Inserts for
Tax Laws Amendment (2013 Measures No. 1) Bill 2013: Taxation of Financial Arrangements (Stages 3 and 4 Part 1)

EXPOSURE DRAFT

Commencement information	
Column 1	Column 2	Column 3	
Provision(s)	Commencement	Date/Details	
1.  Section 4	The day this Act receives the Royal Assent.		
2.  Schedule 1	Immediately after the commencement of item 1 of Schedule 3 to the Tax Laws Amendment (2010 Measures No. 4) Act 2010.	26 March 2009	

4  Amendment of assessments
		Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment if:
	(a)	the assessment was made before the commencement of Schedule 1 to this Act; and
	(b)	the amendment is made within 2 years after that commencement; and
	(c)	the amendment is made for the purpose of giving effect to that Schedule.

Schedule 1—Taxation of financial arrangements
Part 1—Core rules
Division 1—Attribution of costs
Income Tax Assessment Act 1997
1  Subsection 230‑70(2)
Omit “are to provide”, substitute “might provide”.
2  Subsection 230‑75(2)
Omit “are to receive”, substitute “might receive”.
Division 2—Interest
Income Tax Assessment Act 1997
3  Subsection 230‑70(4)
Repeal the subsection.
4  At the end of section 230‑70
Add:
Note:	Generally, no financial benefit you have provided, or might provide, under a financial arrangement is reasonably attributable to an amount you receive that is in the nature of interest.
5  Subsection 230‑75(4)
Repeal the subsection.
6  At the end of section 230‑75
Add:
Note:	Generally, no financial benefit you have received, or might receive, under a financial arrangement is reasonably attributable to an amount you provide that is in the nature of interest.

