TAX LAWS AMENDMENT (TAXATION OF FINANCIAL ARRANGEMENTS) BILL 2007

B04PZ224.v05.doc 26/8/2005 2:40 PM

2004-2005-2006-2007

The Parliament of the
Commonwealth of Australia

HOUSE OF REPRESENTATIVES

Presented and read a first time

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007

No. , 2007

(Treasury)

A Bill for an Act to amend the law relating to taxation, and for related purposes

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 No. , 2007
B04PZ224.v05.doc 26/8/2005 2:40 PM

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 No. , 2007
Contents

1 Short title 1

2 Commencement 1

3 Schedule(s) 3
Schedule 1--Amendments 4
Part 1--Main amendments 4
Income Tax Assessment Act 1997 4
Part 2--Consequential amendments 115
Income Tax Assessment Act 1936 115
Income Tax Assessment Act 1997 116
New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003 124
Taxation Administration Act 1953 124
Part 3--Application and transitional provisions 126

Schedule 1 Amendments
Part 3 Application and transitional provisions

Amendments Schedule 1
Application and transitional provisions Part 3

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 No. , 2007

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 No. , 2007

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2007 No. , 2007

A Bill for an Act to amend the law relating to taxation, and for related purposes
The Parliament of Australia enacts:

1 Short title

This Act may be cited as the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2007.

2 Commencement

(1) Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms.

Commencement information

Column 1
Column 2
Column 3

Provision(s)
Commencement
Date/Details

1. Sections 1 to 3 and anything in this Act not elsewhere covered by this table
The day on which this Act receives the Royal Assent.

2. Schedule 1, items 1 to 21
The day on which this Act receives the Royal Assent.

3. Schedule 1, item 22

1 July 2003.

1 July 2003

4. Schedule 1, items 23 to 84
The day on which this Act receives the Royal Assent.

5. Schedule 1, items 85 and 86
Immediately after the commencement of the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003.

17 December 2003

6. Schedule 1, item 87
The day on which this Act receives the Royal Assent.

7. Schedule 1, item 88
Immediately after the commencement of the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003.

17 December 2003

8. Schedule 1, item 89
The day on which this Act receives the Royal Assent.

9. Schedule 1, item 90
Immediately after the commencement of the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003.

17 December 2003

10. Schedule 1, item 91
The day on which this Act receives the Royal Assent.

11. Schedule 1, item 92
Immediately after the commencement of the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003.

17 December 2003

12. Schedule 1, item 93
The day on which this Act receives the Royal Assent.

13. Schedule 1, item 94
Immediately after the commencement of the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003.

17 December 2003

14. Schedule 1, items 95 to 99
The day on which this Act receives the Royal Assent.

Note: This table relates only to the provisions of this Act as originally passed by both Houses of the Parliament and assented to. It will not be expanded to deal with provisions inserted in this Act after assent.

(2) Column 3 of the table contains additional information that is not part of this Act. Information in this column may be added to or edited in any published version of this Act.

3 Schedule(s)

Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.

Schedule 1--Amendments
Part 1--Main amendments
Income Tax Assessment Act 1997

1 Before Division 240
Insert:

Division 230--Taxation of financial arrangements
Table of Subdivisions

Guide to Division 230

230-A Core rules

230-B The accruals/realisation methods

230-C Fair value method

230-D Foreign exchange retranslation method

230-E Hedging financial arrangements method

230-F Reliance on financial reports

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

230-H Exceptions

230-I Other provisions

230-J Additional operation of Division
Guide to Division 230

230-1 What this Division is about
This Division is about the tax treatment of gains and losses from your financial arrangements.

You recognise the gains and losses, as appropriate, over the life of a financial arrangement and ignore distinctions between income and capital unless specific rules apply.

If it is sufficiently certain that you will make a gain or loss, you use a compounding accruals method to recognise the gain or loss. Otherwise you use a realisation method. Instead of either, you may be able to choose to use a fair value or hedging method or to rely on your financial reports. You may also be able to choose to recognise foreign exchange gains and losses using a retranslation method.

230-5 Scope of this Division

(1) You have a financial arrangement if you have one or more cash settlable legal or equitable rights and/or obligations to receive or provide a financial benefit.

(2) This Division does not apply to all financial arrangements. The main exceptions are if:

(a) you are:

(i) an individual; or

(ii) an ADI, securitisation vehicle or other financial sector entity with an aggregated turnover of less than $20 million; or

(iii) another entity with an aggregated turnover of less than $100 million;

and either:

(iv) the arrangement is to end not more than 12 months after you start to have it; or

(v) the arrangement is not a qualifying security; or

(b) the arrangement is a financial arrangement under section 230-55 (equity interests etc.) and neither a fair value election, a hedging financial arrangement election nor an election to rely on financial reports applies to the arrangement.

Note: Section 230-405 provides for the exception referred to in paragraph (a).

Subdivision 230-A--Core rules
Table of sections
Objects

230-10 Objects of this Division
Tax treatment of gains and losses from financial arrangements

230-15 Gains are assessable and losses deductible

230-20 Gain or loss to be taken into account only once under this Act

230-25 Associated financial benefits to be taken into account only once under this Act

230-30 Disregard some gains and losses

230-35 Certain gains treated as exempt income or non-assessable non-exempt income

230-40 Treatment of offshore banking units
Method to be applied to take account of gain or loss

230-45 Methods for taking gain or loss into account
Financial arrangement concept

230-50 Financial arrangement

230-55 Financial arrangement (equity interest or right or obligation in relation to equity interest)

230-60 Rights, obligations and arrangements (grouping and disaggregation rules)
General rules

230-65 When financial benefit provided or received under financial arrangement

230-70 Amount of financial benefit where waiver

230-75 Apportionment when financial benefit received or right ceases

230-80 Apportionment when financial benefit provided or obligation ceases

230-85 Consistency in working out gains or losses (integrity measure)

230-90 Rights and obligations include contingent rights and obligations
Objects

230-10 Objects of this Division

The objects of this Division are:

(a) to minimise the extent to which the tax treatment of gains and losses from your *financial arrangements distorts, by providing inappropriate impediments and stimulation, your trading, financing and investment decisions and your risk taking and risk management; and

(b) to do so by aligning more closely the tax and commercial recognition of gains and losses from your financial arrangements in the following ways:

(i) by allocating the gains and losses to income years throughout the life of your financial arrangements on a reasonable basis;

(ii) by generally recognising gains and losses on revenue rather than capital account; and

Tax treatment of gains and losses from financial arrangements

230-15 Gains are assessable and losses deductible
Gains

(1) Your assessable income includes a gain you make from a *financial arrangement.

Note: This Division does not apply to gains or losses that are subject to exceptions under Subdivision 230-H.

Losses

(2) You can deduct a loss you make from a *financial arrangement, but only to the extent that:

(a) you make it in gaining or producing your assessable income; or

(b) you necessarily make it in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: This Division does not apply to gains or losses that are subject to exceptions under Subdivision 230-H.

(3) You can also deduct a loss you make from a *financial arrangement if:

(a) you are an *Australian entity; and

(b) you make the loss in deriving income from a foreign source; and

(c) the income is *non-assessable non-exempt income under section 23AI, 23AJ or 23AK of the Income Tax Assessment Act 1936; and

(d) the loss is, in whole or in part, a cost in relation to a *debt interest you issue that is covered by paragraph 820-40(1)(a).

You can deduct the loss only to the extent to which it is a cost in relation to a *debt interest you issue that is covered by paragraph 820-40(1)(a).

Note: This Division does not apply to gains or losses that are subject to exceptions under Subdivision 230-H.

(4) If the *financial arrangement is a *debt interest, the loss is not prevented from being deductible for an income year under subsection (2) merely because of either or both of the following:

(a) one or more of the *financial benefits that are taken into account in working out the amount of the loss are *contingent on the economic performance (whether past, current or future) of:

(i) you or a part of your activities; or

(ii) a *connected entity of yours or a part of the activities of a connected entity of yours;

(b) one or more of the financial benefits that are taken into account in working out the amount of the loss secure a permanent or enduring benefit for you or a connected entity of yours.

(5) Subject to subsection (6), subsection (4) does not apply to the loss to the extent to which the annually compounded internal rate of return on the *debt interest exceeds the *benchmark rate of return for the debt interest increased by 150 basis points.

(6) If:

(a) regulations made for the purposes of subsection 25-85(6) provide that a specified number of basis points is to apply for the purposes of applying subsection 25-85(5) in particular circumstances; and

(b) those circumstances exist in relation to the *debt interest;
subsection (5) applies as if the reference in that subsection to 150 basis points were a reference to the number of basis points specified in the regulations.

Section does not affect foreign residence rules

(7) Nothing in this section affects the operation of the provisions of Division 6 that provide for the significance of foreign residence for the assessability of income.

Note: Gains that are assessable under this Division are, for example, statutory income for the purposes of subsections 6-10(4) and (5).

230-20 Gain or loss to be taken into account only once under this Act
Application of section

(1) This section applies to the following:

(a) a gain that is included in your assessable income for an income year under this Division;

(b) a loss that is allowable as a deduction to you for an income year under this Division;

Purpose of this section

(2) The purpose of this section is to ensure that your gains and losses, and *financial benefits, to which this section applies are taken into account only once under this Act in working out your taxable income.

Gain or loss to be taken into account only once

(3) A gain or loss to which this section applies is not to be (to any extent):

(a) included in your assessable income; or

(b) allowable as a deduction to you; or

(c) dealt with in accordance with subsection 230-270(4);
again under this Division for the same or any other income year.

(4) A gain or loss to which this section applies is not to be (to any extent):

(a) included in your assessable income; or

(b) allowable as a deduction to you;
under any provisions of this Act outside this Division for the same or any other income year.

Section does not give rise to exempt income

(5) A gain is not to be treated as *exempt income merely because it is not included in your assessable income under this section.

