Income Tax Assessment Act 1997

No. 38, 1997

Compilation No. 174

Compilation date:   12 October 2017

Includes amendments up to: Act No. 108, 2017

Registered:    12 October 2017

This compilation is in 11 volumes

Volume 1: sections 11 to 3655

Volume 2: sections 401 to 5510

Volume 3: sections 581 to 122205

Volume 4: sections 1241 to 152430

Volume 5: sections 1641 to 220800

Volume 6: sections 2301 to 31215

Volume 7: sections 3151 to 42070

Volume 8: sections 6151 to 727910

Volume 9: sections 7681 to 9951

Volume 10: Endnotes 1 to 3

Volume 11: Endnote 4

Each volume has its own contents

 

About this compilation

This compilation

This is a compilation of the Income Tax Assessment Act 1997 that shows the text of the law as amended and in force on 12 October 2017 (the compilation date).

The notes at the end of this compilation (the endnotes) include information about amending laws and the amendment history of provisions of the compiled law.

Uncommenced amendments

The effect of uncommenced amendments is not shown in the text of the compiled law. Any uncommenced amendments affecting the law are accessible on the Legislation Register (www.legislation.gov.au). The details of amendments made up to, but not commenced at, the compilation date are underlined in the endnotes. For more information on any uncommenced amendments, see the series page on the Legislation Register for the compiled law.

Application, saving and transitional provisions for provisions and amendments

If the operation of a provision or amendment of the compiled law is affected by an application, saving or transitional provision that is not included in this compilation, details are included in the endnotes.

Editorial changes

For more information about any editorial changes made in this compilation, see the endnotes.

Modifications

If the compiled law is modified by another law, the compiled law operates as modified but the modification does not amend the text of the law. Accordingly, this compilation does not show the text of the compiled law as modified. For more information on any modifications, see the series page on the Legislation Register for the compiled law.

Selfrepealing provisions

If a provision of the compiled law has been repealed in accordance with a provision of the law, details are included in the endnotes.

 

 

 

Contents

Chapter 3—Specialist liability rules

Part 310—Financial transactions

Division 230—Taxation of financial arrangements

Guide to Division 230 1

2301 What this Division is about

2305 Scope of this Division

Subdivision 230A—Core rules

Objects 

23010 Objects of this Division

Tax treatment of gains and losses from financial arrangements

23015 Gains are assessable and losses deductible

23020 Gain or loss to be taken into account only once under this Act

23025 Associated financial benefits to be taken into account only once under this Act

23030 Treatment of gains and losses related to exempt income and nonassessable nonexempt income

23035 Treatment of gains and losses of private or domestic nature

Method to be applied to take account of gain or loss

23040 Methods for taking gain or loss into account

Financial arrangement concept

23045 Financial arrangement

23050 Financial arrangement (equity interest or right or obligation in relation to equity interest)

23055 Rights, obligations and arrangements (grouping and disaggregation rules)

General rules 

23060 When financial benefit provided or received under financial arrangement

23065 Amount of financial benefit relating to more than one financial arrangement etc.

23070 Apportionment when financial benefit received or right ceases

23075 Apportionment when financial benefit provided or obligation ceases

23080 Consistency in working out gains or losses (integrity measure)

23085 Rights and obligations include contingent rights and obligations

Subdivision 230B—The accruals/realisation methods

Guide to Subdivision 230B

23090 What this Subdivision is about

Objects of Subdivision

23095 Objects of this Subdivision

When accruals method or realisation method applies

230100 When accruals method or realisation method applies

230105 Sufficiently certain overall gain or loss

230110 Sufficiently certain gain or loss from particular event

230115 Sufficiently certain financial benefits

230120 Financial arrangements with notional principal

The accruals method

230125 Overview of the accruals method

230130 Applying accruals method to work out period over which gain or loss is to be spread

230135 How gain or loss is spread

230140 Method of spreading gain or loss—effective interest method

230145 Application of effective interest method where differing income and accounting years

230150 Election for portfolio treatment of fees

230155 Election for portfolio treatment of fees where differing income and accounting years

230160 Portfolio treatment of fees

230165 Portfolio treatment of premiums and discounts for acquiring portfolio

230170 Allocating gain or loss to income years

230172 Applying accruals method to loss resulting from impairment

230175 Running balancing adjustments

Realisation method

230180 Realisation method

Reassessment and reestimation

230185 Reassessment

230190 Reestimation

230192 Reestimation—impairments and reversals

230195 Balancing adjustment if rate of return maintained on reestimation

230200 Reestimation if balancing adjustment on partial disposal

Subdivision 230C—Fair value method

230205 Objects of this Subdivision

230210 Fair value election

230215 Fair value election where differing income and accounting years

230220 Financial arrangements to which fair value election applies

230225 Financial arrangements to which election does not apply

230230 Applying fair value method to gains and losses

230235 Splitting financial arrangements into 2 financial arrangements

230240 When election ceases to apply

230245 Balancing adjustment if election ceases to apply

Subdivision 230D—Foreign exchange retranslation method

230250 Objects of this Subdivision

230255 Foreign exchange retranslation election

230260 Foreign exchange retranslation election where differing income and accounting years

230265 Financial arrangements to which general election applies

230270 Financial arrangements to which general election does not apply

230275 Balancing adjustment for election in relation to qualifying forex accounts

230280 Applying foreign exchange retranslation method to gains and losses

230285 When election ceases to apply

230290 Balancing adjustment if election ceases to apply

Subdivision 230E—Hedging financial arrangements method

230295 Objects of this Subdivision

230300 Applying hedging financial arrangement method to gains and losses

230305 Table of events and allocation rules

230310 Aligning tax classification of gain or loss from hedging financial arrangement with tax classification of hedged item

230315 Hedging financial arrangement election

230320 Hedging financial arrangement election where differing income and accounting years

230325 Hedging financial arrangements to which election applies

230330 Hedging financial arrangements to which election does not apply

230335 Hedging financial arrangement and hedged item

230340 Generally whole arrangement must be hedging financial arrangement

230345 Requirements not satisfied because of honest mistake or inadvertence

230350 Derivative financial arrangement and foreign currency hedge

230355 Recording requirements

230360 Determining basis for allocating gain or loss

230365 Effectiveness of the hedge

230370 When election ceases to apply

230375 Balancing adjustment if election ceases to apply

230380 Commissioner may determine that requirement met

230385 Consequences of failure to meet requirements

Subdivision 230F—Reliance on financial reports

230390 Objects of this Subdivision

230395 Election to rely on financial reports

230400 Financial reports election where differing income and accounting years

230405 Commissioner discretion to waive requirements in paragraphs 230395(2)(c) and (e)

230410 Financial arrangements to which the election applies

230415 Financial arrangements not covered by election

230420 Effect of election to rely on financial reports

230425 When election ceases to apply

230430 Balancing adjustment if election ceases to apply

Subdivision 230G—Balancing adjustment on ceasing to have a financial arrangement

230435 When balancing adjustment made

230440 Exceptions

230445 Balancing adjustment

Subdivision 230H—Exceptions

230450 Shortterm arrangements where nonmoney amount involved

230455 Certain taxpayers where no significant deferral

230460 Various rights and/or obligations

230465 Ceasing to have a financial arrangement in certain circumstances

230470 Forgiveness of commercial debts

230475 Clarifying exceptions

230480 Treatment of gains in form of franked distribution etc.

230481 Registered emissions units

Subdivision 230I—Other provisions

230485 Effect of change of residence—rules for particular methods

230490 Effect of change of residence—disposal and reacquisition etc. after ceasing to be Australian resident where no further recognised gains or losses from arrangement

230495 Effect of change of accounting principles or standards

230500 Comparable foreign accounting and auditing standards

230505 Financial arrangement as consideration for provision or acquisition of a thing

230510 Nonarm’s length dealings in relation to financial arrangement

230515 Arm’s length dealings in relation to financial arrangement—adjustment to gain or loss in certain situations

230520 Disregard gains or losses covered by value shifting regime

230525 Consolidated financial reports

230527 Elections—reporting documents of foreign ADIs

Subdivision 230J—Additional operation of Division

230530 Additional operation of Division

Division 235—Particular financial transactions

Guide to Division 235 153

2351 What this Division is about

Subdivision 235I—Instalment trusts

Guide to Subdivision 235I

235805 What this Subdivision is about

Operative provisions

235810 Object of this Subdivision

235815 Application of Subdivision

235820 Lookthrough treatment for instalment trusts

235825 Meaning of instalment trust and instalment trust asset

235830 What trusts are covered—instalment trust arrangements

235835 Requirement for underlying investments to be listed or widely held

235840 What trusts are covered—limited recourse borrowings by regulated superannuation funds

235845 Interactions with other provisions

Division 240—Arrangements treated as a sale and loan

Guide to Division 240 160

2401 What this Division is about

2403 How the recharacterisation affects the notional seller

2407 How the recharacterisation affects the notional buyer

Subdivision 240A—Application and scope of Division

Operative provisions

24010 Application of this Division

24015 Scope of Division

Subdivision 240B—The notional sale and notional loan

Operative provisions

24017 Who is the notional seller and the notional buyer?

24020 Notional sale of property by notional seller and notional acquisition of property by notional buyer

24025 Notional loan by notional seller to notional buyer

Subdivision 240C—Amounts to be included in notional seller’s assessable income

Guide to Subdivision 240C

24030 What this Subdivision is about

Operative provisions

24035 Amounts to be included in notional seller’s assessable income

24040 Arrangement payments not to be included in notional seller’s assessable income

Subdivision 240D—Deductions allowable to notional buyer

Guide to Subdivision 240D

24045 What this Subdivision is about

Operative provisions

24050 Extent to which deductions are allowable to notional buyer

24055 Arrangement payments not to be deductions

Subdivision 240E—Notional interest and arrangement payments

Operative provisions

24060 Notional interest

24065 Arrangement payments

24070 Arrangement payment periods

Subdivision 240F—The end of the arrangement

Operative provisions

24075 When is the end of the arrangement?

24080 What happens if the arrangement is extended or renewed

24085 What happens if an amount is paid by or on behalf of the notional buyer to acquire the property

24090 What happens if the notional buyer ceases to have the right to use the property

Subdivision 240G—Adjustments if total amount assessed to notional seller differs from amount of interest