Part 2—Accruals/realisation methods
Division 1—Sufficiently certain particular gains or losses
Income Tax Assessment Act 1997
7  Paragraph 230‑110(2)(a)
After “gain or loss”, insert “, and the extent to which such a financial benefit is, for the purposes of subsection 230‑70(2) or 230‑75(2), reasonably attributable to the benefit, right or obligation mentioned in paragraph (1)(c) or (d) of this section at the time mentioned in subsection (1)”.
Division 2—Precedence of particular gains or losses
Income Tax Assessment Act 1997
8  At the end of subsection 230‑100(2) (before the note)
Add:
	; and (c)	you choose to apply the accruals method to the gain or loss, or subsection (4) applies to the gain or loss.
9  Paragraph 230‑110(2)(b)
Repeal the paragraph, substitute:
	(b)	disregard any financial benefit that has already been taken into account, under subsection 230‑105(1), in working out, at the time when you started to have the arrangement, the amount of a sufficiently certain overall gain or loss from the *financial arrangement to which the accruals method applies; and
10  Subsection 230‑130(2)
Repeal the subsection.
Division 3—Spreading prepayments
Income Tax Assessment Act 1997
11  After subsection 230‑100(4)
Insert:
Accruals method—particular gain or loss becomes sufficiently certain
	(4A)	The accruals method provided for in this Subdivision also applies to a gain or loss you have 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 becomes sufficiently certain at the time you receive or provide the benefit; and
	(c)	at least part of the period over which the gain or loss would be spread under that method (assuming that method applied) occurs after the time you receive or provide the benefit.
Note 1:	Subsection 230‑110(1) tells you when you have a sufficiently certain gain or loss at a particular time.
Note 2:	For the period over which the gain or loss would be spread, see subsections 230‑130(3) to (5).
12  Subsection 230‑110(1)
Omit “will make”, substitute “make, or will make,”.
13  Subsection 230‑115(1)
Omit “will make”, substitute “make, or will make,”.
14  Paragraph 230‑130(4)(b)
Before “not start”, insert “other than in the case of a gain or loss to which subsection 230‑100(4A) applies—”.
15  Subsection 230‑130(5)
Repeal the subsection, substitute:
	(5)	The end of the period over which a gain or loss to which subsection (3) applies is to be spread must not end later than the time when you will cease to have the *financial arrangement.
16  After subsection 230‑170(2)
Insert:
	(2A)	Subsections (1) and (2) do not apply to a part of a gain or loss if:
	(a)	subsection 230‑100(4A) applies to the gain or loss; and
	(b)	that part of the gain or loss is allocated to an interval under section 230‑135; and
	(c)	that interval ends before or during the income year during which the gain or loss becomes sufficiently certain.
Instead, you are taken, for the purposes of section 230‑15, to make, for that income year, a gain or loss equal to that part of that gain or loss.
Division 4—Spreading single payment
Income Tax Assessment Act 1997
17  After subsection 230‑135(6)
Insert:
	(6A)	However, if there is only one *financial benefit that is to be taken into account in working out the amount of the gain or loss, then, for the purposes of paragraph (5)(b), in determining the amount to which you apply the rate of return, have regard to a notional principal:
	(a)	by reference to which the financial benefit is calculated; or
	(b)	which is reasonably related to the financial benefit.
Division 5—Re‑estimations
Income Tax Assessment Act 1997
18  Paragraph 230‑190(1)(c)
Omit “and”.
19  Paragraph 230‑190(1)(d)
Repeal the paragraph.
20  Subsection 230‑190(2)
Repeal the subsection, substitute:
	(2)	You must re‑estimate the gain or loss as soon as reasonably practicable after you become aware of the circumstances referred to in paragraph (1)(b), if subsection (1) applies.
21  After subsection 230‑190(3)
Insert:
	(3A)	You also re‑estimate a gain or loss from a *financial arrangement under subsection (5) if:
	(a)	the gain or loss is spread using the method referred to in paragraph 230‑135(2)(b) in accordance with section 230‑140 (effective interest method); and
	(b)	the maximum life of the arrangement (as determined under the terms and conditions of the arrangement) is more than 12 months; and
	(c)	the method requires you to recalculate the effective interest rate.
	(3B)	You must re‑estimate the gain or loss at the relevant reset date if:
	(a)	subsection (3A) applies; and
	(b)	the terms and conditions of the *financial arrangement provide for reset dates to occur no more than 12 months apart.
22  Subsections 230‑190(8) to (10)
Repeal the subsections.
23  After section 230‑190
Insert:
230‑192  Re‑estimation—impairments and reversals
	(1)	This section applies if the re‑estimation mentioned in section 230‑190 arises because of:
	(a)	an impairment (within the meaning of the *accounting principles) of:
	(i)	the *financial arrangement; or
	(ii)	a financial asset or financial liability that forms part of the arrangement; or
	(b)	a reversal of an impairment loss (within the meaning of the accounting principles) that resulted from such an impairment.
	(2)	Despite paragraph 230‑190(6)(a), you must make the fresh allocation in accordance with paragraph 230‑190(6)(b).
	(3)	You cannot deduct a loss you make for an income year under section 230‑15, to the extent that the loss results from:
	(a)	the impairment (including as affected by any later reversal of the impairment loss that resulted from the impairment); or
	(b)	the operation of subsection (6).
	(4)	Disregard subsection (3) for the purposes of step 1 of the method statement in subsection 230‑445(1).
Reversal
	(5)	Subsections (6) and (7) apply to the part of the gain or loss that is to be reallocated in accordance with paragraph 230‑190(6)(b), if:
	(a)	the fresh determination under paragraph 230‑190(5)(a) that arose because of the reversal resulted in that part being a gain; and
	(b)	there are losses that:
	(i)	resulted from the impairment; and
	(ii)	you could have deducted apart from subsection (3).
	(6)	Treat the fresh determination as having resulted in that part being a loss, if the total of the losses mentioned in paragraph (5)(b) exceeds the amount of the gain mentioned in paragraph (5)(a). The amount of the loss is equal to the amount of the excess.
	(7)	Otherwise, reduce the amount of that gain by the total of those losses.
Division 6—Running balancing adjustments
Income Tax Assessment Act 1997
24  After subsection 230‑175(1)
Insert:
	(1A)	Subsection (1) does not apply to the extent that the difference results from:
	(a)	an impairment (within the meaning of the *accounting principles) of:
	(i)	the *financial arrangement; or
	(ii)	a financial asset or financial liability that forms part of the arrangement; or
	(b)	you writing off, as a bad debt, a right to a *financial benefit (or a part of a financial benefit).
25  After subsection 230‑175(2)
Insert:
	(2A)	Subsection (2) does not apply to the extent that the difference results from the reversal of an impairment loss (within the meaning of the *accounting principles) that resulted from an impairment (within the meaning of the accounting principles) of:
	(a)	the *financial arrangement; or
	(b)	a financial asset or financial liability that forms part of the arrangement.
Division 7—Ceasing of rights or obligations
Income Tax Assessment Act 1997
26  Subsection 230‑180(2)
Repeal the subsection, substitute:
	(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, rights and obligations taken into account in determining the amount of the gain or loss:
	(a)	in the case of a financial benefit:
	(i)	is provided; or
	(ii)	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; or
	(b)	in the case of a right or obligation—ceases.
This subsection has effect subject to subsection (3).