230-25 Associated financial benefits to be taken into account only once under this Act
Application of section

(1) This section applies to a *financial benefit whose amount or value is taken into account in working out whether you make, or the amount of, a gain or loss to which paragraph 230-20(1)(a), (b) or (c) applies.

Associated financial benefit to be taken into account only once

(2) A *financial benefit to which this section applies is not to be (to any extent):

(a) included in your assessable income; or

(b) allowable as a deduction to you;
under any provision of this Act outside this Division for the same or any other income year.

(3) Subsection (4) applies if:

(a) you start to have, or cease to have, a *financial arrangement (or a part of a financial arrangement) as consideration (or as part of the consideration) for:

(i) something (the thing provided) that you provided, or are to provide, to someone else or that you ceased to have, or are to cease to have; or

(ii) something (the thing acquired) that someone else has provided, or is to provide, to you or that someone else has ceased to have or is to cease to have; and

(b) you are taken, under subsection 230-440(2) or (5), to have received, or provided, as consideration for starting to have, or ceasing to have, the arrangement (or that part of the arrangement), *financial benefits whose value is equal to the *market value of the arrangement (or that part of the arrangement) at a particular time.

(4) To avoid doubt, subsection (2) does not, merely because of the circumstances referred to in paragraph (3)(b), prevent the *market value of the *financial arrangement (or that part of the financial arrangement) from being taken into account to determine an amount to be included in your assessable income, or allowable as a deduction for you, in relation to the thing provided or the thing acquired.

Exception for certain bad debts

(5) If:

(a) a *financial benefit has been included in your assessable income under a provision of this Act outside this Division; and

(b) a bad debt deduction would, but for subsection (3), have been allowed under section 25-35 in relation to the financial benefit;
subsections (2) and (3) do not prevent that bad debt deduction from being allowed under section 25-35 in relation to the financial benefit as if the debt were still outstanding.

Section does not give rise to exempt income

(6) A *financial benefit is not to be treated as *exempt income merely because it is not included in your assessable income under this section.

230-30 Disregard some gains and losses
Exempt or non-assessable non-exempt income

(1) A loss you make from a *financial arrangement is disregarded to the extent that you make it in gaining or producing your *exempt income or your *non-assessable non-exempt income.

(2) Subsection (1) does not prevent you from deducting a loss under subsection 230-15(3).

Gain or loss of private or domestic nature

(3) A gain or loss you make from a *financial arrangement is disregarded:

(a) if a *borrowing is made to you, or credit is provided to you, under the arrangement and you use some or all of the funds borrowed or the credit provided for a private or domestic purpose--to the extent that you use the funds raised or the credit provided for a private or domestic purpose; or

(b) if you are an individual, the arrangement is a *derivative financial arrangement and the arrangement is held, wholly or in part, for a private or domestic purpose--to the extent that the arrangement is held or used for a private or domestic purpose.

230-35 Certain gains treated as exempt income or non-assessable non-exempt income

(1) A gain you make from a *financial arrangement is *exempt income to the extent that, if it had been a loss, you would have made it in gaining or producing exempt income.

(2) A gain you make from a *financial arrangement is *non-assessable non-exempt income to the extent to which, if it had been a loss, you would have made it in gaining or producing non-assessable non-exempt income.

230-40 Treatment of offshore banking units

If an *offshore banking unit consists of:

(a) one or more *permanent establishments in Australia at or through which the offshore banking unit carries on what are *OB activities; and

(b) one or more other permanent establishments either in Australia or outside Australia;
this Division applies as if:

(d) the permanent establishments referred to in paragraph (b) were separate entities.

Note: This means that it is possible for the OBU to have a financial arrangement between the permanent establishments referred to in paragraph (a) and the permanent establishments referred to in paragraph (b) and for the OBU to make a gain or loss from such an arrangement.

Method to be applied to take account of gain or loss

230-45 Methods for taking gain or loss into account
Methods available

(1) The methods that can be applied to take account of a gain or loss you make from a *financial arrangement are:

(a) the accruals and realisation methods provided for in Subdivision 230-B; or

(b) the fair value method provided for in Subdivision 230-C; or

(d) the hedging financial arrangement method provided for in Subdivision 230-E; or

(e) the method of relying on your financial reports provided for in Subdivision 230-F; or

(f) a balancing adjustment provided for in Subdivision 230-G.

A gain or loss is not taken into account under any of the methods referred to in paragraphs (a) to (e) to the extent to which the gain or loss is taken into account under Subdivision 230-G.

Note: The methods referred to in paragraphs (b) to (e) only apply if you make an election under the relevant Subdivision and you must meet certain requirements before you can make such an election.

Elections override accruals and realisation methods

(2) Subdivision 230-B (accruals and realisation method) does not apply to a gain or loss you make from a *financial arrangement:

(a) if Subdivision 230-C (fair value method) applies to the arrangement; or

(b) to the extent that Subdivision 230-D (foreign exchange retranslation method) applies to the gain or loss; or

(d) if Subdivision 230-F (method of relying on financial reports) applies to the arrangement; or

(e) if the arrangement is a financial arrangement under section 230-55 (equity interests etc.).

Priorities among election methods

(3) Subdivision 230-C (fair value method) does not apply to a gain or loss you make from a *financial arrangement:

(a) to the extent that Subdivision 230-E (hedging financial arrangements method) applies to the arrangement; or

(b) if Subdivision 230-F (method of relying on financial reports) applies to the arrangement.

(4) Subdivision 230-D (foreign exchange retranslation method) does not apply to a gain or loss you make from a *financial arrangement:

(a) if Subdivision 230-C (fair value method) applies to the arrangement; or

(b) to the extent that Subdivision 230-E (hedging financial arrangements method) applies to the arrangement; or

(5) Subdivision 230-F (method of relying on financial reports) does not apply to a gain or loss you make from a *financial arrangement to the extent that Subdivision 230-E (hedging financial arrangements method) applies to the arrangement.

Financial arrangement concept

230-50 Financial arrangement

(1) You have a financial arrangement if you have, under an *arrangement:

(a) a *cash settlable legal or equitable right to receive a *financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

(d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e) for one or more of the rights and/or obligations covered by paragraph (d):

(i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii) the right or obligation is not cash settlable; and

(f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

Note 1: Whether your rights and/or obligations under an arrangement constitute a financial arrangement can change over time depending on changes either to the terms of the arrangement or external circumstances (such as particular rights or obligations under the arrangement being satisfied by the parties). For example, a contract may provide for the transfer of a boat in 6 months time and payment of the contract price at the end of 2 years. Until the boat is delivered, there is no financial arrangement because of the operation of paragraphs (d), (e) and (f) above. Once the boat is delivered, there is a financial arrangement because those paragraphs are no longer applicable.

Note 2: The operative provisions of this Division do not apply to all financial arrangements, and only apply partially to some: see the exceptions in Subdivision 230-H.

Note 3: There are some rules in this Division that tell you what happens if an arrangement ceases to be a financial arrangement (see Subdivision 230-G and section 230-440).

(2) A right you have to receive, or an obligation you have to provide, a *financial benefit is cash settlable if, and only if:

(a) the benefit is money or a *money equivalent; or

(b) in the case of a right--you intend to satisfy or settle it by receiving money or a money equivalent or by starting to have, or ceasing to have, another *financial arrangement; or

(c) in the case of an obligation--you intend to satisfy or settle it by providing money or a money equivalent or by starting to have, or ceasing to have, another financial arrangement; or

(d) you have a practice of satisfying or settling similar rights or obligations as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way); or

(e) you deal with the right or obligation, or with similar rights or obligations, in order to generate a profit from short-term fluctuations in price, from a dealer's margin, or from both; or

(f) none of paragraphs (a) to (e) applies but you satisfy subsection (3); or

(g) you are able to settle the right or obligation as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way) and you do not have, as your sole or dominant purpose for entering into the arrangement under which you are to receive or provide the financial benefit, the purpose of receiving or delivering the financial benefit as part of your expected purchase, sale or usage requirements.

A reference in paragraph (b) or (c) to a financial arrangement does not include a reference to something that is a financial arrangement under section 230-55.

Note: Examples of dealing of the kind covered by paragraph (e) are:

(a) dealing with the right or obligation, or similar rights or obligations, on a frequent basis, a short-term basis or frequent and short-term basis; and
(b) acquiring the right or obligation, or similar rights or obligations, and managing the resulting risk by entering into offsetting arrangements that provide a profit margin.

(3) You satisfy this subsection if:

(a) the *financial benefit is readily convertible into money or a *money equivalent; and

(b) there is a market for the financial benefit that has a high degree of liquidity; and

(i) the amount of the money or money equivalent referred to in paragraph (a) is not subject to a substantial risk of change in value; or

(ii) your purpose, or one of your purposes, for entering into the financial arrangement under which you are to receive or provide the financial benefit, is to receive or deliver the financial benefit so that it may be converted or liquidated into money or a money equivalent (other than in the ordinary course of business).

230-55 Financial arrangement (equity interest or right or obligation in relation to equity interest)

(1) You also have a financial arrangement if you have an *equity interest. The equity interest constitutes the financial arrangement.

(2) You also have a financial arrangement if:

(a) you have, under an *arrangement:

(i) a legal or equitable right to receive something that is a financial arrangement under this section; or

(ii) a legal or equitable obligation to provide something that is a financial arrangement under this section; or

(iii) a combination of one or more such rights and/or obligations; and

(b) the right, obligation or combination does not constitute, or form part of, a financial arrangement under section 230-50.

The right, obligation or combination referred to in paragraph (a) constitutes the financial arrangement.

Note 1: Paragraph 230-45(2)(e) prevents the accruals method or the realisation method being applied to something that is a financial arrangement under this section.

Note 2: Subsection 230-230(1) prevents the retranslation method being applied to something that is a financial arrangement under this section.

Note 3: Subsection 230-285(1) prevents the hedging method being applied to something that is a financial arrangement under this section.