Guide to Subdivision 240G

240100 What this Subdivision is about

Operative provisions

240105 Adjustments for notional seller

240110 Adjustments for notional buyer

Subdivision 240H—Application of Division 16E to certain arrangements

240112 Division 16E applies to certain arrangements

Subdivision 240I—Provisions applying to hire purchase agreements

Operative provisions

240115 Another person, or no person taken to own property in certain cases

Division 242—Leases of luxury cars

Guide to Division 242 180

2421 What this Division is about

Subdivision 242A—Notional sale and loan

Guide to Subdivision 242A

2425 What this Subdivision is about

Operative provisions

24210 Application

24215 Notional sale and acquisition

24220 Consideration for notional sale, and cost, of car

24225 Notional loan by lessor to lessee

Subdivision 242B—Amount to be included in lessor’s assessable income

Guide to Subdivision 242B

24230 What this Subdivision is about

Operative provisions

24235 Amount to be included in lessor’s assessable income

24240 Treatment of lease payments

Subdivision 242C—Deductions allowable to lessee

Guide to Subdivision 242C

24245 What this Subdivision is about

Operative provisions

24250 Extent to which deductions are allowable to lessee

24255 Lease payments not deductible

Subdivision 242D—Adjustments if total amount assessed to lessor differs from amount of interest

Guide to Subdivision 242D

24260 What this Subdivision is about

Operative provisions

24265 Adjustments for lessor

24270 Adjustments for lessee

Subdivision 242E—Extension, renewal and final ending of the lease

Guide to Subdivision 242E

24275 What this Subdivision is about

Operative provisions

24280 What happens if the term of the lease is extended or the lease is renewed

24285 What happens if an amount is paid by the lessee to acquire the car

24290 What happens if the lessee stops having the right to use the car

Division 243—Limited recourse debt

Guide to Division 243 195

24310 What this Division is about

Subdivision 243A—Circumstances in which Division operates

Operative provisions

24315 When does this Division apply?

24320 What is limited recourse debt?

24325 When is a debt arrangement terminated?

24330 What is the financed property and the debt property?

Subdivision 243B—Working out the excessive deductions

Operative provisions

24335 Working out the excessive deductions

Subdivision 243C—Amounts included in assessable income and deductions

Operative provisions

24340 Amount included in debtor’s assessable income

24345 Deduction for later payments in respect of debt

24350 Deduction for payments for replacement debt

24355 Effect of Division on later capital allowance deductions

24357 Effect of Division on later capital allowance balancing adjustments

24358 Adjustment where debt only partially used for expenditure

Subdivision 243D—Special provisions

Operative provisions

24360 Application of Division to partnerships

24365 Application where partner reduces liability

24370 Application of Division to companies ceasing to be 100% subsidiary

24375 Application of Division where debt forgiveness rules also apply

Division 245—Forgiveness of commercial debts

Guide to Division 245 212

2451 What this Division is about

2452 Simplified outline of this Division

Subdivision 245A—Debts to which operative rules apply

Guide to Subdivision 245A

2455 What this Subdivision is about

Application of Division

24510 Commercial debts

24515 Nonequity shares

24520 Parts of debts

Subdivision 245B—What constitutes forgiveness of a debt

Guide to Subdivision 245B

24530 What this Subdivision is about

Operative provisions

24535 What constitutes forgiveness of a debt

24536 What constitutes forgiveness of a debt if the debt is assigned

24537 What constitutes forgiveness of a debt if a subscription for shares enables payment of the debt

24540 Forgivenesses to which operative rules do not apply

24545 Application of operative rules if forgiveness involves an arrangement

Subdivision 245C—Calculation of gross forgiven amount of a debt

Guide to Subdivision 245C

24548 What this Subdivision is about

Working out the value of a debt

24550 Extent of forgiveness if consideration is given

24555 General rule for working out the value of a debt

24560 Special rule for working out the value of a nonrecourse debt

24561 Special rule for working out the value of a previously assigned debt

Working out if an amount is offset against the value of the debt

24565 Amount offset against amount of debt

Working out the gross forgiven amount

24575 Gross forgiven amount of a debt

24577 Gross forgiven amount shared between debtors

Subdivision 245D—Calculation of net forgiven amount of a debt

Guide to Subdivision 245D

24580 What this Subdivision is about

Operative provisions

24585 Reduction of gross forgiven amount

24590 Agreement between companies under common ownership for creditor to forgo capital loss or deduction

Subdivision 245E—Application of net forgiven amounts

Guide to Subdivision 245E

24595 What this Subdivision is about

General operative provisions

245100 Subdivision not to apply to calculation of attributable income

245105 How total net forgiven amount is applied

Reduction of tax losses

245115 Total net forgiven amount is applied in reduction of tax losses

245120 Allocation of total net forgiven amount in respect of tax losses

Reduction of net capital losses

245130 Remaining total net forgiven amount is applied in reduction of net capital losses

245135 Allocation of remaining total net forgiven amount in respect of net capital losses

Reduction of expenditure

245145 Remaining total net forgiven amount is applied in reduction of expenditure

245150 Allocation of remaining total net forgiven amount in respect of expenditures

245155 How expenditure is reduced—straight line deductions

245157 How expenditure is reduced—diminishing balance deductions

245160 Amount applied in reduction of expenditure included in assessable income in certain circumstances

Reduction of cost bases of assets

245175 Remaining total net forgiven amount is applied in reduction of cost bases of CGT assets

245180 Allocation of remaining total net forgiven amount among relevant cost bases of CGT assets

245185 Relevant cost bases of investments in associated entities are reduced last

245190 Reduction of the relevant cost bases of a CGT asset

Unapplied total net forgiven amount

245195 No further consequences if there is any remaining unapplied total net forgiven amount

Subdivision 245F—Special rules relating to partnerships

Guide to Subdivision 245F

245200 What this Subdivision is about

Operative provisions

245215 Unapplied total net forgiven amount of a partnership is transferred to partners

Subdivision 245G—Record keeping

245265 Keeping and retaining records

Division 247—Capital protected borrowings

Guide to Division 247 245

2471 What this Division is about

Operative provisions

2475 Object of Division

24710 What capital protected borrowing and capital protection are

24715 Application of this Division

24720 Treating capital protection as a put option

24725 Number of put options

24730 Exercise or expiry of option

Division 250—Assets put to tax preferred use

Guide to Division 250 251

2501 What this Division is about

Subdivision 250A—Objects

2505 Main objects

Subdivision 250B—When this Division applies to you and an asset

Overall test 

25010 When this Division applies to you and an asset

25015 General test

25020 First exclusion—small business entities

25025 Second exclusion—financial benefits under minimum value limit

25030 Third exclusion—certain short term or low value arrangements

25035 Exceptions to section 25030

25040 Fourth exclusion—sum of present values of financial benefits less than amount otherwise assessable

25045 Fifth exclusion—Commissioner determination

Tax preferred use of asset

25050 End user of an asset

25055 Tax preferred end user

25060 Tax preferred use of an asset

25065 Arrangement period for tax preferred use

25070 New tax preferred use at end of arrangement period if tax preferred use continues

25075 What constitutes a separate asset for the purposes of this Division

25080 Treatment of particular arrangements in the same way as leases

Financial benefits in relation to tax preferred use

25085 Financial benefits in relation to tax preferred use of an asset

25090 Financial benefit provided directly or indirectly

25095 Expected financial benefits in relation to an asset put to tax preferred use

250100 Present value of financial benefit that has already been provided

Discount rate to be used in working out present values

250105 Discount rate to be used in working out present values

Predominant economic interest

250110 Predominant economic interest

250115 Limited recourse debt test

250120 Right to acquire asset test

250125 Effectively noncancellable, long term arrangement test

250130 Meaning of effectively noncancellable arrangement

250135 Level of expected financial benefits test

250140 When to retest predominant economic interest under section 250135

Subdivision 250C—Denial of, or reduction in, capital allowance deductions

250145 Denial of capital allowance deductions

250150 Apportionment rule

Subdivision 250D—Deemed loan treatment of financial benefits provided for tax preferred use

250155 Arrangement treated as loan

250160 Financial benefits that are subject to deemed loan treatment

250180 End value of asset

250185 Financial benefits subject to deemed loan treatment not assessed

Subdivision 250E—Taxation of deemed loan

Guide to Subdivision 250E

250190 What this Subdivision is about

Application and objects of Subdivision

250195 Application of Subdivision

250200 Objects of this Subdivision

Tax treatment of gains and losses from financial arrangements

250205 Gains are assessable and losses deductible

250210 Gain or loss to be taken into account only once under this Act

Method to be applied to take account of gain or loss

250215 Methods for taking gain or loss into account

General rules 

250220 Consistency in working out gains or losses (integrity measure)

250225 Rights and obligations include contingent rights and obligations

The accruals method

250230 Application of accruals method

250235 Overview of the accruals method

250240 Applying accruals method to work out period over which gain or loss is to be spread

250245 How gain or loss is spread

250250 Allocating gain or loss to income years

250255 When to reestimate

250260 Reestimation if balancing adjustment on partial disposal

Balancing adjustment

250265 When balancing adjustment made

250270 Exception for subsidiary member leaving consolidated group

250275 Balancing adjustment

Other provisions

250280 Financial arrangement received or provided as consideration

Subdivision 250F—Treatment of asset when Division ceases to apply to the asset

250285 Treatment of asset after Division ceases to apply to the asset

250290 Balancing adjustment under Subdivision 40D in some circumstances

Subdivision 250G—Objections against determinations and decisions by the Commissioner

