October 2007
In order to understand the broad industry impact of TOFA, it is important to first understand that TOFA does indeed have a broad industry impact.
TOFA is not a regime relevant only to banks and other financial institutions. All businesses use financial arrangements of one sort or another:
- bank accounts
- borrowings and deposits
- interest rate swaps
- forward foreign currency contracts, or
- the many other financial instruments on offer.
Assuming an annual turnover of $100 million or more, a range of businesses and industries will be impacted, for example:
- exporters
- importers
- businesses with inbound and/or outbound international structures, and
- commodity dealers.
Entities that use derivatives to manage their exposure relating to price or currency sensitive inputs and outputs are also clearly impacted.
All entities that are within the scope of the new TOFA rules need to understand the rules, not just to ensure compliance, but more so to evaluate the possible opportunities the rules present. Indeed, those who fall outside the rules should evaluate whether to opt in.
The significant range of choices available under the TOFA regime means that, whilst there will be up-front evaluation time, there is a great opportunity to tailor the rules to best advantage.
At one extreme it would be possible, by staying with the default taxing methods of accruals or realisation, to obtain tax outcomes with little or no difference to those under the existing law. But this may be to miss out on the significant opportunities TOFA presents. A practical approach may be to:
- align tax and accounting outcomes, by simplifying the tax compliance process (eg, not having to adjust between foreign exchange gains and losses recognised on a retranslation basis for accounting purposes and a realisation basis for tax purposes), or
- align tax outcomes with commercial outcomes (eg, having gains or losses on hedge transactions dealt with at the same time and in the same manner as gains or losses on the underlying transaction - including taking the hedge gains or losses outside the Australian tax net where this is how the underlying exposure is dealt with, such as certain investments in foreign subsidiaries).
For further information, please complete the following form, or contact:
David Romans, Partner
PricewaterhouseCoopers Tax
Institutional Corporate
Phone: +61 3 8603 6862