230-60 Rights, obligations and arrangements (grouping and disaggregation rules)
Single right or obligation or multiple rights or obligations?

(1) If you have a right to receive 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate right to receive each of those financial benefits.

(2) If you have an obligation to provide 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate obligation to provide each of those financial benefits.

(3) Subsections (1) and (2) apply for the avoidance of doubt.

Matters relevant to determining what rights and/or obligations constitute particular arrangements

(4) For the purposes of this Division, whether a number of rights and/or obligations are themselves an *arrangement or are 2 or more separate arrangements is a question of fact and degree that you determine having regard to the following:

(a) the nature of the rights and/or obligations;

(b) their terms and conditions (including those relating to any payment or other consideration for them);

(c) the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of one or more of the entities involved);

(d) whether they can be dealt with separately or must be dealt with together;

(e) normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole);

(f) the objects of this Division.

In applying this subsection, have regard to the matters referred to in paragraphs (a) to (f) both in relation to the rights and/or obligations separately and in relation to the rights and/or obligations in combination with each other.

Example 1: Your rights and obligations under a typical convertible note, including the right to convert the note into a share or shares, would constitute one arrangement.

Example 2: Your rights and obligations under a typical price-linked or index-linked bond would constitute one arrangement.

Note 1: If you raised funds by means of a contract that you would not have entered into without entering into another contract, and neither contract could be assigned to a third party without the other also being assigned, this would tend to indicate that your rights and obligations under the 2 contracts together constitute one arrangement.

Note 2: If the commercial effect of your individual rights and/or obligations in a group or series cannot be understood without reference to the group or series as a whole, this would tend to indicate that all of your rights and/or obligations in the group or series together constitute one arrangement.

General rules

230-65 When financial benefit provided or received under financial arrangement
Financial benefit provided under financial arrangement

(1) You are taken, for the purposes of this Division, to have (or to have had) an obligation to provide a *financial benefit under a *financial arrangement if:

(a) you have (or had) an obligation to provide the financial benefit in relation to the arrangement; and

(b) the financial benefit would not otherwise be treated as one that you have (or had) an obligation to provide under the arrangement; and

(c) the financial benefit plays an integral role in determining whether you make, or the amount of, a gain or loss from the arrangement.

Paragraph (a) applies even if the entity to which you provide the financial benefit is not a party to the arrangement.

Note: This means that the financial benefits you provide to acquire the financial arrangement (whether to the issuer, a previous holder or a third party) are taken to be financial benefits you provide under the arrangement. The financial benefits you provide may include, for example, fees paid or the forgoing of rights to receive a financial benefit.

Financial benefit received under financial arrangement

(2) You are taken, for the purposes of this Division, to have (or to have had) a right to receive a *financial benefit under a *financial arrangement if:

(a) you have (or had) a right to receive the financial benefit in relation to the arrangement; and

(b) the financial benefit would not otherwise be treated as one that you have (or had) a right to receive under the arrangement; and

Paragraph (a) applies even if the entity that provides the financial benefit is not a party to the arrangement.

Note: The financial benefits you receive may include, for example, the waiving of an obligation you have to provide a financial benefit.

230-70 Amount of financial benefit where waiver

If:

(a) providing a *financial benefit takes the form of waiving a right to receive a financial benefit in the future; or

(b) receiving a financial benefit takes the form of having an obligation to provide a financial benefit in the future waived;
the amount of the financial benefit is taken, for the purposes of this Division, to be its *market value at the time it is waived (and not its nominal value).

230-75 Apportionment when financial benefit received or right ceases

(1) Apply subsection (2) in working out whether you make, or will make, a gain or loss (and the amount of the gain or loss) when:

(a) you receive a particular *financial benefit under a *financial arrangement; or

(b) one of your rights under a financial arrangement *ceases.

The gain or loss is to be calculated in nominal (and not *present value) terms.

(2) You must have regard to the extent to which the *financial benefits that you have provided, or are to provide, under the *financial arrangement are reasonably attributable to the benefit or right referred to in paragraph (1)(a) or (b).

(3) Despite subsection (2), no *financial benefit that you have provided, or are to provide, under the *financial arrangement is to be attributed to the benefit or right referred to in paragraph (1)(a) or (b) if:

(a) you are working out the amount of a gain or loss for the purposes of Subdivision 230-B; and

(b) the gain or loss is not an overall gain or loss from the arrangement (within the meaning of that Subdivision) at the time when you start to have the arrangement; and

(c) the benefit or right referred to in paragraph (1)(a) or (b) is an amount that represents, or is a right to an amount that represents:

(i) interest; or

(ii) something that is in the nature of interest; or

(iii) something that could reasonably be regarded as being a substitute for interest; or

(iv) something prescribed by the regulations for the purposes of this paragraph.

Note 1: An example of something in the nature of interest is a discount on a security.

Note 2: An example of something that could reasonably be regarded as being a substitute for interest is a lump sum payment received instead of payments of interest.

(4) Any attribution made under subsection (2) 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

230-80 Apportionment when financial benefit provided or obligation ceases

(1) Apply subsection (2) in working out whether you make, or will make, a gain or loss (and the amount of the gain or loss) when:

(a) you provide a particular *financial benefit under the *financial arrangement; or

(b) one of your obligations under a financial arrangement *ceases.

The gain or loss is to be calculated in nominal (and not *present value) terms.

(2) You must have regard to the extent to which the *financial benefits that you have received, or are to receive, under the *financial arrangement are reasonably attributable to the benefit or obligation referred to in paragraph (1)(a) or (b).

(3) Despite subsection (2), no *financial benefit that you have received, or are to receive, under the *financial arrangement is to be attributed to the benefit or obligation referred to in paragraph (1)(a) or (b) if:

(a) you are working out the amount of a gain or loss for the purposes of Subdivision 230-B; and

(b) the gain or loss is not an overall gain or loss from the arrangement (within the meaning of that Subdivision) at the time when you start to have the arrangement; and

(c) the benefit or obligation referred to in paragraph (1)(a) or (b) is an amount that represents, or is an obligation to provide an amount that represents:

(i) interest; or

(ii) something that is in the nature of interest; or

(iii) something that could reasonably be regarded as being a substitute for interest; or

(iv) something prescribed by the regulations for the purposes of this paragraph.

Note 1: An example of something in the nature of interest is a discount on a security.

Note 2: An example of something that could reasonably be regarded as being a substitute for interest is a lump sum payment made instead of payments of interest.

(4) Any attribution made under subsection (2) 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

230-85 Consistency in working out gains or losses (integrity measure)
Object of section

(1) The object of this section is to stop you obtaining an inappropriate tax benefit from not working out your gains and losses in a consistent manner.

Consistent treatment for particular financial arrangement

(2) If:

(a) this Division provides that a particular method applies to gains or losses you make from a *financial arrangement; and

(b) that method allows you to choose the particular manner in which you apply that method;
you must use that manner consistently for the arrangement for all income years.

Consistent treatment for financial arrangements of essentially the same nature

(3) If:

(a) this Division provides that a particular method applies to gains or losses you make from 2 or more *financial arrangements; and

(b) that method allows you to choose the particular manner in which you apply that method;
you must use that same manner consistently for all of those financial arrangements that are essentially of the same nature.

230-90 Rights and obligations include contingent rights and obligations

To avoid doubt:

(a) a right is treated as a right for the purposes of this Division even it is subject to a contingency; and

(b) an obligation is treated as an obligation for the purposes of this Division even if it is subject to a contingency.

Subdivision 230-B--The accruals/realisation methods
Table of sections

Guide to Subdivision 230-B

230-95 What this Subdivision is about
Objects of Subdivision

230-100 Objects of this Subdivision
When accruals method or realisation method applies

230-105 When accruals method or realisation method applies

230-110 Sufficiently certain overall gain or loss

230-115 Sufficiently certain gain or loss from particular event

230-120 Sufficiently certain financial benefits
The accruals method

230-125 Overview of the accruals method

230-130 Applying accruals method to work out period over which gain or loss is to be spread

230-135 How gain or loss is spread

230-140 Allocating gain or loss to income years

230-145 Running balancing adjustments
Realisation method

230-150 Realisation method
Reassessment and re-estimation

230-155 Reassessment

230-160 Re-estimation

230-165 Balancing adjustment if rate of return maintained on re-estimation

230-170 Re-estimation if balancing adjustment on partial disposal
Guide to Subdivision 230-B

230-95 What this Subdivision is about
This Subdivision applies the accruals method to determine the amount and timing of gains and losses from a financial arrangement if they are sufficiently certain for such accrual to be done.

This Subdivision applies the realisation method to determine the amount and timing of gains and losses if they are not sufficiently certain to be dealt with under the accruals method.

If the accruals method is applied to a gain or loss on the basis of an estimate of a financial benefit and the benefit when received or provided is more or less than the estimate, a balancing adjustment is made to correct for the underestimate or overestimate.

If the accruals method is being applied to gains and losses from the arrangement and there is a material change to the arrangement, or the circumstances in which it operates, a reassessment is made of whether the accruals method or the realisation method should apply to gains and losses from the arrangement.

A change in circumstances may also cause a re-estimation of gains and losses that the accruals method is being applied to.

Objects of Subdivision

230-100 Objects of this Subdivision

The objects of this Subdivision are:

(a) to properly recognise gains and losses from *financial arrangements by allocating them to appropriate periods of time; and

(b) to reduce compliance costs by reflecting commercial accounting concepts where appropriate; and

When accruals method or realisation method applies

230-105 When accruals method or realisation method applies
When accruals method applies and when realisation method applies

(1) This section tells you when to apply the accruals method and when to apply the realisation method if this Subdivision applies to gains and losses from a *financial arrangement.

Accruals method--sufficiently certain overall gain or loss at start time

(2) The accruals method provided for in this Subdivision applies to a gain or loss you make from a *financial arrangement if:

(a) the gain or loss is an overall gain or loss from the arrangement; and

(b) the gain or loss is sufficiently certain at the time when you start to have the arrangement.