250295 Objections against determinations and decisions by the Commissioner

Division 253—Financial claims scheme for accountholders with insolvent ADIs

Subdivision 253A—Tax treatment of entitlements under financial claims scheme

Guide to Subdivision 253A

2531 What this Subdivision is about

Operative provisions

2535 Payment of entitlement under financial claims scheme treated as payment from ADI

25310 Disposal of rights against ADI to APRA and meeting of financial claims scheme entitlement have no CGT effects

25315 Cost base of financial claims scheme entitlement and any remaining part of account that gave rise to entitlement

Part 325—Particular kinds of trusts

Division 275—Australian managed investment trusts: general

Guide to Division 275 313

2751 What this Division is about

Subdivision 275A—Meaning of managed investment trust

Guide to Subdivision 275A

2755 What this Subdivision is about

Operative provisions

27510 Meaning of managed investment trust

27515 Trusts with wholesale membership

27520 Widelyheld requirements—ordinary case

27525 Widelyheld requirements for registered MIT—special case for entities covered by subsection 27520(4)

27530 Closelyheld restrictions

27535 Licensing requirements for unregistered MIS

27540 MIT participation interest

27545 Meaning of managed investment trust—every member of trust is a managed investment trust etc.

27550 Extended definition of managed investment trust—no fund payment made in relation to the income year

27555 Extended definition of managed investment trust—temporary circumstances outside the control of the trustee

Subdivision 275B—Choice for capital treatment of managed investment trust gains and losses

275100 Consequences of making choice—CGT to be primary code for calculating MIT gains or losses

275105 Covered assets

275110 MIT not to be trading trust

275115 MIT CGT choices

275120 Consequences of not making choice—revenue account treatment

Subdivision 275C—Carried interests in managed investment trusts

275200 Gains and losses etc. from carried interests in managed investment trusts reflected in assessable income or deduction

Subdivision 275L—Modification for nonarm’s length income

Guide to Subdivision 275L

275600 What this Subdivision is about

Operative provisions

275605 Trustee taxed on amount of nonarm’s length income of managed investment trust

275610 Nonarm’s length income

275615 Commissioner’s determination in relation to amount of nonarm’s length income

Division 276—Australian managed investment trusts: attribution managed investment trusts

Guide to Division 276 342

2761 What this Division is about

Subdivision 276A—What is an attribution managed investment trust?

Guide to Subdivision 276A

2765 What this Subdivision is about

Operative provisions

27610 Meaning of attribution managed investment trust (or AMIT)

27615 Clearly defined interests

27620 Trust with classes of membership interests—each class treated as separate AMIT

Subdivision 276B—Member’s vested and indefeasible interest in share of income and capital of AMIT

Guide to Subdivision 276B

27650 What this Subdivision is about

Operative provisions

27655 AMIT taken to be fixed trust and member taken to have vested and indefeasible interest in income and capital

Subdivision 276C—Taxation etc. of member components

Guide to Subdivision 276C

27675 What this Subdivision is about

Taxation etc. of member on determined member components

27680 Member’s assessable income or tax offsets for determined member components—general rules

27685 Member’s assessable income or tax offsets for determined member components—specific rules

27690 Commissioner’s determination as to status of member as qualified person

27695 Relationship between section 27680 and withholding rules

276100 Relationship between section 27680 and other charging provisions in this Act

Foreign resident members—taxation of trustee and corresponding tax offset for members

276105 Trustee taxed on foreign resident’s determined member components

276110 Refundable tax offset for foreign resident member—member that is not a trustee

Special rule for interposed custodian

276115 Custodian interposed between AMIT and member

Subdivision 276D—Member components

Guide to Subdivision 276D

276200 What this Subdivision is about

Memberlevel concepts

276205 Meaning of determined member component

276210 Meaning of member component

Subdivision 276E—Trust components

Guide to Subdivision 276E

276250 What this Subdivision is about

Trustlevel concepts

276255 Meaning of determined trust component

276260 Meaning of trust component

276265 Rules for working out trust components—general rules

276270 Rules for working out trust components—allocation of deductions

Subdivision 276F—Unders and overs

Guide to Subdivision 276F

276300 What this Subdivision is about

Adjustment of trust component for unders and overs etc.

276305 Adjustment of trust component for unders and overs

276310 Rounding adjustment deficit increases trust component

276315 Rounding adjustment surplus decreases trust component

276320 Meaning of trust component deficit

276325 Trust component of character relating to assessable income—adjustment for crosscharacter allocation amount, carryforward trust component deficit and FITO allocation amount

276330 Meaning of crosscharacter allocation amount and carryforward trust component deficit

276335 Meaning of FITO allocation amount

276340 Trust component character relating to tax offset—taxation of trust component deficit

Unders and overs

276345 Meaning of under and over of a character

276350 Limited discovery period for unders and overs

Subdivision 276G—Shortfall and excess taxation

Guide to Subdivision 276G

276400 What this Subdivision is about

Ensuring determined trust components are properly taxed

276405 Trustee taxed on shortfall in determined member component (character relating to assessable income)

276410 Trustee taxed on excess in determined member component (character relating to tax offset)

276415 Trustee taxed on amounts of determined trust component that are not reflected in determined member components

Ensuring unders and overs are properly taxed

276420 Trustee taxed on amounts of under of character relating to assessable income not properly carried forward

276425 Trustee taxed on amounts of over of character relating to tax offset not properly carried forward

Commissioner may remit tax under this Subdivision

276430 Commissioner may remit tax under this Subdivision

Subdivision 276H—AMMA statements

Guide to Subdivision 276H

276450 What this Subdivision is about

Operative provisions

276455 Obligation to give an AMMA statement

276460 AMIT member annual statement (or AMMA statement)

Subdivision 276J—Debtlike trust instruments

Guide to Subdivision 276J

276500 What this Subdivision is about

Operative provisions

276505 Meaning of debtlike trust instrument

276510 Debtlike trust instruments treated as debt interests etc.

276515 Distribution on debtlike trust instrument could be deductible in working out trust components

Subdivision 276K—Ceasing to be an AMIT

Guide to Subdivision 276K

276800 What this Subdivision is about

Operative provisions

276805 Application of Subdivision to former AMIT

276810 Continue to work out trust components, unders, overs etc.

276815 Effect of increase

276820 Effect of decrease

Part 330Superannuation

Division 280—Guide to the superannuation provisions

2801 Effect of this Division

2805 Overview

Contributions phase

28010 Contributions phase—deductibility

28015 Contributions phase—limits on superannuation tax concessions

Investment phase

28020 Investment phase

Benefits phase 

28025 Benefits phase—different types of superannuation benefit

28030 Benefits phase—taxation varies with age of recipient and type of benefit

28035 Benefits phase—rollovers

The regulatory scheme outside this Act

28040 Other relevant legislative schemes

Division 285—General concepts relating to superannuation

2855 Transfers of property

Division 290Contributions to superannuation funds

Guide to Division 290 395

2901 What this Division is about

Subdivision 290AGeneral rules

2905 Nonapplication to rollover superannuation benefits etc.

29010 No deductions other than under this Division

Subdivision 290B—Deduction of employer contributions and other employmentconnected contributions