Part 3—Fair value method
Income Tax Assessment Act 1997
27  Paragraph 230‑40(4)(a)
Repeal the paragraph, substitute:
	(a)	to the extent that Subdivision 230‑C (fair value method) applies to the gain or loss; or
Note:	See subsection (5) of this section and subsection 230‑230(4).
28  Paragraph 230‑220(1)(c)
Omit “to classify or designate”, substitute “to classify, designate or (in whole or in part) otherwise treat”.
29  Subsection 230‑230(1)
Repeal the subsection, substitute:
	(1)	You make a gain or loss for an income year from a *financial arrangement to which a *fair value election applies if:
	(a)	the principles or standards mentioned in paragraph 230‑210(2)(a) require you to recognise a gain or loss in profit or loss for the income year from the asset or liability mentioned in paragraph 230‑220(1)(c); or
	(b)	in the case of an arrangement to which subsection 230‑220(2) applies—the principles or standards referred to in paragraph 230‑220(1)(c) would have required you to recognise a gain or loss in profit or loss for the year from the asset or liability mentioned in paragraph 230‑220(1)(c) if the arrangement had not been an intra‑group transaction for the purposes of the standard referred to in paragraph 230‑220(2)(b); or
	(c)	in the case of an arrangement to which subsection 230‑220(3) applies—the principles or standards referred to in paragraph 230‑220(1)(c) would have required you to recognise a gain or loss in profit or loss for the year from the asset or liability mentioned in paragraph 230‑220(1)(c) if the arrangement had been between 2 separate entities.
Note:	Subsection 230‑40(7) 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.
	(1A)	The gain or loss you make is the gain or loss the principles or standards require, or would have required, you to recognise in profit or loss as mentioned in subsection (1).
30  At the end of section 230‑230
Add:
Subdivision does not apply to extent gains or losses not recognised as at fair value
	(4)	This Subdivision does not apply to a gain or loss you make from the *financial arrangement, to the extent:
	(a)	you are required, as mentioned in paragraph 230‑220(1)(c), to otherwise treat the financial arrangement as at fair value through profit and loss; and
	(b)	the principles or standards referred to in paragraph 230‑210(2)(a) do not require you to recognise the gain or loss as at fair value through profit or loss.
Note:	See also subsection 230‑40(5).
31  At the end of section 230‑245
Add:
	(6)	In determining, for the purposes of the balancing adjustment under subsection (2) or (4) or for the purposes of subsection (5), the fair value of the *financial arrangement at a time, disregard any changes in the fair value to the extent that:
	(a)	you are required, as mentioned in paragraph 230‑220(1)(c), to otherwise treat the financial arrangement as at fair value through profit and loss; and
	(b)	the principles or standards referred to in paragraph 230‑210(2)(a) do not require you to recognise the changes as at fair value through profit or loss.