Note: Subsection 230-110(1) tells you when you have a sufficiently certain overall gain or loss.

Accruals method--particular sufficiently certain gain or loss

(3) The accruals method provided for in this Subdivision also applies to a gain or loss you make from a *financial arrangement if:

(a) the gain or loss arises from a *financial benefit that you are to receive or are to provide under the arrangement; and

(b) the gain or loss:

(i) is sufficiently certain at the time when you start to have the arrangement and before you are to receive or provide the benefit; or

(ii) becomes sufficiently certain after the time when you start to have the arrangement and before you are to receive or provide the benefit; and

(i) the accrual method provided for in this Subdivision; or

(ii) the realisation method provided for in this Subdivision;

to another gain or loss from the arrangement.

This subsection has effect subject to subsection (4).

Note: Subsection 230-115(1) tells you when you have a sufficiently certain gain or loss at a particular time.

(4) Subsection (3) does not apply to a gain or loss that you make from a *financial arrangement if:

(a) you are:

(i) an individual; or

(ii) an entity (other than an individual) that satisfies subsection 230-405(2) or (3) for the income year in which you start to have the arrangement; and

(b) the arrangement is a *qualifying security; and

Realisation method--gain or loss not sufficiently certain

(5) The realisation method provided for in this Subdivision applies to a gain or loss that you make from a *financial arrangement if the accruals method provided for in this Subdivision does not apply to that gain or loss.

Note: Section 230-150 tells you how to apply the realisation method to the gain or loss.

230-110 Sufficiently certain overall gain or loss

(1) You have a sufficiently certain overall gain or loss from a *financial arrangement at the time when you start to have the arrangement only if it is sufficiently certain at that time that you will make an overall gain or loss from the arrangement of:

(a) a particular amount; or

(b) at least a particular amount.

The amount of the gain or loss is the amount referred to in paragraph (a) or (b).

Note: Sections 230-75 and 230-80 (about apportionment of financial benefits) only apply in working out whether you make, or will make, a gain or loss (and the amount of the gain or loss) when particular events happen. They do not apply in working out, at the time when you start to have a financial arrangement, whether it is sufficiently certain that you will make an overall gain or loss from the arrangement.

(2) In applying subsection (1), you must:

(a) assume that you will continue to have the *financial arrangement for the rest of its life; and

(b) have regard to the extent of the risk that a *financial benefit that you are not sufficiently certain to provide or receive under the arrangement may reduce the amount of the gain or loss.

230-115 Sufficiently certain gain or loss from particular event

(1) You have a sufficiently certain gain or loss from a *financial arrangement at a particular time if it is sufficiently certain at that time that you will make a gain or loss from the arrangement of:

(a) a particular amount; or

(b) at least a particular amount;
when one of the following occurs:

(c) you receive a particular *financial benefit under the arrangement or one of your rights under the arrangement *ceases;

(d) you provide a particular financial benefit under the arrangement or one of your obligations under the arrangement ceases.

The amount of the gain or loss is the amount referred to in paragraph (a) or (b).

(2) In applying subsection (1) to work out whether you have a sufficiently certain gain or loss at a particular time:

(a) have regard to the extent of the risk that a *financial benefit that you are not sufficiently certain to provide or receive under the arrangement may reduce the amount of the gain or loss; and

(b) disregard any financial benefit that has already been taken into account in working out the amount of a sufficiently certain overall gain or loss from the *financial arrangement under subsection 230-110(1) at the time when you started to have the arrangement; and

(c) disregard any financial benefit (or that part of any financial benefit) that has already been taken into account in working out the amount of a sufficiently certain gain or loss from the *financial arrangement under subsection (1).

Note: Sections 230-75 and 230-80 allow you to apportion financial benefits provided and financial benefits received in working out the amount of a gain or loss.

230-120 Sufficiently certain financial benefits

(1) In deciding for the purposes of this Division whether it is sufficiently certain at a particular time that you will make a gain or loss from a *financial arrangement, have regard only to:

(a) *financial benefits that you are sufficiently certain to receive; and

(b) financial benefits that you are sufficiently certain to provide.

(2) A *financial benefit that you are to receive or provide is to be treated as one that you are sufficiently certain to receive or to provide only if:

(a) it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the *financial arrangement for the rest of its life); and

(b) the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy.

(3) In applying subsection (2) to the *financial benefit:

(a) you must have regard to:

(i) the terms and conditions of the *financial arrangement; and

(ii) accepted pricing and valuation techniques; and

(iii) the economic or commercial substance and effect of the arrangement; and

(iv) the contingencies that attach to the other financial benefits that are to be provided or received under the arrangement; and

(b) you must treat the financial benefit as if it were not contingent if it is appropriate to do so having regard to the contingencies that attach to the other financial benefits that are to be received or provided under the arrangement.

(4) In applying paragraph (2)(b) at a particular time (the reference time) to a *financial benefit that depends on a variable that is based on:

(a) an interest rate; or

(b) a rate that solely or primarily reflects the time value of money; or

(d) a rate that solely or primarily reflects an index prescribed by the regulations for the purposes of this paragraph;
you must assume that that variable will continue to have the value it has at the reference time.

(5) Despite subsection (4), in applying paragraph (2)(b) at a particular time to a *financial benefit that depends on a rate of change to a variable that is based on:

(a) a rate that solely or primarily reflects a consumer price index; or

(b) a rate that solely or primarily reflects an index prescribed by the regulations for the purposes of this paragraph;
you must assume that the rate of change to that variable will continue to be the rate of change that is current at that time.

(6) If subsection (4) or (5) applies to a gain or loss and you are determining the amount of the gain or loss at a particular time, you must also assume that that variable will continue to have the value that it has at that time.

(7) Subsections (4) and (5) do not limit paragraph (2)(b).

(8) If all of the *financial benefits provided and received under the *financial arrangement are denominated in a particular foreign currency, those financial benefits are not to be translated into Australian currency for the purposes of applying subsection (2) to the arrangement.

(9) To avoid doubt:

(a) a *financial benefit that you have already provided at a particular time is taken to be one that it is, at that time, a financial benefit that you are sufficiently certain to provide; and

(b) a financial benefit that you have already received at a particular time is taken to be one that it is, at that time, a financial benefit that you are sufficiently certain to receive.

The accruals method

230-125 Overview of the accruals method

If the accruals method applies to a gain or loss you make from a *financial arrangement:

(a) you use section 230-130 to work out the period over which the gain or loss is to be spread; and

(b) you use section 230-135 to work out how to allocate the gain or loss to particular intervals within the period over which the gain or loss is to be spread; and

(c) if an interval to which part of the gain or loss is allocated straddles 2 income years, you use section 230-140 to work out how to allocate that part of the gain or loss allocated between those 2 income years.

230-130 Applying accruals method to work out period over which gain or loss is to be spread
Period over which overall gain or loss is to be spread

(1) If you have a sufficiently certain overall gain or loss from a *financial arrangement under subsection 230-110(1), the period over which the gain or loss is to be spread is the period that:

(a) starts when you start to have the arrangement; and

(b) ends when you will cease to have the arrangement.

In applying paragraph (b), you must assume that you will continue to have the arrangement for the rest of its life.

Period over which particular gain or loss is to be spread

(2) If you have a sufficiently certain gain or loss from a *financial arrangement under subsection 230-115(1), the period over which the gain or loss is to be spread is the period to which the gain or loss relates. Have regard to the pricing, terms and conditions of the arrangement in working out the period to which the gain or loss relates. This subsection has effect subject to subsections (3) and (4).

(3) The start of the period over which a gain or loss to which subsection (2) applies is to be spread must:

(a) not start earlier than the time when you start to have the *financial arrangement; and

(b) not start earlier than the start of the income year during which it becomes sufficiently certain that you will make the gain or loss.

(4) The end of the period over which a gain or loss to which subsection (2) applies is to be spread must:

(a) not end later than the time when you will cease to have the *financial arrangement; and

(b) not end later than the end of the income year during which:

(i) the *financial benefit that gives rise to the gain or loss is to be received or provided; or

(ii) the right or obligation whose *ceasing gives rise to the gain or loss is to cease.

230-135 How gain or loss is spread
How to spread gain or loss

(1) This section tells you how to spread a gain or loss to which the accruals method applies.

Compounding accruals or approximation

(2) The gain or loss is to be spread using:

(a) compounding accruals (with the intervals to which parts of the gain or loss are allocated complying with subsection (3)); or

(b) a method whose results approximate those obtained using the method referred to in paragraph (a) (having regard to the length of the period over which the gain or loss is to be spread).

Intervals to which parts of gain or loss allocated

(3) The intervals to which parts of the gain or loss are allocated must:

(a) not exceed 12 months; and

(b) all be of the same length.

Paragraph (b) does not apply to the first and last intervals. These may be shorter than the other intervals.

Assumption of continuing to hold arrangement for rest of its life

(4) The gain or loss is to be spread assuming that you will continue to have the *financial arrangement for the rest of its life.

Regard to be had to financial benefits provided or received in interval

(5) In allocating the gain or loss to intervals, have regard to the *financial benefits to be provided or received in each of those intervals.

230-140 Allocating gain or loss to income years

(1) You are taken, for the purposes of section 230-15, to make, for an income year, a gain or loss equal to a part of a gain or loss if:

(a) that part of the gain or loss is allocated to an interval under section 230-135; and

(b) that interval falls wholly within that income year.

(2) If:

(a) a part of a gain or loss is allocated to an interval under section 230-135; and

(b) that interval straddles 2 income years;
you are taken, for purposes of section 230-15, to make a gain or loss equal to so much of that part of the gain or loss as is allocated between those income years on a reasonable basis.

(3) If:

(a) a *head company of a *consolidated group or *MEC group has a *financial arrangement; and

(b) a subsidiary member of the group ceases to be a member of the group at a particular time (the leaving time); and

(c) immediately after the leaving time, the subsidiary member has the arrangement;
an income year of the group is taken, for the purposes of applying this section to the group and the arrangement, to end at the leaving time.

