Financial institutions have been the major proponents of TOFA since the policy was first floated in the early 1990s, and many in this sector will be looking forward to finally being in a position to access and take advantage of the benefits that the new regime provides.
It is likely that the elective financial reports method will be both attractive and available to most, if not all, financial institutions. The initial focus of financial institutions, however, needs to be on the practical operation of the rules to determine whether the expected benefits will flow in the manner anticipated.
Financial institutions will also need to consider the advantages and disadvantages of the election to bring existing financial arrangements within the scope of Division 230.
As would be expected in a sector which lives and breathes financial instruments, senior management will take a keen interest in the impact of TOFA. The project implementation team will need to be prepared to answer the Chief Financial Officer’s (CFO’s) questions to do with the impact on the financial accounts, the timing and quantum of tax payments and (for corporates) the franking position.
The starting point for many financial institutions will be to establish a small project team. They will need to manage the implementation issues relating to Division 230, including the accounting, treasury, and operational impacts of the regime and the escalation of decisions relating to the various TOFA tax timing elections and the transitional election.
The interests of a range of potential stakeholders may need to be represented on this project team, see Diagram 2.
The PricewaterhouseCoopers TOFA implementation methodology on pages 8 and 9 may provide a useful road-map for the project team to follow. For illustrative purposes, the practical steps that could be involved in applying the PricewaterhouseCoopers methodology to a financial institution are outlined below.
Diagram 2: Potential stakeholders
Step by step
It sounds trite, but most readers have probably already learned from painful experience that the best way of tackling a big job is to break it down into component parts. This is also how we suggest implementing TOFA.
- Identify the financial arrangements that are within the scope of Division 230. Since the financial reports method is closely aligned to the financial accounting treatment for financial institutions, this step may be made easier by retrieving from archive the working papers created upon transition to the Australian Equivalents to International Financial Reporting Standards (AIFRS) that identified arrangements falling within the scope of AASB 132 and AASB 139. Then consider whether there are there any differences between the financial arrangements required to be recognised under TOFA and the financial instruments recognised under AASB 132 and AASB 139.
- Determine the differing tax treatments available under the elective tax timing methods, with a focus on the timing of gains and losses and the impact on tax payments that flow from them. A consideration of the potential reduction of tax compliance costs and the advantages of having tax payments more closely aligned to accounting results can also be assessed at this stage. The default methods (accruals and realisation) will be the benchmark against which the benefits and impacts that will flow from each of the available elections can be compared.
There will be a host of additional issues to be considered, particularly for financial institutions that market or use particularly complex, inter-related financial products, are part of a consolidated group, or have dealings with foreign related parties or permanent establishments.
The end result?
A business which can make well-informed decisions on the most beneficial TOFA elections available and knows what needs to be done to prepare systems, processes and documentation for implementation.
For further information, please complete the following form, or contact:
Ashley King, Director
PricewaterhouseCoopers
Institutional Corporate
Phone: +61 3 8603 2280