Part 4—Hedging financial arrangements method
Division 1—One in all in principle
Income Tax Assessment Act 1997
32  Section 230‑325
Repeal the section, substitute:
230‑325  Hedging financial arrangements to which election applies
		A *hedging financial arrangement election applies to a *hedging financial arrangement:
	(a)	that you start to have in the income year in which you make the election or in a later income year; and
	(b)	that is not excluded from the application of the election by section 230‑330.
Note:	Subject to a determination by the Commissioner, the hedging financial arrangement election does not apply to a financial arrangement you start to have after you fail to comply with the requirements in sections 230‑355 and 230‑360 and paragraph 230‑365(c) in relation to a hedging financial arrangement to which the election does apply: see section 230‑385. See also subsection 230‑305(1).
33  Paragraph 230‑335(3)(d)
Before “you satisfy”, insert “in a case in which none of subsections (5), (6) and (7) are satisfied—”.
34  Paragraph 230‑335(3)(e)
Before “you satisfy”, insert “in any case—”.
35  After subsection 230‑335(3)
Insert:
	(3A)	Disregard paragraph (3)(d) if subsection (4) is satisfied and:
	(a)	a *hedging financial arrangement election applies to the *financial arrangement (because you previously satisfied the additional recording requirements mentioned in that paragraph at a time when the election applied); or
	(b)	all of the following subparagraphs apply:
	(i)	a hedging financial arrangement election would apply to the financial arrangement if you satisfied the additional recording requirements mentioned in paragraph (3)(d);
	(ii)	the election and subsection (3) apply to another financial arrangement;
	(iii)	subsection (4) is or was satisfied in relation to that other arrangement at a time when the election applied to that other arrangement.
36  Paragraph 230‑365(c)
Omit all the words after subparagraph (ii).
37  At the end of section 230‑365
Add:
	; and (d)	your assessment must be that the hedging of the risk will be highly effective (within the meaning of the principles or standards referred to in paragraph 230‑315(2)(a)) in reducing your exposure to changes in the fair value of the hedged item or items or cash flows attributable to the hedged risk throughout the remainder of the period for which you expect to have the arrangement.
38  Section 230‑380 (heading)
Repeal the heading, substitute:
230‑380  Commissioner may determine that requirement met
39  Section 230‑385
Repeal the section, substitute:
230‑385  Consequences of failure to meet requirements
When this section applies
	(1)	This section applies if:
	(a)	your *hedging financial arrangement election applies to a *hedging financial arrangement; and
	(b)	you do not meet a requirement of section 230‑355 or 230‑360 or paragraph 230‑365(c) in relation to the arrangement.
	(2)	For the purposes of paragraph (1)(b), treat the requirement in paragraph 230‑365(c) as being met even if you do not assess the hedging of the risk mentioned in that paragraph, but you can demonstrate that you intend to do so.
Commissioner may determine matter under section 230‑360
	(3)	If:
	(a)	you fail to determine a matter in relation to the *hedging financial arrangement under section 230‑360; or
	(b)	you determine a matter in relation to the arrangement under section 230‑360 but the determination does not satisfy the requirements of subsection 230‑360(2);
the Commissioner may determine that matter. A reference in this Division to a determination made under that section is treated as including a reference to a determination under this subsection.
Election does not apply to hedging financial arrangements you start to have after failing to comply with requirements
	(4)	Your *hedging financial arrangement election does not apply to a *hedging financial arrangement you start to have:
	(a)	after you fail to meet the requirement mentioned in paragraph (1)(b) in relation to the arrangement mentioned in that paragraph; and
	(b)	before a date (if any) determined by the Commissioner.
	(5)	The Commissioner may make a determination under paragraph (4)(b) only if satisfied that you are unlikely to fail again to meet a requirement of section 230‑355 or 230‑360 or paragraph 230‑365(c) in relation to a *hedging financial arrangement.
	(6)	In deciding whether to make a determination under paragraph (4)(b), the Commissioner must have regard to:
	(a)	your record keeping practices; and
	(b)	your compliance history; and
	(c)	any changes that have been made to:
	(i)	your accounting systems and controls; and
	(ii)	your internal governance processes;
		to ensure that failures of the kind mentioned in paragraph (1)(b) do not happen again; and
	(d)	any other relevant matter.
Commissioner may still exercise powers under section 230‑380
	(7)	This section does not prevent the Commissioner from exercising the Commissioner’s powers under section 230‑380 in relation to the *hedging financial arrangement mentioned in subsection (1).
Division 2—Hedging net investments in foreign operations
Income Tax Assessment Act 1997
40  Subsection 230‑310(5)
Repeal the subsection, substitute:
	(5)	Subsection (6) applies if:
	(a)	a *hedged item is your net investment in a foreign operation (within the meaning of the *accounting principles); 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).
	(6)	The table in subsection (4) has effect as if:
	(a)	to the extent that the *hedging financial arrangement hedges a risk or risks in relation to *shares you hold in the company—the reference in that table to the *hedged item were a reference to your interest in those shares; and
	(b)	to the extent that the hedging financial arrangement hedges a risk or risks in relation to another interest you have in the company—the reference in that table to the hedged item were a reference to that interest.