230-145 Running balancing adjustments
Overestimate of financial benefit to be received

(1) You are taken for the purposes of this Division to make a loss from a *financial arrangement if:

(a) a provision of this Subdivision has applied on the basis that you were sufficiently certain, at a particular time, to receive a *financial benefit of, or of at least, a particular amount under the arrangement; and

(b) when you receive the benefit (or the time comes for you to receive the benefit), the amount you receive (or are to receive) is nil or is less than the amount estimated.

The amount of the loss is equal to the difference between the amount estimated and the amount you receive (or are to receive). You are taken to have made the loss for the income year in which you receive the benefit (or in which the time comes for you to receive the benefit).

Underestimate of financial benefit to be received

(2) You are taken for the purposes of this Division to make a gain from a *financial arrangement if:

(a) a provision of this Subdivision has applied on the basis that you were sufficiently certain at a particular time to receive a *financial benefit of, or of at least, a particular amount under the arrangement; and

(b) when you receive the benefit, or the time comes for you to receive the benefit, the amount you receive, or are to receive, is more than the amount estimated.

The amount of the gain is equal to the difference between the amount estimated and the amount you receive or are to receive. You are taken to have made that gain in the income year in which you receive the benefit or in which the time comes for you to receive the benefit.

Overestimate of financial benefit to be provided

(3) You are taken for the purposes of this Division to make a gain from a *financial arrangement if:

(a) a provision of this Subdivision has applied on the basis that you were sufficiently certain at a particular time to provide a *financial benefit of, or of at least, a particular amount under the arrangement; and

(b) when you provide the benefit, or the time comes for you to provide the benefit, the amount you provide, or are to provide, is nil or is less than the amount estimated.

The amount of the gain is equal to the difference between the amount estimated and the amount you provide or are to provide. You are taken to have made that gain in the income year in which you provide the benefit or in which the time comes for you to provide the benefit.

Underestimate of financial benefit to be provided

(4) You are taken for the purposes of this Division to make a loss from a *financial arrangement if:

(b) when you provide the benefit, or the time comes for you to provide the benefit, the amount you are to provide is more than the estimated amount referred to in paragraph (a).

The amount of the loss is equal to the difference between the amount estimated and the amount you are to provide. You are taken to have made that loss in the income year in which the time comes for you to provide the benefit.

Realisation method

230-150 Realisation method

(1) If a gain or loss is to be taken into account using the realisation method, you are taken, for the purposes of section 230-15, to make the gain or loss for the income year in which the gain or loss occurs.

Note: Sections 230-75 and 230-80 allow you to apportion financial benefits provided and financial benefits received in working out the amount of the gain or loss.

(2) For the purposes of subsection (1), a gain or loss from a *financial arrangement is taken to occur at the time at which the last of the *financial benefits taken into account in determining the amount of the gain or loss:

(a) is provided; or

(b) if the financial benefit is not provided at the time when it is due to be provided under the arrangement and it is reasonable to expect that the financial benefit will be provided--is due to be provided.

This subsection has effect subject to subsection (3).

(3) For the purposes of subsection (1), you make a loss from a *financial arrangement from writing off, as a bad debt, a right to a *financial benefit (or a part of a financial benefit) if:

(a) the financial benefit was taken into account in working out the amount of a gain from the arrangement and the gain has been included in your assessable income under this Division; or

(b) the right is one in respect of money that you lent in the ordinary course of your *business of lending money; or

(4) The loss referred to in subsection (3) occurs when you write off the right to the *financial benefit (or the part of the financial benefit) as a bad debt.

(5) The amount of the loss referred to in subsection (3) is:

(a) if paragraph (3)(a) applies--so much of the gain referred to in that paragraph as is reasonably attributable to the *financial benefit (or the part of the financial benefit); or

(b) if paragraph (3)(b) applies--the amount of the financial benefit (or the part of the financial benefit); or

(c) if paragraph (3)(c) applies--the amount of the financial benefit (or the part of the financial benefit) but only up to the value of the financial benefit you provided to acquire the right to the financial benefit (or the part of the financial benefit).

(6) For the purposes of this Act, a deduction for the loss referred to in subsection (3) is to be treated as a deduction of a bad debt.

Note: Various provisions in this Act and the Income Tax Assessment Act 1936 restrict the availability of deductions for bad debts and make provision in relation to the recoupment of amounts in relation to bad debts that have been written off. These provisions are set out in subsection 25-35(5).

Reassessment and re-estimation

230-155 Reassessment

(1) You must make a fresh assessment of which gains and losses from a *financial arrangement the accruals method should apply to, and which gains and losses from that arrangement the realisation method should apply to, if:

(a) the accruals method, or the realisation method, provided for in this Subdivision applies to gains and losses from the arrangement; and

(b) there is a material change to:

(i) the terms and conditions of the arrangement; or

(ii) circumstances that affect the arrangement.

(2) Without limiting subsection (1), the following changes are material changes to the terms and conditions of, or circumstances that affect, the *financial arrangement:

(a) a change to the terms or conditions of the arrangement in a way that alters the essential nature of the arrangement (for example, by altering it from a *debt interest to an *equity interest or from an equity interest to a debt interest);

(b) a change to the terms or conditions of the arrangement in a way that materially affects the contingencies on which significant obligations and rights under the arrangement are dependent (for example, by introducing such a contingency or removing such a contingency);

(i) materially affects significant obligations and rights under the arrangement; and

(ii) was previously dependent on a contingency;

no longer dependent on a contingency (because, for example, only one of a number of previously possible contingencies is realised);

(d) a change to:

(i) the terms on which credit is to be provided to an entity that is not a party to the arrangement; or

(ii) the credit rating of an entity that is not a party to the arrangement;

if a significant obligation or right under the arrangement is dependent on that credit being provided or that rating being maintained;

(e) if the arrangement is, or includes, a loan and you prepare your financial reports in accordance with:

(i) the *accounting standards; or

(ii) if those standards do not apply to the preparation of the financial report--comparable accounting standards made under a *foreign law that apply to the preparation of the financial report under a foreign law;

a change to the terms or conditions of, or circumstances that affect, the arrangement that are sufficient for the loan to be treated as impaired for the purposes of those standards.

(3) You do not need to make a reassessment under this section merely because of a change in the fair value of the *financial arrangement.

230-160 Re-estimation
When re-estimation necessary

(1) You re-estimate a gain or loss from a *financial arrangement under subsection (4) if:

(a) the accruals method applies to the gain or loss; and

(b) circumstances arise that materially affect:

(i) the amount or value; or

(ii) the timing;

of *financial benefits that were taken into account in working out the amount of the gain or loss; and

You must re-estimate the gain or loss as soon as reasonably practicable after you become aware of the circumstances referred to in paragraph (b).

(2) Without limiting subsection (1), the following are circumstances of the kind referred to in paragraph (1)(b):

(a) a material change in market conditions that are relevant to the amount or value of the *financial benefits to be received or provided under the *financial arrangement;

(b) cash flows that were previously estimated becoming known and the difference between the cash flows that become known and the cash flows that were previously estimates is not insignificant;

(d) you have made a reassessment under section 230-155 in relation to gains or losses under the arrangement and you have determined on the reassessment under that section that the accruals method should continue to apply to those gains or losses.

(3) You do not re-estimate a gain or loss from a *financial arrangement under subsection (4) merely because of any one or more of the following:

(a) a change in the credit rating, or the creditworthiness, of a party or parties to the arrangement;

(b) the impairment (within the meaning of the *accounting standards) of the arrangement or a debt that forms part of the arrangement.

Nature of re-estimation

(4) Making a re-estimation in relation to a gain or loss under this subsection involves:

(a) a fresh determination of the amount of the gain or loss; and

(b) a reapplication of the accruals method to the redetermined gain or loss to make a fresh allocation of the part of the redetermined gain or loss that has not already been allocated to intervals ending before the re-estimation is made to intervals ending after the re-estimation is made.

Basis for re-estimation

(5) You may make the fresh allocation of the gain or loss under subsection (4) on either of the following bases:

(a) by maintaining the rate of return being used and adjusting the amount to which you apply the rate of return to the present value of the estimated future cash flows discounted at the maintained rate of return;

(b) adjusting the rate of return and maintaining the amount to which the adjusted rate of return is to be applied.

The object to be achieved by both bases is to allow you to bring the remainder of the gain or loss based on the new estimates properly to account over the remainder of the period over which you spread the gain or loss.

Note: The amount referred to in paragraph (b) is the amount to which the previous rate of return was being applied immediately before the re-estimation.

(6) If you adopt a particular basis under subsection (5) for a gain or loss from a *financial arrangement, you must use the same basis for all the re-estimations you make under this section in relation to your gains and losses from all your financial arrangements.

230-165 Balancing adjustment if rate of return maintained on re-estimation

(1) If you make a fresh allocation of the gain or loss on the basis referred to in paragraph 230-160(5)(a), you must make the following balancing adjustment:

(a) if you re-estimate a gain and the amount to which you apply the rate of return increases--you make a gain from the *financial arrangement, for the income year in which you make the re-estimation, equal to the amount of the increase;

(b) if you re-estimate a gain and the amount to which you apply the rate of return decreases--you make a loss from the arrangement, for the income year in which you make the re-estimation, equal to the amount of the decrease;

(c) if you re-estimate a loss and the amount to which you apply the rate of return increases--you make a loss from the arrangement, for the income year in which you make the re-estimation, equal to the amount of the increase;

(d) if you re-estimate a loss and the amount to which you apply the rate of return decreases--you make a gain from the arrangement, for the income year in which you make the re-estimation, equal to the amount of the decrease.

