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A question of attribution problems with the hedging election under TOFA
Published on 01 Apr 12 by "THE TAX SPECIALIST" JOURNAL ARTICLE
Under Subdiv 230-E of the Income Tax Assessment Act 1997 (Cth), a taxpayer may elect to apply hedging treatment to holdings of financial arrangements which are in a designated hedging relationship for accounting purposes. The election also covers other situations, including hedges of currency risks in relation to anticipated dividends from overseas subsidiaries.
This article examines the character-matching aspects of the hedging election, the effect of which is to match the character of the gain or loss attributable to the hedging financial arrangement with the character of the underlying hedged item. By way of an extended worked example, the article provides a close examination of the issues raised by a hedging transaction, applying the core taxation of financial arrangements (TOFA) rules and the hedging election. In the author’s view, there is a need to resolve some of the issues exposed by the example, both by legislative amendment and finalisation of the Commissioner’s views.