Deducting employer contributions

29060 Employer contributions deductible

29065 Application to employees etc.

Conditions for deducting an employer contribution

29070 Employment activity conditions

29075 Complying fund conditions

29080 Age related conditions

Other employmentconnected deductions

29085 Contributions for former employees etc.

29090 Controlling interest deductions

29095 Amounts offset against superannuation guarantee charge

Returned contributions

290100 Returned contributions assessable

Subdivision 290CDeducting personal contributions

290150 Personal contributions deductible

Conditions for deducting a personal contribution

290155 Complying superannuation fund condition

290165 Agerelated conditions

290170 Notice of intent to deduct conditions

290175 Deduction limited by amount specified in notice

290180 Notice may be varied but not revoked or withdrawn

Subdivision 290DTax offsets for spouse contributions

290230 Offset for spouse contribution

290235 Limit on amount of tax offsets

290240 Tax file number

Division 291—Excess concessional contributions

Guide to Division 291 416

2911 What this Division is about

Subdivision 291A—Object of this Division

2915 Object of this Division

Subdivision 291B—Excess concessional contributions

Guide to Subdivision 291B

29110 What this Subdivision is about

Operative provisions

29115 Excess concessional contributions—assessable income, 15% tax offset

29120 Your excess concessional contributions for a financial year

29125 Your concessional contributions for a financial year

Subdivision 291C—Modifications for defined benefit interests

Guide to Subdivision 291C

291155 What this Subdivision is about

Operative provisions

291160 Application

291165 Concessional contributions—special rules for defined benefit interests

291170 Notional taxed contributions

291175 Defined benefit interest

Subdivision 291CA—Contributions that do not result in excess contributions

Guide to Subdivision 291CA

291365 What this Subdivision is about

Operative provisions

291370 Contributions that do not result in excess contributions

Subdivision 291D—Other provisions

Guide to Subdivision 291D

291460 What this Subdivision is about

Operative provisions

291465 Commissioner’s discretion to disregard contributions etc. in relation to a financial year

Division 292—Excess nonconcessional contributions

Guide to Division 292 429

2921 What this Division is about

Subdivision 292AObject of this Division

2925 Object of this Division

Subdivision 292B—Assessable income and tax offset

29215 What this Subdivision is about

29220 Amount in assessable income, and tax offset, relating to your nonconcessional contributions

29225 Amount included in assessable income

29230 Amount of the tax offset

Subdivision 292CExcess nonconcessional contributions tax

29275 What this Subdivision is about

Operative provisions

29280 Liability for excess nonconcessional contributions tax

29285 Your excess nonconcessional contributions for a financial year

29290 Your nonconcessional contributions for a financial year

29295 Contributions arising from structured settlements or orders for personal injuries

292100 Contribution relating to some CGT small business concessions

292105 CGT cap amount

Subdivision 292EExcess nonconcessional contributions tax assessments

Guide to Subdivision 292E

292225 What this Subdivision is about

Operative provisions

292230 Commissioner must make an excess nonconcessional contributions tax assessment

292240 Validity of assessment

292245 Objections

Subdivision 292FAmending excess nonconcessional contributions tax assessments

Guide to Subdivision 292F

292300 What this Subdivision is about

Operative provisions

292305 Amendments within 4 years of the original assessment

292310 Amended assessments are treated as excess nonconcessional contributions tax assessments

292315 Later amendments—on request

292320 Later amendments—fraud or evasion

292325 Further amendment of an amended particular

292330 Amendment on review etc.

Subdivision 292G—Collection and recovery

Guide to Subdivision 292G

292380 What this Subdivision is about

Operative provisions

292385 Due date for payment of excess nonconcessional contributions tax

292390 General interest charge

292395 Refunds of amounts overpaid

292405 Release authority

292410 Giving a release authority to a superannuation provider

292415 Superannuation provider given release authority must pay amount

Subdivision 292HOther provisions

292465 Commissioner’s discretion to disregard contributions etc. in relation to a financial year

292467 Direction that the value of superannuation interests is nil

Division 293—Sustaining the superannuation contribution concession

Guide to Division 293 458

2931 What this Division is about

Subdivision 293A—Object of this Division

Operative provisions

2935 Object of this Division

Subdivision 293B—Sustaining the superannuation contribution concession

Guide to Subdivision 293B

29310 What this Subdivision is about

Liability for tax

29315 Liability for tax

29320 Your taxable contributions

Low tax contributions

29325 Your low tax contributions

29330 Low tax contributed amounts

Subdivision 293C—When tax is payable

Guide to Subdivision 293C

29360 What this Subdivision is about

Operative provisions

29365 When tax is payable—original assessments

29370 When tax is payable—amended assessments

29375 General interest charge

Subdivision 293D—Modifications for defined benefit interests

Guide to Subdivision 293D

293100 What this Subdivision is about

Operative provisions

293105 Low tax contributions—modification for defined benefit interests

293115 Defined benefit contributions

Subdivision 293E—Modifications for constitutionally protected State higher level office holders

Guide to Subdivision 293E

293140 What this Subdivision is about

Operative provisions

293145 Who this Subdivision applies to

293150 Low tax contributionsmodification for CPFs

293155 High income threshold—effect of modification

293160 Salary packaged contributions

Subdivision 293F—Modifications for Commonwealth justices

Guide to Subdivision 293F

293185 What this Subdivision is about

Operative provisions

293190 Who this Subdivision applies to

293195 Defined benefit contributions—modified treatment of contributions under the Judges’ Pensions Act 1968

293200 High income threshold—effect of modification

Subdivision 293G—Modifications for temporary residents who depart Australia

Guide to Subdivision 293G

293225 What this Subdivision is about

Operative provisions

293230 Who is entitled to a refund

293235 Amount of the refund

293240 Entitlement to refund stops all Division 293 tax liabilities

Division 294—Transfer balance cap

Guide to Division 294 474

2941 What this Division is about

Subdivision 294A—Object of this Division

Operative provisions

2945 Object of this Division

Subdivision 294B—Transfer balance account

Guide to Subdivision 294B

29410 What this Subdivision is about

Operative provisions

29415 When you have a transfer balance account

29420 Meaning of retirement phase recipient

29425 Transfer balance credits

29430 Excess transfer balance

29435 Your transfer balance cap

29440 Proportionally indexed transfer balance cap

29445 Transfer balance account ends

29450 Assumptions about income streams

29455 Repayment of limited recourse borrowing arrangement

Subdivision 294C—Transfer balance debits

Guide to Subdivision 294C

29475 What this Subdivision is about

Operative provisions

29480 Transfer balance debits

29485 Certain events that result in reduced superannuation

29490 Payment splits

29495 Payment splits—no double debiting

Subdivision 294D—Modifications for certain defined benefit income streams

Guide to Subdivision 294D

294120 What this Subdivision is about

Operative provisions

294125 When this Subdivision applies

294130 Meaning of capped defined benefit income stream

294135 Transfer balance credit—special rule for capped defined benefit income streams

294140 Excess transfer balance—special rule for capped defined benefit income streams

294145 Transfer balance debits—special rules for capped defined benefit income streams

Subdivision 294E—Modifications for death benefits dependants who are children

Guide to Subdivision 294E

294170 What this Subdivision is about

Operative provisions

294175 When this Subdivision applies

294180 Transfer balance account ends

294185 Transfer balance cap—special rule for child recipient

294190 Cap increment—child recipient just before 1 July 2017

294195 Cap increment—child recipient on or after 1 July 2017, deceased had no transfer balance account

294200 Cap increment—child recipient on or after 1 July 2017, deceased had transfer balance account

Subdivision 294F—Excess transfer balance tax

Guide to Subdivision 294F

294225 What this Subdivision is about

Operative provisions

294230 Excess transfer balance tax

294235 Your excess transfer balance earnings

294240 When tax is payable—original assessments

294245 When tax is payable—amended assessments

294250 General interest charge

Division 295Taxation of superannuation entities

Guide to Division 295 504

2951 What this Division is about

Subdivision 295A—Provisions of general operation

2955 Entities to which Division applies

29510 How to work out the tax payable by superannuation entities

29515 Division does not impose a tax on property of a State

29520 Exempting laws ineffective

29525 Assessments on basis of anticipated SIS Act notice

29530 Effect of revocation etc. of SIS Act notices

29535 Acronyms used in tables

Subdivision 295BModifications of provisions of this Act

29585 CGT to be primary code for calculating gains or losses

29590 CGT rules for pre30 June 1988 assets

29595 Deductions related to contributions

295100 Deductions for investing in PSTs and life policies

295105 Distributions to PST unitholders

Subdivision 295CContributions included

Guide to Subdivision 295C

295155 What this Subdivision is about

Contributions and payments

295160 Contributions and payments

295165 Exception—spouse contributions

295170 Exception—Government cocontributions and contributions for a child

295173 Exception—trustee contributions

295175 Exception—payments by a member spouse

295180 Exception—choice to exclude certain contributions

295185 Exception—temporary residents

Personal contributions and rollover amounts

295190 Personal contributions and rollover amounts

295195 Exclusion of personal contributions—contributions

295197 Exclusion of personal contributions—successor funds

Transfers from foreign funds

295200 Transfers from foreign superannuation funds

Application of tables to RSA providers

295205 Application of tables to RSA providers

Former constitutionally protected funds

295210 Former constitutionally protected funds

Subdivision 295DContributions excluded

295260 Transfer of liability to investment vehicle

295265 Application of pre1 July 88 funding credits

295270 Anticipated funding credits

Subdivision 295EOther income amounts

Amounts included

295320 Other amounts included in assessable income

295325 Previously complying funds

295330 Previously foreign funds

Amounts excluded

295335 Amounts excluded from assessable income

Subdivision 295FExempt income

295385 Income from assets set aside to meet current pension liabilities

295387 Disregarded small fund assets

295390 Income from other assets used to meet current pension liabilities

295395 Meaning of segregated noncurrent assets

295400 Income of a PST attributable to current pension liabilities

295405 Other exempt income

295407 Covered superannuation income streams—RSAs

295410 Amount credited to RSA

Subdivision 295GDeductions

Death or disability benefits

295460 Benefits for which deductions are available

295465 Complying funds—deductions for insurance premiums

295470 Complying funds—deductions for future liability to pay benefits

295475 RSA providers—deductions for insurance premiums

295480 Meaning of whole of life policy and endowment policy

Other deductions

295490 Other deductions

Certain amounts cannot be deducted

295495 Amounts that cannot be deducted

Subdivision 295HComponents of taxable income

295545 Components of taxable income—complying superannuation funds, complying ADFs and PSTs

295550 Meaning of nonarm’s length income

295555 Components of taxable income—RSA providers

Subdivision 295INoTFN contributions

295605 Liability for tax on noTFN contributions income

295610 NoTFN contributions income

295615 Meaning of quoted (for superannuation purposes)

295620 No reduction under Subdivision 295D

295625 Assessments

Subdivision 295JTax offset for noTFN contributions income (TFN quoted within 4 years)

295675 Entitlement to a tax offset

295680 Amount of the tax offset

Division 301Superannuation member benefits paid from complying plans etc.