(2) Subsection (3) applies if:

(a) the re-estimation is made wholly or partly on the basis that you have written off, as a bad debt, a right to receive a *financial benefit (or a part of a financial benefit); and

(b) the right:

(i) is not one in respect of money that you lent in the ordinary course of your *business of lending money; and

(ii) is not one that you bought in the ordinary course of your business of lending money.

(3) The balancing adjustment to be made under paragraph (1)(b), to the extent that it relates to the writing off of the bad debt, must not exceed so much of the gain in relation to the *financial arrangement as:

(a) has been assessed under this Division; and

(b) is reasonably attributable to the *financial benefit (or the part of the financial benefit).

(4) Subsection (5) applies if:

(a) the re-estimation is made wholly or partly on the basis that you have written off, as a bad debt, a right to receive a *financial benefit; and

(b) the right is one that you bought in the ordinary course of your *business of lending money.

(5) The balancing adjustment to be made under paragraph (1)(b), to the extent that it relates to the writing off of the bad debt, must not exceed the value of the *financial benefit you provided to acquire the right to the financial benefit (or the part of the financial benefit).

(6) For the purposes of this Act, a deduction for the balancing adjustment referred to in subsection (3) is to be treated as a deduction of a bad debt.

230-170 Re-estimation if balancing adjustment on partial disposal
Re-estimation if balancing adjustment on partial disposal

(1) You also re-estimate a gain or loss from a *financial arrangement under subsection (2) if:

(a) the accruals method applies to the gain or loss; and

(b) a balancing adjustment is made in relation to the arrangement under Subdivision 230-G because you transfer to another entity:

(i) a proportionate share of all of your rights and/or obligations under the arrangement; or

(ii) a right or obligation that you have under the arrangement to a specifically identified *financial benefit; or

(iii) a proportionate share of a right or obligation that you have under the arrangement to a specifically identified financial benefit.

You must re-estimate the gain or loss as soon as reasonably practicable after the transfer occurs.

Nature of re-estimation

(2) Making a re-estimation in relation to a gain or loss under this subsection involves:

(a) a fresh determination of the amount of the gain or loss disregarding:

(i) *financial benefits; and

(ii) amounts of the gain or loss that have already been allocated to intervals ending before the re-estimation is made;

to the extent to which they are reasonably attributable to the proportionate share, or the right or obligation, referred to in paragraph (1)(b); and

(b) a reapplication of the accruals method to the redetermined gain or loss to make a fresh allocation of the part of that gain or loss that has not already been allocated to intervals ending before the re-estimation is made to intervals ending after the re-estimation is made.

In applying paragraph (a), disregard subsections 230-75(3) and 230-80(3).

Basis for re-estimation

(3) You make the fresh allocation of the gain or loss under subsection (2) by maintaining the rate of return being used and adjusting the amount to which you apply the rate of return to the present value of the estimated future cash flows discounted at the maintained rate of return. The object to be achieved by the fresh allocation is to allow you to bring the redetermined gain or loss properly to account over the remainder of the period over which you spread the gain or loss.

Subdivision 230-C--Fair value method
Table of sections

230-175 Objects of this Subdivision

230-180 Fair value election

230-185 Financial arrangements to which fair value election applies

230-190 Financial arrangements to which election does not apply

230-195 Applying fair value method to gains and losses

230-200 Splitting financial arrangements into 2 financial arrangements

230-205 When election ceases to apply

230-210 Balancing adjustment if election ceases to apply

230-175 Objects of this Subdivision

The objects of this Subdivision are:

(a) to allow you to align the tax treatment of gains and losses from *financial arrangements with the accounting treatment that applies where financial assets and liabilities are classified or designated as at fair value through profit or loss; and

(b) to facilitate efficient price-making; and

230-180 Fair value election
Election

(1) You may make a fair value election under this section if you are eligible under subsection (2) to make the election for the income year in which you make the election.

Eligibility to make fair value election for an income year

(2) You are eligible to make a fair value election for an income year if:

(a) you prepare a financial report for that income year in accordance with:

(i) the *accounting standards; or

(b) the financial report is audited in accordance with:

(i) the *auditing standards; or

(ii) if the auditing standards do not apply to the auditing of the financial report--comparable auditing standards made under a *foreign law.

Note: Section 230-435 allows regulations to be made specifying particular foreign accounting and auditing standards as ones that are to be treated as comparable with Australian accounting and auditing standards for the purposes of this Division.

Election irrevocable

(3) A *fair value election is irrevocable.

Note: The election may cease to have effect, or cease to apply to a particular financial arrangement, under section 230-205.

230-185 Financial arrangements to which fair value election applies

(1) A *fair value election applies in relation to *financial arrangements that:

(a) are *Division 230 financial arrangements; and

(b) are recognised in financial reports of the kind referred to in paragraph 230-180(2)(a) that are audited, or required to be audited, as referred to in paragraph 230-180(2)(b); and

(i) the *accounting standards; or

(ii) if those standards do not apply to the preparation of the financial report--comparable accounting standards that apply to the preparation of the financial report under a *foreign law;

to classify or designate, in the financial reports, as at fair value through profit or loss; and

(d) you start to have in the income year in which you make the election or in a later income year.

This subsection has effect subject to section 230-190.

(2) If:

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

(b) but for this subsection, paragraphs (1)(b) and (c) would not be satisfied in relation to a *financial arrangement because the arrangement is an intra-group transaction for the purposes of:

(i) *accounting standard AASB 127 (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 the financial report--a comparable accounting standard that applies to the preparation of the financial report under a *foreign law;
paragraphs (1)(b) and (c) are taken to be satisfied in relation to the arrangement.

230-190 Financial arrangements to which election does not apply

(1) A *fair value election does not apply to a *financial arrangement if:

(a) the arrangement is an *equity interest; and

(b) you are the issuer of the equity interest.

(2) A *fair value election does not apply to a *financial arrangement if:

(a) you are:

(i) an individual; or

(ii) an entity (other than an individual) that satisfies subsection 230-405(2) or (3) for the income year in which you start to have the arrangement; and

(b) the arrangement is a *qualifying security; and

(3) A *fair value election does not apply to a *financial arrangement if:

(a) the election is made by the *head company of a *consolidated group or a *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.

(4) A *fair value election does not apply to a *financial arrangement if the arrangement is associated with a business of a kind specified in regulations made for the purposes of this subsection.

230-195 Applying fair value method to gains and losses

(1) If a *fair value election applies to your *financial arrangement, the gain or loss you make from the arrangement for an income year is:

(a) the gain or loss that the standards referred to in paragraph 230-180(2)(a) require you to recognise in profit or loss for the income year from the asset or liability mentioned in paragraph 230-185(1)(c); or

(b) if subsection 230-185(2) applies to the arrangement--the gain or loss that the standards referred to in paragraph 230-185(1)(c) would have required you to recognise in profit or loss for the year from the asset or liability mentioned in paragraph 230-185(1)(c) if the arrangement had not been an intra-group transaction for the purposes of the standards referred to in paragraph 230-185(2)(b).

Note: Subsection 230-45(3) provides that an election under Subdivision 230-E (hedging financial arrangements method) or Subdivision 230-F (method of relying on financial reports) may override a fair value election.

(2) Subsection (1) does not apply to a gain if the gain is in the form of:

(a) a *franked distribution (including a franked distribution that *flows indirectly to you); or

(b) a right to receive a franked distribution (including a franked distribution that will flow indirectly to you).

(3) Subsection (4) applies if:

(a) a *head company of a *consolidated group or *MEC group has a *financial arrangement; and

(b) a *fair value election applies to the arrangement; and

(d) immediately after the leaving time, the subsidiary member has the arrangement.

(4) The gain or loss the group makes from the arrangement for the income year in which the leaving time occurs is taken to be the gain or loss that the standards referred to in paragraph 230-180(2)(a) would require the group to recognise as at fair value through profit or loss for the income year from the asset or liability mentioned in paragraph 230-185(1)(c) if:

(a) the circumstances that existed in relation to the arrangement (including its value) immediately before the leaving time had continued to exist until the end of the income year; and

(b) any circumstances that arise in relation to the financial arrangement after the leaving time were disregarded.

230-200 Splitting financial arrangements into 2 financial arrangements

(1) If:

(a) a *financial arrangement is constituted only in part by an asset or liability mentioned in paragraph 230-185(1)(c); and

(b) a *fair value election would apply to the arrangement if it were constituted solely by that asset or liability;
the provisions of this Division (other than this section) apply to the arrangement as if it were instead 2 separate financial arrangements.

(2) The 2 separate *financial arrangements are:

(a) one consisting of the part referred to in paragraph (1)(a); and

(b) one consisting of the remaining part.

230-205 When election ceases to apply

(1) A *fair value election ceases to have effect from the start of an income year if you cease to be eligible under subsection 230-180(2) to make the fair value election for that income year.

(2) Subsection (1) does not prevent you from making a new *fair value election at a later time if you become, at that later time, eligible under subsection 230-180(2) to make a fair value election for an income year.

Note: The new election will only apply to financial arrangements you start to have after the start of the income year in which the new election is made.

(3) A *fair value election ceases to apply to a particular *financial arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of paragraph 230-185(1)(b) or (c) during that income year.

(4) If the election ceases to apply to a particular *financial arrangement under subsection (3), the election cannot subsequently reapply to that arrangement (even if the requirements of paragraphs 230-185(1)(b) and (c) are satisfied once more in relation to the arrangement).

230-210 Balancing adjustment if election ceases to apply

(1) You must make balancing adjustments under subsection (2) if a *fair value election ceases to have effect under subsection 230-205(1).

(2) The balancing adjustments under this subsection are the balancing adjustments you would make under Subdivision 230-G for each of the *financial arrangements to which the election applied if you disposed of the arrangement for its fair value when the election ceases to have effect.

(3) You must make a balancing adjustment under subsection (4) if a *fair value election ceases to apply to a particular *financial arrangement under subsection 230-205(3).

