
In the case of an asset, subitems (5), (6) and (7) apply if, on the assumption that subsection 701-55(5A) of the Income Tax Assessment Act 1997 applies in relation to the asset at the joining time, paragraph 701-55(5A)(b) of that Act would apply in relation to the asset.

(5)
Work out if the Division 230 starting value for the asset at the joining time exceeds or falls short of its tax cost setting amount.

(6)
If there is an excess, an amount equal to 25 % of that excess is included in the head company ' s assessable income for:

(a) the head company ' s first applicable income year; and

(b) each of the 3 subsequent income years.

(7)
If there is a shortfall, the head company is entitled to a deduction equal to 25 % of that shortfall for:

(a) the head company ' s first applicable income year; and

(b) each of the 3 subsequent income years.

(8)
In the case of a liability, subitem (9) applies if Subdivision 705-B of the Income Tax Assessment Act 1997 (group formation) has effect in relation to the joining entity becoming a subsidiary member of the group.

(9)
Treat the amount of the payment mentioned in subsection 715-375(2) of that Act as being the amount of consideration that the joining entity would need to provide, if it were to cease holding the liability just before the joining time, without an amount being assessable income of, or deductible to, the joining entity.
104C Exception to item 104B
(1)
Subitem (2) applies if:

(a) assuming that item 51 of Schedule 3 to the Tax Laws Amendment (2012 Measures No. 2) Act 2012 commenced at the same time as this item, that item would apply in relation to a ruling or advice; and

(b) to the extent that the ruling or advice has effect in relation to the application of subsection 701-55(5C) or (6) of the original 2010 law (within the meaning of that Schedule) in respect of the joining entity mentioned in item 50 of that Schedule, that ruling or advice is in relation to an asset of an entity for an income year; and

(c) the asset is, or is part of, a financial arrangement at the start of the income year; and

(d) the requirements in subitem 104B(1) are satisfied in relation to the asset; and

(e) the entity is the head company mentioned in subitem 104B(1); and

(f) the income year is the head company ' s first applicable income year mentioned in subitem 104B(1).

(2)
Item 104B does not apply in relation to the asset.

(3)
Subitem (4) applies if:

(a) subitem (2) applies; and

(b) a liability is, or is part of, a financial arrangement at the start of the income year mentioned in subitem (1); and

(c) the financial arrangement is of the same kind as the financial arrangement mentioned in paragraph (1)(c); and

(d) the requirements in subitem 104B(1) are satisfied in relation to the liability; and

(e) the head company mentioned in subitem 104B(1) is the same entity as the head company mentioned in paragraph (1)(e) of this item.

(4)
Item 104B does not apply in relation to the liability.
105 Application of financial arrangement amendments (arrangements that are not financial arrangements)
(1)
Subject to this item, items 104 and 104A apply to arrangements that are not financial arrangements in the same way that those items apply to financial arrangements.

(2)
However, the method statement in subitem 104(13) applies to arrangements that are not financial arrangements in accordance with subitem (1) of this item as if:

(a) the reference in step 1 of that method statement to " Division 230 of the Income Tax Assessment Act 1997 " were a reference to " Subdivision 775-F of the Income Tax Assessment Act 1997 " ; and

(b) the reference in step 2 of that method statement to " Division " were a reference to " Subdivision " .

Subdivision 230-G - Balancing adjustment on ceasing to have a financial arrangement

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SECTION 230-445 Balancing adjustment

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Complete cessation or transfer

230-445(1)
Use the following method statement to make the balancing adjustment if paragraph 230-435(1)(a) , (b) or (d) applies: Method statement for balancing adjustment

Step 1.

Add up the following:

(a) the total of all the *financial benefits you have received under the *financial arrangement;

Note:

This would include financial benefits you receive in relation to the transfer or cessation (see paragraph 230-60(2)(c) ).

(b) the total of the amounts that have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement;

(c) the total of the other amounts that would have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement if all your losses from the arrangement were allowable as deductions;

Note:

The losses from the arrangement here include losses made in gaining or producing exempt income or non-assessable non-exempt income.