Guide to Division 301 559

3011 What this Division is about

Subdivision 301A—Application

3015 Division applies to superannuation member benefits paid from complying plans etc.

Subdivision 301B—Member benefits: general rules

Member benefits—recipient aged 60 or above

30110 All superannuation benefits are tax free

Member benefits—recipient aged over preservation age and under 60

30115 Tax free status of tax free component

30120 Superannuation lump sum—taxable component taxed at 0% up to low rate cap amount, 15% on remainder

30125 Superannuation income stream—taxable component attracts 15% offset

Member benefits—recipient aged under preservation age

30130 Tax free status of tax free component

30135 Superannuation lump sum—taxable component taxed at 20%

30140 Superannuation income stream—taxable component is assessable income, 15% offset for disability benefit

Subdivision 301C—Member benefits: elements untaxed in fund

30190 Tax free component and element taxed in fund dealt with under Subdivision 301B, but element untaxed in the fund dealt with under this Subdivision

Member benefits (element untaxed in fund)—recipient aged 60 or above

30195 Superannuation lump sum—element untaxed in fund taxed at 15% up to untaxed plan cap amount, top rate on remainder

301100 Superannuation income stream—element untaxed in fund attracts 10% offset

Member benefits (element untaxed in fund)—recipient aged over preservation age and under 60

301105 Superannuation lump sum—element untaxed in fund taxed at 15% up to low rate cap amount, 30% up to untaxed plan cap amount, top rate on remainder

301110 Superannuation income stream—element untaxed in fund is assessable income

Member benefits (element untaxed in fund)—recipient aged under preservation age

301115 Superannuation lump sum—element untaxed in fund taxed at 30% up to untaxed plan cap amount, top rate on remainder

301120 Superannuation income stream—element untaxed in fund is assessable income

Miscellaneous 

301125 Unclaimed money payments by the Commissioner

Subdivision 301D—Departing Australia superannuation payments

301170 Departing Australia superannuation payments

301175 Treatment of departing Australia superannuation benefits

Subdivision 301E—Superannuation lump sum member benefits less than $200

301225 Superannuation lump sum member benefits less than $200 are tax free

Division 302Superannuation death benefits paid from complying plans etc.

Guide to Division 302 571

3021 What this Division is about

Subdivision 302A—Application

3025 Division applies to superannuation death benefits paid from complying plans etc.

30210 Superannuation death benefits paid to trustee of deceased estate

Subdivision 302B—Death benefits to dependant

Lump sum death benefits to dependants are tax free

30260 All of superannuation lump sum is tax free

Superannuation income stream—either deceased died aged 60 or above or dependant aged 60 or above

30265 Superannuation income stream benefits are tax free

Superannuation income stream—deceased died aged under 60 and dependant aged under 60

30270 Superannuation income stream—tax free status of tax free component

30275 Superannuation income stream—taxable component attracts 15% offset

Death benefits to dependant—elements untaxed in fund

30280 Treatment of element untaxed in the fund of superannuation income stream death benefit to dependant

30285 Deceased died aged 60 or above or dependant aged 60 years or above—superannuation income stream: element untaxed in fund attracts 10% offset

30290 Deceased died aged under 60 and dependant aged under 60—superannuation income stream: element untaxed in fund is assessable income

Subdivision 302C—Death benefits to nondependant

Superannuation lump sum

302140 Superannuation lump sum—tax free status of tax free component

302145 Superannuation lump sum—element taxed in the fund taxed at 15%, element untaxed in the fund taxed at 30%

Subdivision 302D—Definitions relating to dependants

302195 Meaning of death benefits dependant

302200 What is an interdependency relationship?

Division 303—Superannuation benefits paid in special circumstances

Guide to Division 303 580

3031 What this Division is about

Subdivision 303A—Modifications for defined benefit income

Operative provisions

3032 Effect of exceeding defined benefit income cap on assessable income

3033 Effect of exceeding defined benefit income cap on tax offsets

3034 Meaning of defined benefit income cap

Subdivision 303B—Other special circumstances

3035 Commutation of income stream if you are under 25 etc.

30310 Superannuation lump sum member benefit paid to member having a terminal medical condition

30315 Payments from release authorities—excess concessional contributions

30317 Payments from release authorities etc.—released nonconcessional contributions and associated earnings

30320 Payments from release authorities—Division 293 tax

Division 304Superannuation benefits in breach of legislative requirements etc.

Guide to Division 304 586

3041 What this Division is about

Operative provisions

3045 Application

30410 Superannuation benefits in breach of legislative requirements etc.

30415 Excess payments from release authorities

30420 Excess payments from release authorities—Division 293 tax

Division 305—Superannuation benefits paid from noncomplying superannuation plans

Guide to Division 305 589

3051 What this Division is about

Subdivision 305A—Superannuation benefits from Australian noncomplying superannuation funds

3055 Tax treatment of superannuation benefits from certain Australian noncomplying superannuation funds

Subdivision 305B—Superannuation benefits from foreign superannuation funds

Application of Subdivision

30555 Restriction to lump sums received from certain foreign superannuation funds

Lump sums received within 6 months after Australian residency or termination of foreign employment etc.

30560 Lump sums tax free—foreign resident period

30565 Lump sums tax free—Australian resident period

Lump sums to which sections 30560 and 30565 do not apply

30570 Lump sums received more than 6 months after Australian residency or termination of foreign employment etc.

30575 Lump sums—applicable fund earnings

30580 Lump sums paid into complying superannuation plans—choice

Division 306Rollovers etc.

Guide to Division 306 597

3061 What this Division is about

Operative provisions

3065 Effect of a rollover superannuation benefit

30610 Rollover superannuation benefit

30612 Involuntary rollover superannuation benefit

30615 Tax on excess untaxed rollover amounts

30620 Effect of payment to government of unclaimed superannuation money

30625 Payments connected with financial claims scheme to RSAs

Division 307Key concepts relating to superannuation benefits

Guide to Division 307 603

3071 What this Division is about

Subdivision 307A—Superannuation benefits generally

3075 What is a superannuation benefit?

30710 Payments that are not superannuation benefits

30715 Payments for your benefit or at your direction or request

Subdivision 307B—Superannuation lump sums and superannuation income stream benefits

30765 Meaning of superannuation lump sum

30770 Meaning of superannuation income stream and superannuation income stream benefit

30775 Meaning of retirement phase superannuation income stream benefit

30780 When a superannuation income stream is in the retirement phase

Subdivision 307C—Components of a superannuation benefit

307120 Components of superannuation benefit

307125 Proportioning rule

307130 Superannuation guarantee payment consists entirely of taxable component

307135 Superannuation cocontribution benefit payment consists entirely of tax free component

307140 Contributionssplitting superannuation benefit consists entirely of taxable component

307142 Components of certain unclaimed money payments

307145 Modification for disability benefits

307150 Modification in respect of superannuation lump sum with element untaxed in fund

Subdivision 307D—Superannuation interests

307200 Regulations relating to meaning of superannuation interests

307205 Value of superannuation interest

307210 Tax free component of superannuation interest

307215 Taxable component of superannuation interest

307220 What is the contributions segment?

307225 What is the crystallised segment?

307230 Total superannuation balance

Subdivision 307E—Elements taxed and untaxed in the fund of the taxable component of superannuation benefit

307275 Element taxed in the fund and element untaxed in the fund of superannuation benefits

307280 Superannuation benefits from constitutionally protected funds etc.

307285 Trustee can choose to convert element taxed in the fund to element untaxed in the fund

307290 Taxed and untaxed elements of death benefit superannuation lump sums

307295 Superannuation benefits from public sector superannuation schemes may include untaxed element

307297 Public sector superannuation schemes—elements set by regulations

307300 Certain unclaimed money payments

Subdivision 307F—Low rate cap and untaxed plan cap amounts

307345 Low rate cap amount

307350 Untaxed plan cap amount

Subdivision 307G—Other concepts

307400 Meaning of service period for a superannuation lump sum

Division 310—Loss relief for merging superannuation funds

Guide to Division 310 641

3101 What this Division is about

Operative provisions

Subdivision 310A—Object of this Division

3105 Object

Subdivision 310B—Choice to transfer losses

31010 Original fund’s assets extend beyond life insurance policies and units in pooled superannuation trusts

31015 Original fund’s assets include a complying superannuation life insurance policy

31020 Original fund’s assets include units in a pooled superannuation trust

Subdivision 310C—Consequences of choosing to transfer losses

31025 Who losses can be transferred to

31030 Losses that can be transferred

31035 Effect of transferring a net capital loss

31040 Effect of transferring a tax loss

Subdivision 310D—Choice for assets rollover

31045 Choosing the assets rollover

31050 Choosing the form of the assets rollover

Subdivision 310E—Consequences of choosing assets rollover

31055 CGT assets—if global asset approach chosen

31060 CGT assets—individual asset approach

31065 Revenue assets—if global asset approach chosen

31070 Revenue assets—individual asset approach

31075 Further consequences for rollovers involving life insurance companies

Subdivision 310F—Choices

31085 Choices

Division 311—Loss relief and asset rollover for transfer of amounts to a MySuper product

Guide to Division 311 658

3111 What this Division is about

Operative provisions

Subdivision 311A—Object of this Division

3115 Object

Subdivision 311B—Choosing loss transfers and asset rollovers

31110 Certain entities can choose transfer of losses, asset rollovers, or both for transfers between funds

31112 Certain entities can choose asset rollovers for transfers within a fund

Subdivision 311C—Consequences of choosing to transfer losses

31115 Who losses can be transferred to

31120 Losses that can be transferred

31125 Effect of transferring a net capital loss

31130 Effect of transferring a tax loss

31135 Realisation of certain assets after completion time

Subdivision 311D—Consequences of choosing asset rollover

31140 Assets rollover—transfers between funds

31142 Assets rollover—transfers within a fund

31145 CGT assets

31150 Revenue assets

31155 Further consequences for rollovers involving life insurance companies

Subdivision 311E—Choices

31160 Choices

Division 312—TransTasman portability of retirement savings

Guide to Division 312 672

3121 What this Division is about

Subdivision 312A—Preliminary

3125 Division implements Arrangement with New Zealand

Subdivision 312B—Amounts contributed to complying superannuation funds from KiwiSaver schemes

31210 Amounts contributed to complying superannuation funds from KiwiSaver schemes

Subdivision 312C—Superannuation benefits paid to KiwiSaver scheme providers

31215 Superannuation benefits paid to KiwiSaver schemes

Chapter 3Specialist liability rules

Part 310Financial transactions

Division 230Taxation of financial arrangements

Table of Subdivisions

 Guide to Division 230

230A Core rules

230B The accruals/realisation methods

230C Fair value method

230D Foreign exchange retranslation method

230E Hedging financial arrangements method

230F Reliance on financial reports

230G Balancing adjustment on ceasing to have a financial arrangement

230H Exceptions

230I Other provisions

230J Additional operation of Division

Guide to Division 230

2301  What this Division is about

This Division is about the tax treatment of gains and losses from your financial arrangements.