(5) If a balancing adjustment is made under subsection (2) or (4) in relation to a *financial arrangement, you are taken, for the purposes of this Division, to have reacquired the arrangement at its fair value immediately after the election ceased to have effect or ceased to apply to the arrangement.

Subdivision 230-D--Foreign exchange retranslation method
Table of sections

230-215 Objects of this Subdivision

230-220 Foreign exchange retranslation election

230-225 Financial arrangements to which general election applies

230-230 Financial arrangements to which general election does not apply

230-235 Balancing adjustment for election in relation to qualifying forex accounts

230-240 Applying foreign exchange retranslation method to gains and losses

230-245 When election ceases to apply

230-250 Balancing adjustment if election ceases to apply

230-215 Objects of this Subdivision

The objects of this Subdivision are:

(a) to allow you to align the tax treatment of gains and losses from foreign exchange rate changes with the accounting treatment of profits and losses from such changes; and

(b) to achieve this without allowing you to obtain an inappropriate tax benefit.

230-220 Foreign exchange retranslation election
General election

(1) You may make a foreign exchange retranslation election under this subsection if you are eligible under subsection (2) to make the election for the income year in which you make the election.

Eligibility to make election

(2) You are eligible to make a *foreign exchange retranslation election for an income year if:

(a) you prepare a financial report for that income year in accordance with:

(i) the *accounting standards; or

(b) the financial report is audited in accordance with:

(i) the *auditing standards; or

(ii) if the auditing standards do not apply to the auditing of the financial report--comparable auditing standards made under a *foreign law.

Election in relation to qualifying forex accounts

(3) You may make a foreign exchange retranslation election under this subsection in relation to a *financial arrangement if:

(a) the arrangement is a *qualifying forex account; and

(b) you have not made a *foreign exchange retranslation election under subsection (1) that applies to the account.

You may make the election even if you start to have the arrangement before you make the election.

Financial arrangements to which election in relation to qualifying forex accounts applies

(4) The election under subsection (3) applies to the *financial arrangement:

(a) from the time when you start to have the arrangement if the election is made before you start to have the arrangement; or

(b) from the start of the income year in which the election is made if you make the election after you start to have the arrangement.

Elections irrevocable

(5) A *foreign exchange retranslation election is irrevocable.

Note: The election may cease to apply under section 230-245.

230-225 Financial arrangements to which general election applies

(1) A *foreign exchange retranslation election under subsection 230-220(1) applies to each of your *financial arrangements:

(a) that are *Division 230 financial arrangements; and

(b) that are recognised in financial reports of a kind referred to in paragraph 230-220(2)(a) that are audited, or required to be audited, as referred to in paragraph 230-220(2)(b); and

(i) *accounting standard AASB 121 (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 the financial report--a comparable accounting standard that applies to the preparation of the financial report under a *foreign law;

to recognise, in the financial reports, amounts in profit or loss (if any) that are attributable to changes in currency exchange rates; and

(d) that you start to have in the income year in which you make the election or in a later income year.

This subsection has effect subject to section 230-230.

Note: The election also has consequences under Subdivision 775-F for arrangements that are not Division 230 financial arrangements.

(2) If:

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

(b) but for this subsection, paragraphs (1)(b) and (c) would not be satisfied in relation to a *financial arrangement because the arrangement is an intra-group transaction for the purposes of:

(i) *accounting standard AASB 127 (or another accounting standard prescribed by the regulations for the purposes of this paragraph); or

230-230 Financial arrangements to which general election does not apply

(1) For the purposes of this Division, a *foreign exchange retranslation election under subsection 230-220(1) does not apply to a *financial arrangement if the arrangement is a financial arrangement under section 230-55 (equity interests etc.).

(2) For the purposes of this Division, a *foreign exchange retranslation election under subsection 230-220(1) does not apply to a *financial arrangement if:

(a) you are:

(i) an individual; or

(ii) an entity (other than an individual) that satisfies subsection 230-405(2) or (3) for the income year in which you start to have the arrangement; and

(b) the arrangement is a *qualifying security; and

(3) A *foreign exchange retranslation election under subsection 230-220(1) does not apply to a *financial arrangement if:

(a) the election is made by the *head company of a *consolidated group or a *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.

(4) A *foreign exchange retranslation election does not apply to a *financial arrangement if the arrangement is associated with a business of a kind specified in regulations made for the purposes of this subsection.

230-235 Balancing adjustment for election in relation to qualifying forex accounts

(1) If you make a *foreign exchange retranslation election under subsection 230-220(3) in relation to a *financial arrangement after you start to have the arrangement, you must make a balancing adjustment under subsection (2).

(2) The balancing adjustment under this subsection is the balancing adjustment you would make under Subdivision 230-G if you ceased to have the arrangement for its fair value at the time when the election started to apply to the arrangement (but only to the extent to which the balancing adjustment is reasonably attributable to a *currency exchange rate effect).

230-240 Applying foreign exchange retranslation method to gains and losses
General election

(1) You make a gain or loss from a *financial arrangement for an income year if:

(a) a *foreign exchange retranslation election under subsection 230-220(1) applies to the arrangement; and

(b) either:

(i) the standard referred to in paragraph 230-225(1)(c) requires you to recognise a particular amount in profit or loss in relation to that arrangement for that income year; or

(ii) if subsection 230-225(2) applies to the arrangement--the standards referred to in paragraph 230-225(1)(c) would have required you to recognise a particular amount in profit or loss in relation to that arrangement for that income year if the arrangement had not been an intra-group transaction for the purposes of the standards referred to in paragraph 230-225(2)(b).

The amount of the gain or loss is the amount the standard requires, or would have required, you to recognise.

Note: See subsection 230-45(4).

Election in relation to qualifying forex accounts

(2) You make a gain or loss from a *financial arrangement for an income year if:

(a) a *foreign exchange retranslation election under subsection 230-220(3) applies to the arrangement; and

(b) the standard referred to in paragraph 230-225(1)(c):

(i) requires you to recognise a particular amount in profit or loss in relation to that arrangement for that income year; or

(ii) would require you to recognise a particular amount in profit or loss in relation to that arrangement for that income year if that standard applied to the arrangement; or

(iii) would require you to recognise a particular amount in profit or loss in relation to that arrangement for that income year if the arrangement had not been an intra-group transaction for the purposes of the standards referred to in paragraph 230-225(2)(b); or

(iv) would require you to recognise a particular amount in profit or loss in relation to that arrangement for that income year if the arrangement had not been an intra-group transaction for the purposes of the standards referred to in paragraph 230-225(2)(b) and if that standard applied to the arrangement.

The amount of the gain or loss is the amount the standard requires, or would require, you to recognise.

Subsidiary leaving group

(3) Subsection (4) applies if:

(a) a *head company of a *consolidated group or *MEC group has a *financial arrangement; and

(b) a *foreign exchange retranslation election under subsection 230-220(1) or (3) applies to the arrangement; and

(d) immediately after the leaving time, the subsidiary member has the arrangement.

(4) The gain or loss the group makes from the arrangement for the income year in which the leaving time occurs is taken to be the gain or loss that the standard referred to in paragraph 230-225(1)(c) would require the group to recognise in profit or loss in relation to the arrangement for that income year if:

(a) the circumstances that existed in relation to the arrangement (including its value) immediately before the leaving time had continued to exist until the end of the income year; and

(b) any circumstances that arise in relation to the arrangement after the leaving time were disregarded.

230-245 When election ceases to apply
General election

(1) A *foreign exchange retranslation election under subsection 230-220(1) ceases to have effect from the start of an income year if you cease to be eligible under subsection 230-220(2) to make a foreign exchange retranslation under subsection 230-220(1) for that income year.

(2) Subsection (1) does not prevent you from making a new *foreign exchange retranslation election at a later time if you become, at that later time, eligible under subsection 230-220(2), to make a foreign exchange retranslation election under subsection 230-220(1) for that income year.

Note: The new election will only apply to financial arrangements you start to have after the start of the income year in which the new election is made.

(3) A *foreign exchange retranslation election under subsection 230-220(1) ceases to apply to a *financial arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of paragraph 230-225(1)(b) or (c) during that income year.

(4) If the election ceases to apply to a particular *financial arrangement under subsection (3), the election cannot subsequently reapply to that arrangement (even if the requirements of paragraphs 230-225(1)(b) and (c) are satisfied once more in relation to the arrangement).

Election in relation to qualifying forex accounts

(5) A *foreign exchange retranslation election under subsection 230-220(3) ceases to apply to a *financial arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of subsection 230-220(3) during that income year.

(6) If the election ceases to apply to a particular *financial arrangement under subsection (5), the election cannot subsequently reapply to that arrangement (even if the requirements of subsection 230-220(3) are satisfied once more in relation to the arrangement).

230-250 Balancing adjustment if election ceases to apply

(1) You must make balancing adjustments under subsection (2) if a *foreign currency retranslation election ceases to have effect under subsection 230-245(1).

(3) You must make a balancing adjustment under this section if a *foreign currency retranslation election ceases to apply to a particular *financial arrangement under subsection 230-245(3) or (5).

(4) The balancing adjustment under this subsection is the balancing adjustment you would make under Subdivision 230-G if you disposed of the *financial arrangement for its fair value when the election ceases to apply to the arrangement (but only to the extent to which the balancing adjustment is reasonably attributable to a *currency exchange rate effect).