Part 5—Transitional balancing adjustments
Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009
41  At the end of paragraph 104(14)(c) of Schedule 1
Add “and”.
42  After paragraph 104(14)(c) of Schedule 1
Insert:
	(ca)	the attributable assessable amount represents the whole of the deferred tax effect of a gain or loss from the financial arrangement that has been recognised in profit or loss in accordance with the accounting principles mentioned in paragraph 230‑395(2)(a) of the Income Tax Assessment Act 1997;
43  At the end of subitem 104(14) of Schedule 1
Add:
Note:	The deferred tax effect to be taken into account for the purposes of paragraph (ca) might be affected by a later assessment, the amendment of an assessment or a law that applies retrospectively.
44  At the end of paragraph 104(15)(c) of Schedule 1
Add “and”.
45  After paragraph 104(15)(c) of Schedule 1
Insert:
	(ca)	the attributable deductible amount represents the whole of the deferred tax effect of a gain or loss from the financial arrangement that has been recognised in profit or loss in accordance with the accounting principles mentioned in paragraph 230‑395(2)(a) of the Income Tax Assessment Act 1997;
46  At the end of subitem 104(15) of Schedule 1
Add:
Note:	The deferred tax effect to be taken into account for the purposes of paragraph (ca) might be affected by a later assessment, the amendment of an assessment or a law that applies retrospectively.

Part 6—Elective requirements
Income Tax Assessment Act 1997
47  At the end of Subdivision 230‑I
Add:
230‑527  Elections—reporting documents of foreign ADIs
	(1)	So much of a Statement of Financial Performance and a Statement of Financial Position, given to *APRA by a foreign ADI (within the meaning of the Banking Act 1959) as required under section 13 of the Financial Sector (Collection of Data) Act 2001, as:
	(a)	cover the activities of an *Australian permanent establishment of the foreign ADI for the year; and
	(b)	are prepared in accordance with the recognition and measurement standards under the *accounting principles; and
	(c)	are audited in accordance with the *auditing principles;
are treated, for the purposes of the provisions mentioned in subsection (2), as being a financial report for a year:
	(d)	prepared by the foreign ADI in accordance with the accounting principles; and
	(e)	audited in accordance with the auditing principles.
	(2)	The provisions are as follows:
	(a)	sections 230‑150 to 230‑165 (election for portfolio treatment of fees);
	(b)	sections 230‑210 to 230‑220 (fair value election);
	(c)	sections 230‑255 to 230‑265 (foreign exchange retranslation election);
	(d)	sections 230‑315 to 230‑335 (hedging financial arrangement election);
	(e)	sections 230‑395, 230‑400, 230‑410 and 230‑430 (election to rely on financial reports).

Part 7—Miscellaneous amendments
Division 1—Consistency of language
Income Tax Assessment Act 1997
48  Paragraphs 230‑80(2)(a) and (3)(a)
Omit “make”, substitute “have”.
49  Subsections 230‑100(2), (3), (4) and (5)
Omit “make”, substitute “have”.
50  Section 230‑125
Omit “make”, substitute “have”.
Division 2—Other amendments
Income Tax Assessment Act 1997
51  Subparagraph 230‑5(2)(a)(iv) (second occurring)
Renumber as subparagraph (iva).
52  Subparagraph 230‑140(3)(c)(ii)
Omit “will be provided or received”, substitute “is to be provided or received”.
53  Paragraph 230‑190(7)(a)
Omit “are to apply”, substitute “is to apply”.
Note:	This item fixes a grammatical error.
54  Subsections 230‑290(1) and (3)
Omit “*foreign currency retranslation election”, substitute “*foreign exchange retranslation election”.
Note:	This item fixes typographical errors.
55  Paragraph 230‑455(1)(d)
Omit “subparagraph (iv)”, substitute “subparagraph (a)(iv)”.
Note:	This item clarifies a cross‑reference.