You recognise the gains and losses, as appropriate, over the life of a financial arrangement and ignore distinctions between income and capital unless specific rules apply.

If it is sufficiently certain that you will make a gain or loss, you use a compounding accruals method to recognise the gain or loss. Otherwise you use a realisation method. Instead of either, you may be able to choose to use a fair value or hedging method or to rely on your financial reports. You may also be able to choose to recognise foreign exchange gains and losses using a retranslation method.

2305  Scope of this Division

 (1) You have a financial arrangement if you have one or more cash settlable legal or equitable rights and/or obligations to receive or provide a financial benefit.

 (2) This Division does not apply to all financial arrangements. The main exceptions are if:

 (a) you are:

 (i) an individual; or

 (ii) a superannuation entity or fund, managed investment scheme or an entity substantially similar to a managed investment scheme under foreign law with assets of less than $100 million; or

 (iii) an ADI, securitisation vehicle or other financial sector entity with an aggregated turnover of less than $20 million; or

 (iv) another entity with an aggregated turnover of less than $100 million, financial assets of less than $100 million and assets of less than $300 million;

  and either:

 (iva) the arrangement is to end not more than 12 months after you start to have it; or

 (v) the arrangement is not a qualifying security; or

 (b) the arrangement is a financial arrangement under section 23050 (equity interests etc.) and neither a fair value election, a hedging financial arrangement election nor an election to rely on financial reports applies to the arrangement.

Note: Section 230455 provides for the exceptions referred to in paragraph (a).

Subdivision 230ACore rules

Table of sections

Objects

23010 Objects of this Division

Tax treatment of gains and losses from financial arrangements

23015 Gains are assessable and losses deductible

23020 Gain or loss to be taken into account only once under this Act

23025 Associated financial benefits to be taken into account only once under this Act

23030 Treatment of gains and losses related to exempt income and nonassessable nonexempt income

23035 Treatment of gains and losses of private or domestic nature

Method to be applied to take account of gain or loss

23040 Methods for taking gain or loss into account

Financial arrangement concept

23045 Financial arrangement

23050 Financial arrangement (equity interest or right or obligation in relation to equity interest)

23055 Rights, obligations and arrangements (grouping and disaggregation rules)

General rules

23060 When financial benefit provided or received under financial arrangement

23065 Amount of financial benefit relating to more than one financial arrangement etc.

23070 Apportionment when financial benefit received or right ceases

23075 Apportionment when financial benefit provided or obligation ceases

23080 Consistency in working out gains or losses (integrity measure)

23085 Rights and obligations include contingent rights and obligations

Objects

23010  Objects of this Division

  The objects of this Division are:

 (a) to minimise the extent to which the tax treatment of gains and losses from your *financial arrangements distorts, by providing inappropriate impediments and stimulation, your trading, financing and investment decisions and your risk taking and risk management; and

 (b) to do so by aligning more closely the tax and commercial recognition of gains and losses from your financial arrangements in the following ways:

 (i) by allocating the gains and losses to income years throughout the life of your financial arrangements on a reasonable basis;

 (ii) by generally recognising gains and losses on revenue rather than capital account; and

 (c) to appropriately take account of, and minimise, your compliance costs.

Tax treatment of gains and losses from financial arrangements

23015  Gains are assessable and losses deductible

Gains

 (1) Your assessable income includes a gain you make from a *financial arrangement.

Note: This Division does not apply to gains that are subject to exceptions under Subdivision 230H.

Losses

 (2) You can deduct a loss you make from a *financial arrangement, but only to the extent that:

 (a) you make it in gaining or producing your assessable income; or

 (b) you necessarily make it in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: This Division does not apply to losses that are subject to exceptions under Subdivision 230H.

 (3) You can also deduct a loss you make from a *financial arrangement if:

 (a) you are an *Australian entity; and

 (b) you make the loss in deriving income from a foreign source; and

 (c) the income is *nonassessable nonexempt income under section 7685, or section 23AI or 23AK of the Income Tax Assessment Act 1936; and

 (d) the loss is, in whole or in part, a cost in relation to a *debt interest you issue that is covered by paragraph 82040(1)(a).

You can deduct the loss only to the extent to which it is a cost in relation to a *debt interest you issue that is covered by paragraph 82040(1)(a).

Note: This Division does not apply to losses that are subject to exceptions under Subdivision 230H.

 (4) If the *financial arrangement is a *debt interest, the loss is not prevented from being deductible for an income year under subsection (2) merely because of either or both of the following:

 (a) one or more of the *financial benefits that are taken into account in working out the amount of the loss are *contingent on aspects of the economic performance (whether past, current or future) of:

 (i) you or a part of your activities; or

 (ii) a *connected entity of yours or a part of the activities of a connected entity of yours;

 (b) one or more of the financial benefits that are taken into account in working out the amount of the loss secure a permanent or enduring benefit for you or a connected entity of yours.

 (4A) A *dividend on a *debt interest is a loss you can deduct to the extent to which it would have been a deductible loss under subsection (2) if:

 (a) the payment of the amount of the dividend were the incurring of a liability to pay the same amount as interest; and

 (b) that interest were incurred in respect of the finance raised by you and in respect of which the dividend was paid or provided; and

 (c) the debt interest retained its character as a debt interest for the purposes of subsection (4).

 (5) Subject to subsection (6), subsection (4) does not apply to the loss to the extent to which the annually compounded internal rate of return on the *debt interest exceeds the *benchmark rate of return for the debt interest increased by 150 basis points.

 (6) If:

 (a) regulations made for the purposes of subsection 2585(6) provide that a specified number of basis points is to apply for the purposes of applying subsection 2585(5) in particular circumstances; and

 (b) those circumstances exist in relation to the *debt interest;

subsection (5) applies as if the reference in that subsection to 150 basis points were a reference to the number of basis points specified in the regulations.

Division does not affect foreign residence rules

 (7) Nothing in this Division affects the operation of the provisions of Division 6 that provide for the significance of foreign residence for the assessability of ordinary and statutory income.

Note 1: Gains that you make under this Division may be ordinary or statutory income for the purposes of Division 6.

Note 2: For the effect of a change of residence during an income year, see sections 230485 and 230490.

23020  Gain or loss to be taken into account only once under this Act

Application of section

 (1) This section applies to the following:

 (a) a gain that is included in your assessable income for an income year under this Division;

 (b) a loss that is allowable as a deduction to you for an income year under this Division;

 (c) a gain or a loss that is dealt with in accordance with subsection 230310(4) in relation to an income year.

Purpose of this section

 (2) The purpose of this section is to ensure that your gains and losses, and *financial benefits, to which this section applies are taken into account only once under this Act in working out your taxable income.

Gain or loss to be taken into account only once

 (3) A gain or loss to which this section applies is not to be (to any extent):

 (a) included in your assessable income; or

 (b) allowable as a deduction to you; or

 (c) dealt with in accordance with subsection 230310(4);

again under this Division for the same or any other income year.

 (4) A gain or loss to which this section applies is not to be (to any extent):

 (a) included in your assessable income; or

 (b) allowable as a deduction to you;

under any provisions of this Act outside this Division for the same or any other income year.

Section does not give rise to exempt income

 (5) A gain is not to be treated as *exempt income merely because it is not included in your assessable income under this section.

23025  Associated financial benefits to be taken into account only once under this Act

Application of section

 (1) This section applies to a *financial benefit whose amount or value is taken into account in working out whether you make, or the amount of, a gain or loss to which paragraph 23020(1)(a), (b) or (c) applies.

Associated financial benefit to be taken into account only once

 (2) A *financial benefit to which this section applies is not to be (to any extent):

 (a) included in your assessable income; or

 (b) allowable as a deduction to you;

under any provision of this Act outside this Division for the same or any other income year.

Exception for certain bad debts

 (3) If:

 (a) a *financial benefit has been included in your assessable income under a provision of this Act outside this Division; and

 (b) a bad debt deduction would have been allowed under section 2535 in relation to the financial benefit;

subsection (2) does not prevent that bad debt deduction from being allowed under section 2535 in relation to the financial benefit as if the debt were still outstanding.

Section does not give rise to exempt income

 (4) A *financial benefit is not to be treated as *exempt income merely because it is not included in your assessable income under this section.

23030  Treatment of gains and losses related to exempt income and nonassessable nonexempt income

 (1) Despite section 23015, a gain that you make from a *financial arrangement:

 (a) to the extent that it reflects an amount that would be treated, or would reasonably expected to be treated, as *exempt income under a provision of this Act if this Division were disregarded—is exempt income; and

 (b) to the extent that it reflects an amount that would be treated or would reasonably expected to be treated, as *nonassessable nonexempt income under a provision of this Act if this Division were disregarded—is not assessable income and is not exempt income.