Subdivision 230-E--Hedging financial arrangements method
Table of sections

230-255 Objects of this Subdivision

230-260 Applying hedging financial arrangement method to gains and losses

230-265 Table of events and allocation rules

230-270 Aligning tax classification of gain or loss from hedging financial arrangement with tax classification of hedged item

230-275 Hedging financial arrangement election

230-280 Hedging financial arrangements to which election applies

230-285 Hedging financial arrangements to which election applies

230-290 Hedging financial arrangement and hedged item

230-295 Generally whole arrangement must be financial hedging arrangement

230-300 Requirements not satisfied because of honest mistake or inadvertence

230-305 Derivative financial arrangement and foreign currency hedge

230-310 Recording requirements

230-315 Determining basis for allocating gain or loss

230-320 Effectiveness of the hedge

230-325 When election ceases to apply

230-330 Balancing adjustment if election ceases to apply

230-335 Where requirements not met

230-340 You may be excluded from this Division for deliberate failures to comply with requirements

230-255 Objects of this Subdivision

The objects of this Subdivision are:

(a) to facilitate the efficient management of financial risk by reducing after-tax mismatches and better aligning tax treatment where hedging takes place; and

(b) to minimise tax deferral and tax motivated practices (including tax deferral arising from such practices as tax advantaged selection from among possible hedges and inappropriate selection of tax treatment).

230-260 Applying hedging financial arrangement method to gains and losses

(1) If you have a *hedging financial arrangement to which a *hedging financial arrangement election applies, the gain or loss you make for an income year from the arrangement is worked out under this section and section 230-270 instead of under Subdivision 230-B, 230-C, 230-D, 230-F or 230-G.

(2) Except where subsection (3), (4) or (6) applies, the gain or loss you make from the *hedging financial arrangement is equal to the overall gain or loss you make from the arrangement, and is allocated over income years according to the determination referred to in subsection 230-315(1).

Note 1: The allocation is capable of extending to income years after you cease to have the hedging financial arrangement (see subsection 230-315(3)).

Note 2: The determination must be included in the record made under section 230-310.

(3) If the *hedging financial arrangement is a *foreign currency hedge and is a *debt interest:

(a) this section applies to a gain or loss you make from the arrangement to the extent to which the gain or loss represents a *currency exchange rate effect attributable to the outstanding balance in relation to the debt interest; and

(b) the remainder (if any) of the gain or loss is allocated under Subdivision 230-B, 230-F or 230-G.

This subsection has effect despite subsections (1) and (2).

(4) If an event listed in the table in section 230-265 occurs:

(a) the gain or loss you make from the *hedging financial arrangement is equal to any gain or loss that you would have made:

(i) while the arrangement was hedging the *hedged item or items; and

(ii) on ceasing to have the arrangement;

if you ceased to have the arrangement for its fair value at the time of the event; and

(b) this Division further applies as if, just after the event, you had acquired the arrangement for its fair value at the time of the event.

The gain or loss referred to in paragraph (a) is allocated over income years according to the table.

(5) The regulations may apply subsection (4) and section 230-265 (with the modifications that are provided for in the regulations) to the situation in which you cease to have one or more, but not all, of the *hedged items.

(6) If the *hedging financial arrangement:

(a) is a *financial arrangement under section 230-55 (equity interests etc.); and

(b) is a *foreign currency hedge; and

(c) is one that you issue;
this section applies to the gain or loss that you make from the arrangement only to the extent to which the gain or loss represents a *currency exchange rate effect. The remainder (if any) of the gain or loss is dealt with in accordance with Subdivision 230-B, 230-D, 230-F or 230-G.

(7) Subsection (6) has effect despite subsections (1) and (2).

230-265 Table of events and allocation rules

For the purposes of paragraph 230-260(4)(a), the following table lists events and their consequences:

Table of events and allocation rules

Item
If this event occurs ...

Your gain or loss is allocated ...

1
(a) you revoke the hedging designation; or
(b) you redesignate your *hedging financial arrangement; or
(c) you cease to meet the requirement of section 230-320 in relation to your hedging financial arrangement
over income years according to the basis determined under subsection 230-315(1).

2
(a) you cease to have the *hedged item or all of the hedged items; or
(b) you cease to expect that the hedged item or items will come into existence
to the income year in which the event occurs.

3
a risk being hedged by your *hedging financial arrangement ceases to exist
to the income year in which the risk ceases to exist.

230-270 Aligning tax classification of gain or loss from hedging financial arrangement with tax classification of hedged item

(1) The object of this section is to better align, in particular circumstances, the tax classification of a gain or loss you make from a *hedging financial arrangement with the tax classification of the *hedged item.

(2) This section applies if:

(a) you make a gain or loss from a *hedging financial arrangement for an income year; and

(b) a *hedging financial arrangement election applies to the arrangement.

(3) Subject to subsection (4):

(a) if you make a gain from the arrangement--your assessable income includes the gain in accordance with subsection 230-15(1); and

(b) if you make a loss from the arrangement--you may deduct the loss in accordance with subsections 230-15(2) and (3).

Note: Subsections 230-260(2) to (7) tell you how to allocate the gain or loss to an income year or years.

(4) A gain or loss you make from a *hedging financial arrangement, to the extent to which it is reasonably attributable to a *hedged item referred to in the following table, is dealt with in the way indicated in that item:

Special tax classification for gains and losses

Item
For a hedged item that is ...

the gain ...

the loss ...

1
a *CGT asset any *net capital gain in relation to which would be assessable under Parts 3-1 and 3-3 in relation to which a *CGT event (the hedged item CGT event) occurs
is treated as a *capital gain from a CGT event (but only to the extent to which the gain is reasonably attributable to the hedged item CGT event)
is treated as a *capital loss from a CGT event (but only to the extent to which the loss is reasonably attributable to the hedged item CGT event)

2
a *CGT asset that is *taxable Australian property
is treated as a *capital gain from a *CGT event for a CGT asset that is taxable Australian property
is treated as a *capital loss from a CGT event for a CGT asset that is taxable Australian property

3
a *CGT asset your capital gains and losses in relation to which are disregarded, or reduced by a particular percentage, under Division 855
is disregarded or reduced by the same percentage
is disregarded or reduced by the same percentage

4
*exempt income
is treated as exempt income
is not deductible

5
*non-assessable non-exempt income of an Australian resident
is treated as non-assessable non-exempt income
is not deductible

6
a share in a company that is a foreign resident if the capital gain or loss you make from a *CGT event that happens to the share is reduced by a particular percentage under Division 768-G
is treated as a *capital gain from a CGT event that is reduced by the same percentage
is treated as a *capital loss from a CGT event that is reduced by the same percentage

7
*ordinary income or *statutory income from an *Australian source
is treated as ordinary income or statutory income from an Australian source
is treated as a loss incurred in gaining or producing your ordinary income or statutory income from an Australian source

8
*ordinary income or *statutory income from a source out of Australia
is treated as ordinary income or statutory income from a source out of Australia
is treated as a loss incurred in gaining or producing ordinary income or statutory income from a source out of Australia

9
a loss or outgoing incurred in gaining or producing *ordinary income or *statutory income from a source out of Australia
reduces the amount of the loss or outgoing by the amount of the gain
increases the amount of the loss or outgoing by the amount of the loss

10
a loss or outgoing incurred in gaining or producing *ordinary income or *statutory income from an *Australian source
reduces the amount of the loss or outgoing by the amount of the gain
increases the amount of the loss or outgoing by the amount of the loss

11
a loss or outgoing that is not allowed as a deduction
reduces the amount of the loss or outgoing by the amount of the gain
increases the amount of the loss or outgoing by the amount of the loss

12
a net investment in a foreign operation (within the meaning of the *accounting standards) that is not carried on through:

(a) a company in which you hold shares; or
(b) a company that is a subsidiary of yours (within the meaning of the Corporations Act 2001);
to the extent to which the gain or loss does not relate to a *hedged item that is covered by another item in this table
is treated as *non-assessable non-exempt income
is not deductible

Note: In some circumstances, more than one item can apply to the same hedging financial arrangement. For example, item 1 might apply to make the gain on the arrangement a capital gain and item 2 might apply to treat the capital gain as being made on an asset that is taxable Australian property.

(5) If:

(a) a *hedged item is your net investment in a foreign operation (within the meaning of the *accounting standards); and

(b) the foreign operation is carried on through:

(i) a company in which you hold shares; or

(ii) a company that is a subsidiary of yours (within the meaning of the Corporations Act 2001);
the hedged item is taken, for the purposes of applying the table in subsection (1), to be the interest you have in the shares of the company.

230-275 Hedging financial arrangement election
Election

(1) You can make a hedging financial arrangement election if you are eligible under subsection (2) to make the election for the income year in which you make the election.

Eligibility to make hedging financial arrangement election for an income year

(2) You are eligible to make a hedging financial arrangement election for an income year if:

(a) you prepare a financial report for that income year in accordance with:

(i) the *accounting standards; or

(b) the financial report is audited in accordance with:

(i) the *auditing standards; or

(ii) if the auditing standards do not apply to the auditing of the financial report--comparable auditing standards made under a *foreign law.

Election irrevocable

(3) The *hedging financial arrangement election is irrevocable.

Note: The election may cease to apply under section 230-340.

230-280 Hedging financial arrangements to which election applies

A *hedging financial arrangement election applies to a *hedging financial arrangement if:

(a) you start to have the arrangement in the income year in which you make the election or in a later income year; and

(b) the requirements in sections 230-310 to 230-320 are met in relation to the arrangement.

This subsection has effect subject to section 230-285.

Note: Paragraph (b)--see section 230-335 for the Commissioner's discretion in relation to failures to meet the requirements of sections 230-310 to 230-320.

230-285 Hedging financial arrangements to which election does not apply

(1) A *hedging financial arrangement election does not apply to a *financial arrangement if the arrangement is a financial arrangement under section 230-55 (equity interests etc.).

(2) Subsection (1) does not apply to a *hedging financial arrangement if:

(a) the hedging financial arrangement is a *foreign currency hedge; and

(b) you issue the hedging financial arrangement.

(3) A *hedging financial arrangement election does not apply to a *financial arrangement if:

(a) you are:

(i) an individual; or

(ii) an entity (other than an individual) that satisfies subsection 230-405(2) or (3) for the income year in which you start to have the arrangement; and

(b) the arrangement is a *qualifying security; and

(4) A *hedging

Commonwealth of Australia Bills

TAX LAWS AMENDMENT (TAXATION OF FINANCIAL ARRANGEMENTS) BILL 2007