(d) the total of the amounts that will be allowed to you as deductions after the transfer or cessation because of a balancing adjustment under subitems 104(12) to (18) of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 to the extent to which those amounts are attributable to the arrangement;

(e) the total of the amounts that will be allowed to you as deductions after the transfer or cessation because of sections 230-160 and 230-165 to the extent to which those amounts are attributable to the arrangement.

Step 2.

Add up the following:

(a) the total of all the *financial benefits you have provided under the *financial arrangement;

Note:

This would include financial benefits you provide in relation to the transfer or cessation (see paragraph 230-60(1)(c) ).

(b) the total of the amounts that have been included in your assessable income, because of circumstances that have occurred before the transfer or cessation, as gains from the arrangement;

(c) the total of the other amounts that would have been included in your assessable income, because of circumstances that have occurred before the transfer or cessation, as gains from the arrangement if all your gains from the arrangement were assessable;

Note:

The gains from the arrangements here include amounts of exempt income or non-assessable non-exempt income.

(d) the total of the amounts that will be included in your assessable income after the transfer or cessation because of a balancing adjustment under subitems 104(12) to (18) of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 to the extent to which those amounts are attributable to the arrangement;

(e) the total of the amounts that will be included in your assessable income after the transfer or cessation because of sections 230-160 and 230-165 to the extent to which those amounts are attributable to the arrangement.

Step 3.

Compare the amount obtained under step 1 (the step 1 amount ) with the amount obtained under step 2 (the step 2 amount ). If the step 1 amount exceeds the step 2 amount, an amount equal to the excess is taken, as a balancing adjustment, to be a gain you make from the *financial arrangement for the purposes of this Division. If the step 2 amount exceeds the step 1 amount, an amount equal to the excess is taken, as a balancing adjustment, to be a loss that you make from the arrangement. If the step 1 amount and the step 2 amount are equal, no balancing adjustment is made.

Proportionate transfer of all rights and/or obligations under financial arrangement

230-445(2)
If subparagraph 230-435(1)(c)(i) applies, you make the balancing adjustment by applying the method statement in subsection (1) but reduce:

(a) the amounts referred to in step 1; and

(b) the amounts referred to in step 2;

by applying the proportion referred to in subparagraph 230-435(1)(c)(i) to them.

Transfer of specifically identified right or obligation under financial arrangement

230-445(3)
If subparagraph 230-435(1)(c)(ii) applies, you make the balancing adjustment by applying the method statement in subsection (1) as if the references to:

(a) the amounts referred to in step 1; and

(b) the amounts referred to in step 2;

were references to those amounts to the extent to which they are reasonably attributable to the right or obligation referred to in subparagraph 230-435(1)(c)(ii) .

Proportionate transfer of specifically identified right or obligation under financial arrangement

230-445(4)
If subparagraph 230-435(1)(c)(iii) applies, you make the balancing adjustment by applying the method statement:

(a) as if the references to:

(i) the amounts referred to in step 1; and

(ii) the amounts referred to in step 2;

were references to those amounts to the extent to which they are reasonably attributable to the right or obligation referred to in subparagraph 230-435(1)(c)(iii) ; and

(b) by reducing those amounts by applying the proportion referred to in subparagraph 230-435(1)(c)(iii) to them.

Attribution must reflect appropriate and commercially accepted valuation principles

230-445(5)
Any attribution made under subsection (3) or paragraph (4)(a) must reflect appropriate and commercially accepted valuation principles that properly take into account:

(a) the nature of the rights and obligations under the *financial arrangement; and

(b) the risks associated with each *financial benefit, right and obligation under the arrangement; and

(c) the time value of money.

Income year for which gain or loss is made

230-445(6)
The gain or loss you are taken to make under subsection (1), (2), (3) or (4) is a gain or loss for the income year in which the event referred to in subsection 230-435(1) occurs.

Treatment of bad debts in relation to financial arrangements

230-445(7)
For the purposes of applying paragraph (b) of step 1 of the method statement in subsection (1) to a *financial arrangement, a bad debt deduction in relation to the arrangement to which subsection 230-25(3) applies is taken to be a deduction for a loss from the arrangement.

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