 (2) Despite section 23015, a gain that you make from a *financial arrangement:

 (a) to the extent that, if it had been a loss, you would have made it in gaining or producing *exempt income—is exempt income; and

 (b) to the extent to which, if it had been a loss, you would have made it in gaining or producing *nonassessable nonexempt income—is not assessable income and is not exempt income.

 (3) A loss you make from a *financial arrangement is not allowable as a deduction to you under any provision of this Act (other than subsection 23015(3)) to the extent that you make it in gaining or producing your:

 (a) *exempt income; or

 (b) *nonassessable nonexempt income.

23035  Treatment of gains and losses of private or domestic nature

Borrowings etc. used for private or domestic purpose

 (1) Subsections (2) and (3) apply if:

 (a) a *borrowing is made by you, or credit is provided to you, under a *financial arrangement; and

 (b) you use some or all of the funds borrowed or the credit provided for a private or domestic purpose.

 (2) This Division does not apply to a gain you make from the arrangement to the extent that you use the funds raised or the credit provided for a private or domestic purpose.

 (3) A loss you make from the arrangement is not allowable as a deduction to you under any provision of this Act to the extent that you use the funds raised or the credit provided for a private or domestic purpose.

Derivative financial arrangement held for private or domestic purpose

 (4) Subsections (5) and (6) apply if:

 (a) you are an individual; and

 (b) you make a gain or loss from a *derivative financial arrangement; and

 (c) the arrangement is held, wholly or in part, for a private or domestic purpose.

 (5) This Division does not apply to a gain you make from the arrangement to the extent that the arrangement is held or used for a private or domestic purpose.

 (6) A loss you make from the arrangement is not allowable as a deduction to you under any provision of this Act to the extent that the arrangement is held or used for a private or domestic purpose.

Method to be applied to take account of gain or loss

23040  Methods for taking gain or loss into account

Methods available

 (1) The methods that can be applied to take account of a gain or loss you make from a *financial arrangement are:

 (a) the accruals and realisation methods provided for in Subdivision 230B; or

 (b) the fair value method provided for in Subdivision 230C; or

 (c) the foreign exchange retranslation method provided for in Subdivision 230D; or

 (d) the hedging financial arrangement method provided for in Subdivision 230E; or

 (e) the method of relying on your financial reports provided for in Subdivision 230F; or

 (f) a balancing adjustment provided for in Subdivision 230G.

Note: The methods referred to in paragraphs (b) to (e) only apply if you make an election under the relevant Subdivision and you must meet certain requirements before you can make such an election.

 (2) A gain or loss is not taken into account under any of the methods referred to in paragraphs (1)(a), (b), (c) and (e) to the extent to which it is taken into account under the method referred to in paragraph (1)(f) (balancing adjustment).

 (3) A gain or loss is not taken into account under the method referred to in paragraph (1)(f) (balancing adjustment) to the extent to which it is taken into account under the method referred to in paragraph (1)(d) (hedging financial arrangement method).

Note: The hedging financial arrangement method may take some account of the gain or loss by reference to the balancing adjustment method (see subsection 230300(5)).

Elections override accruals and realisation methods

 (4) Subdivision 230B (accruals and realisation method) does not apply to a gain or loss you make from a *financial arrangement:

 (a) to the extent that Subdivision 230C (fair value method) applies to the gain or loss; or

Note: See subsection (5) of this section and subsection 230230(4).

 (b) to the extent that Subdivision 230D (foreign exchange retranslation method) applies to the gain or loss; or

 (c) to the extent that Subdivision 230E (hedging financial arrangements method) applies to the arrangement; or

 (d) if Subdivision 230F (method of relying on financial reports) applies to the arrangement; or

 (e) if the arrangement is a financial arrangement under section 23050 (equity interests etc.).

Priorities among election methods

 (5) Subdivision 230C (fair value method) does not apply to a gain or loss you make from a *financial arrangement:

 (a) to the extent that Subdivision 230E (hedging financial arrangements method) applies to the arrangement; or

 (b) if Subdivision 230F (method of relying on financial reports) applies to the arrangement.

 (6) Subdivision 230D (foreign exchange retranslation method) does not apply to a gain or loss you make from a *financial arrangement:

 (a) if Subdivision 230C (fair value method) applies to the arrangement; or

 (b) to the extent that Subdivision 230E (hedging financial arrangements method) applies to the arrangement; or

 (c) if Subdivision 230F (method of relying on financial reports) applies to the arrangement.

 (7) Subdivision 230F (method of relying on financial reports) does not apply to a gain or loss you make from a *financial arrangement to the extent that Subdivision 230E (hedging financial arrangements method) applies to the arrangement.

Financial arrangement concept

23045  Financial arrangement

 (1) You have a financial arrangement if you have, under an *arrangement:

 (a) a *cash settlable legal or equitable right to receive a *financial benefit; or

 (b) a cash settlable legal or equitable obligation to provide a financial benefit; or

 (c) a combination of one or more such rights and/or one or more such obligations;

unless:

 (d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

 (e) for one or more of the rights and/or obligations covered by paragraph (d):

 (i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

 (ii) the right or obligation is not cash settlable; and

 (f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

Note 1: Whether your rights and/or obligations under an arrangement constitute a financial arrangement can change over time depending on changes either to the terms of the arrangement or external circumstances (such as particular rights or obligations under the arrangement being satisfied by the parties). For example, a contract may provide for the transfer of a boat in 6 months time and payment of the contract price at the end of 2 years. Until the boat is delivered, there is no financial arrangement because of the operation of paragraphs (d), (e) and (f) above. Once the boat is delivered, there is a financial arrangement because those paragraphs are no longer applicable.

Note 2: The operative provisions of this Division do not apply to all financial arrangements, and only apply partially to some: see the exceptions in Subdivision 230H.

Note 3: There are some rules in this Division that tell you what happens if an arrangement ceases to be a financial arrangement (see Subdivision 230G and section 230505).

 (2) A right you have to receive, or an obligation you have to provide, a *financial benefit is cash settlable if, and only if:

 (a) the benefit is money or a *money equivalent; or

 (b) in the case of a right—you intend to satisfy or settle it by receiving money or a money equivalent or by starting to have, or ceasing to have, another *financial arrangement; or

 (c) in the case of an obligation—you intend to satisfy or settle it by providing money or a money equivalent or by starting to have, or ceasing to have, another financial arrangement; or

 (d) you have a practice of satisfying or settling similar rights or obligations as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way); or

 (e) you deal with the right or obligation, or with similar rights or obligations, in order to generate a profit from shortterm fluctuations in price, from a dealer’s margin, or from both; or

 (f) none of paragraphs (a) to (e) applies but you satisfy subsection (3); or

 (g) you are able to settle the right or obligation as mentioned in paragraph (b) or (c) (whether or not you intend to satisfy or settle the right or obligation in that way) and you do not have, as your sole or dominant purpose for entering into the arrangement under which you are to receive or provide the financial benefit, the purpose of receiving or delivering the financial benefit as part of your expected purchase, sale or usage requirements.

A reference in paragraph (b) or (c) to a financial arrangement does not include a reference to something that is a financial arrangement under section 23050.

Note: Examples of dealing of the kind covered by paragraph (e) are:

(a) dealing with the right or obligation, or similar rights or obligations, on a frequent basis, a shortterm basis or on a frequent and shortterm basis; and

(b) acquiring the right or obligation, or similar rights or obligations, and managing the resulting risk by entering into offsetting arrangements that provide a profit margin.

 (3) You satisfy this subsection if:

 (a) the *financial benefit is readily convertible into money or a *money equivalent; and

 (b) there is a market for the financial benefit that has a high degree of liquidity; and

 (c) subsection (4) or (5) is satisfied.

 (4) This subsection is satisfied if, for the recipient of the *financial benefit, the amount of the money or *money equivalent referred to in paragraph (3)(a) is not subject to a substantial risk of substantial decrease in value.

 (5) This subsection is satisfied if your purpose, or one of your purposes, for entering into the arrangement under which you are to receive or provide the *financial benefit, is to receive or deliver the financial benefit:

 (a) to raise or provide finance; or

 (b) if paragraph (a) does not apply—so that it may be converted or liquidated into money or a money equivalent (other than as part of your expected purchase, sale or usage requirements).

23050  Financial arrangement (equity interest or right or obligation in relation to equity interest)

 (1) You also have a financial arrangement if you have an *equity interest. The equity interest constitutes the financial arrangement.

 (2) You also have a financial arrangement if:

 (a) you have, under an *arrangement:

 (i) a legal or equitable right to receive something that is a financial arrangement under this section; or

 (ii) a legal or equitable obligation to provide something that is a financial arrangement under this section; or

 (iii) a combination of one or more such rights and/or obligations; and

 (b) the right, obligation or combination does not constitute, or form part of, a financial arrangement under subsection 23045(1).

The right, obligation or combination referred to in paragraph (a) constitutes the financial arrangement.

Note 1: Paragraph 23040(4)(e) prevents the accruals method or the realisation method being applied to something that is a financial arrangement under this section.

Note 2: Subsection 230270(1) prevents the retranslation method being applied to something that is a financial arrangement under this section.

Note 3: Subsection 230330(1) prevents the hedging method being applied to something that is a financial arrangement under this section.

23055  Rights, obligations and arrangements (grouping and disaggregation rules)

Single right or obligation or multiple rights or obligations?

 (1) If you have a right to receive 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate right to receive each of those financial benefits.

 (2) If you have an obligation to provide 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate obligation to provide each of those financial benefits.

 (3) Subsections (1) and (2) apply for the avoidance of doubt.

