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This Monday, 5 December 2011, Tony Frost FTIA, Andrew Hirst FTIA (both from Greenwoods & Freehills) and Matt Osmond FTIA (PwC) attended a meeting with Treasury to discuss implementation of the proposals outlined in Attachment B (Operation of the TOFA rules for consolidated groups) to the Assistant Treasurer’s Media Release No. 159 of 2011.   
Broadly, Attachment B provides for amendments to various TOFA / Consolidation interaction provisions.
These TOFA / Consolidation interaction provisions operate when a consolidated group that is subject to TOFA acquires another entity (i.e. a corporate acquisition) and the acquired entity has TOFA “financial arrangements”. The primary purpose of these provisions is set an appropriate “tax cost” in the relevant financial arrangements. This is relevant to the ongoing tax treatment of the financial arrangements. This is an extremely complicated area of the tax law as it requires consideration of both the consolidation provisions (in particular, the ACA and tax cost setting process) and the TOFA provisions in Division 230.
At the meeting, the extent of the proposed changes became clear. Relevantly, although Attachment B appears to be simply providing for clarification of the existing law, the changes proposed are extremely significant - the two fundamental changes proposed are:

  • to set the tax cost of liabilities that are TOFA financial arrangements (other than amounts that relate to the repayment of principal) held by an entity that joins a consolidated group at its accounting value at the joining time. Although not clear from the press release, Treasury confirmed that the effect of the proposed change will lead to the acquiring group not obtaining future deductions for such liabilities (i.e. up to the amount of the accounting liability at the joining time). In Treasury’s view this is appropriate as a corresponding benefit may be obtained through the ACA process; and
  • for taxpayers that have elected to “un-grandfather” their existing TOFA financial arrangements to change the manner in which they are required to calculate their transitional balancing adjustment amount in relation to financial arrangements that they have previously acquired as part of a corporate acquisition. As part of this, Treasury confirmed that they intend that the TOFA / Consolidation interaction provisions apply to this calculation. This has a number of implications the most significant being the denial of deductions in relation to financial arrangement liabilities assumed as part of a historic corporate which a taxpayer still held when the TOFA provisions first started to apply to the taxpayer (generally, 1 July 2010).

There was strong industry representation on both these issues. The main points raised were:

  • in relation to liabilities, this is a significant change from current law. Furthermore, as the Board of Tax is considering the treatment of liabilities generally in the context of consolidation, why are TOFA financial arrangements being treated differently; and
  • in the context of the transitional balancing adjustment calculations, how can these changes be made with retrospective application? Any such retrospective changes could not only have significant consequences in relation to historic corporate acquisitions (which could potentially go back to the introduction of consolidation) but also could have affected decisions made by a taxpayer when TOFA commenced – for instance, taxpayers have elected to un-grandfather their existing financial arrangements on the basis that these provisions did not apply to historic corporate acquisitions. As the election is irrevocable, how can the goalposts be changed after the event with these provisions “switched-on”?

Treasury agreed to accept and consider industry submissions in relation to the issues raised. As such, the various professional bodies (including the Tax Institute) will be drafting a joint submission to be provided to Treasury. Should you wish to contribute to this submission, please do not hesitate to contact us at Tax Policy.

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