Matters relevant to determining what rights and/or obligations constitute particular arrangements

 (4) For the purposes of this Division, whether a number of rights and/or obligations are themselves an *arrangement or are 2 or more separate arrangements is a question of fact and degree that you determine having regard to the following:

 (a) the nature of the rights and/or obligations;

 (b) their terms and conditions (including those relating to any payment or other consideration for them);

 (c) the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of one or more of the entities involved);

 (d) whether they can be dealt with separately or must be dealt with together;

 (e) normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole);

 (f) the objects of this Division.

In applying this subsection, have regard to the matters referred to in paragraphs (a) to (f) both in relation to the rights and/or obligations separately and in relation to the rights and/or obligations in combination with each other.

Example 1: Your rights and obligations under a typical convertible note, including the right to convert the note into a share or shares, would constitute one arrangement.

Example 2: Your rights and obligations under a typical pricelinked or indexlinked bond would constitute one arrangement.

Note 1: If you raised funds by means of a contract that you would not have entered into without entering into another contract, and neither contract could be assigned to a third party without the other also being assigned, this would tend to indicate that your rights and obligations under the 2 contracts together constitute one arrangement.

Note 2: If the commercial effect of your individual rights and/or obligations in a group or series cannot be understood without reference to the group or series as a whole, this would tend to indicate that all of your rights and/or obligations in the group or series together constitute one arrangement.

General rules

23060  When financial benefit provided or received under financial arrangement

Financial benefit provided under financial arrangement

 (1) You are taken, for the purposes of this Division, to have (or to have had) an obligation to provide a *financial benefit under a *financial arrangement if:

 (a) you have (or had) an obligation to provide the financial benefit in relation to the arrangement; and

 (b) the financial benefit would not otherwise be treated as one that you have (or had) an obligation to provide under the arrangement; and

 (c) the financial benefit plays an integral role in determining:

 (i) whether you make a gain or loss from the arrangement; or

 (ii) the amount of such a gain or loss.

Paragraph (a) applies even if the entity to which you provide the financial benefit is not a party to the arrangement.

Note: This means that the financial benefits you provide to acquire the financial arrangement (whether to the issuer, a previous holder or a third party) are taken to be financial benefits you provide under the arrangement. The financial benefits you provide may include, for example, fees paid or the forgoing of rights to receive a financial benefit.

Financial benefit received under financial arrangement

 (2) You are taken, for the purposes of this Division, to have (or to have had) a right to receive a *financial benefit under a *financial arrangement if:

 (a) you have (or had) a right to receive the financial benefit in relation to the arrangement; and

 (b) the financial benefit would not otherwise be treated as one that you have (or had) a right to receive under the arrangement; and

 (c) the financial benefit plays an integral role in determining:

 (i) whether you make a gain or loss from the arrangement; or

 (ii) the amount of such a gain or loss.

Paragraph (a) applies even if the entity that provides the financial benefit is not a party to the arrangement.

Note: The financial benefits you receive may include, for example, the waiving of an obligation you have to provide a financial benefit.

23065  Amount of financial benefit relating to more than one financial arrangement etc.

 (1) This section applies if:

 (a) a *financial benefit plays the integral role mentioned in paragraph 23060(1)(c) or (2)(c) in relation to a *financial arrangement; and

 (b) either or both of the following apply:

 (i) the financial benefit plays that role in relation to one or more other financial arrangements;

 (ii) the financial benefit is provided or received for one or more other things that are not financial arrangements.

 (2) For the purposes of this Division, determine the amount of the *financial benefit that plays that role in relation to a particular *financial arrangement by apportioning the actual amount of the financial benefit, on a reasonable basis, between:

 (a) that financial arrangement; and

 (b) each other financial arrangement (if any) in relation to which the benefit plays that role; and

 (c) each other thing (if any) mentioned in subparagraph (1)(b)(ii).

23070  Apportionment when financial benefit received or right ceases

 (1) Apply subsection (2) in working out whether you make, or will make, a gain or loss (and the amount of the gain or loss) at a time when:

 (a) you receive a particular *financial benefit under a *financial arrangement; or

 (b) one of your rights under a financial arrangement ceases.

The gain or loss is to be calculated in nominal (and not *present value) terms.

 (2) You must have regard to the extent to which the *financial benefits that you have provided, or are to provide or might provide, under the *financial arrangement are reasonably attributable, at the time mentioned in subsection (1), to the benefit or right referred to in paragraph (1)(a) or (b).

 (3) Any attribution made under subsection (2) must reflect appropriate and commercially accepted valuation principles that properly take into account:

 (a) the nature of the rights and obligations under the *financial arrangement; and

 (b) the risks associated with each *financial benefit, right and obligation under the arrangement; and

 (c) the time value of money.

Note: Generally, no financial benefit you have provided, or are to provide or might provide, under a financial arrangement is reasonably attributable to an amount you receive that is in the nature of interest.

23075  Apportionment when financial benefit provided or obligation ceases

 (1) Apply subsection (2) in working out whether you make, or will make, a gain or loss (and the amount of the gain or loss) at a time when:

 (a) you provide a particular *financial benefit under the *financial arrangement; or

 (b) one of your obligations under a financial arrangement ceases.

The gain or loss is to be calculated in nominal (and not *present value) terms.

 (2) You must have regard to the extent to which the *financial benefits that you have received, or are to receive or might receive, under the *financial arrangement are reasonably attributable, at the time mentioned in subsection (1), to the benefit or obligation referred to in paragraph (1)(a) or (b).

 (3) Any attribution made under subsection (2) must reflect appropriate and commercially accepted valuation principles that properly take into account:

 (a) the nature of the rights and obligations under the *financial arrangement; and

 (b) the risks associated with each *financial benefit, right and obligation under the arrangement; and

 (c) the time value of money.

Note: Generally, no financial benefit you have received, or are to receive or might receive, under a financial arrangement is reasonably attributable to an amount you provide that is in the nature of interest.

23080  Consistency in working out gains or losses (integrity measure)

Object of section

 (1) The object of this section is to stop you obtaining an inappropriate tax benefit from not working out your gains and losses in a consistent manner.

Consistent treatment for particular financial arrangement

 (2) If:

 (a) this Division provides that a particular method applies to gains or losses you have from a *financial arrangement; and

 (b) that method allows you to choose the particular manner in which you apply that method;

you must use that manner consistently for the arrangement for all income years.

Consistent treatment for financial arrangements of essentially the same nature

 (3) If:

 (a) this Division provides that a particular method applies to gains or losses you have from 2 or more *financial arrangements; and

 (b) that method allows you to choose the particular manner in which you apply that method;

you must use that same manner consistently for all of those financial arrangements that are essentially of the same nature.

 (4) Subsection (3) does not require you to use that same manner consistently for:

 (a) a *financial arrangement that you start to have on or after the time a *Commonwealth law that amends the method is made; and

 (b) a financial arrangement that you start to have before that time;

if:

 (c) the Commonwealth law allows you to choose to apply the method in a particular manner (being a manner in which you are not, apart from the Commonwealth law, allowed to apply the method); and

 (d) the inconsistency is entirely due to you choosing to apply the method in that manner to the financial arrangement mentioned in paragraph (a).

23085  Rights and obligations include contingent rights and obligations

  To avoid doubt:

 (a) a right is treated as a right for the purposes of this Division even if it is subject to a contingency; and

 (b) an obligation is treated as an obligation for the purposes of this Division even if it is subject to a contingency.

Subdivision 230BThe accruals/realisation methods

Table of sections

 Guide to Subdivision 230B

23090 What this Subdivision is about

Objects of Subdivision

23095 Objects of this Subdivision

When accruals method or realisation method applies

230100 When accruals method or realisation method applies

230105 Sufficiently certain overall gain or loss

230110 Sufficiently certain gain or loss from particular event

230115 Sufficiently certain financial benefits

230120 Financial arrangements with notional principal

The accruals method

230125 Overview of the accruals method

230130 Applying accruals method to work out period over which gain or loss is to be spread

230135 How gain or loss is spread

230140 Method of spreading gain or loss—effective interest method

230145 Application of effective interest method where differing income and accounting years

230150 Election for portfolio treatment of fees

230155 Election for portfolio treatment of fees where differing income and accounting years

230160 Portfolio treatment of fees

230165 Portfolio treatment of premiums and discounts for acquiring portfolio

230170 Allocating gain or loss to income years

230172 Applying accruals method to loss resulting from impairment

230175 Running balancing adjustments

Realisation method

230180 Realisation method

Reassessment and reestimation

230185 Reassessment

230190 Reestimation

230192 Reestimation—impairments and reversals

230195 Balancing adjustment if rate of return maintained on reestimation

230200 Reestimation if balancing adjustment on partial disposal

Guide to Subdivision 230B

23090  What this Subdivision is about

This Subdivision applies the accruals method to determine the amount and timing of gains and losses from a financial arrangement if they are sufficiently certain for such accrual to be done.

This Subdivision applies the realisation method to determine the amount and timing of gains and losses if they are not sufficiently certain to be dealt with under the accruals method.

If the accruals method is applied to a gain or loss on the basis of an estimate of a financial benefit and the benefit when received or provided is more or less than the estimate, a balancing adjustment is made to correct for the underestimate or overestimate.

If the accruals method is being applied to gains and losses from the arrangement and there is a material change to the arrangement, or the circumstances in which it operates, a reassessment is made of whether the accruals method or the realisation method should apply to gains and losses from the arrangement.

A change in circumstances may also cause a reestimation of gains and losses that the accruals method is being applied to.

Objects of Subdivision

23095  Objects of this Subdivision

  The objects of this Subdivision are:

 (a) to properly recognise gains and losses from *financial arrangements by allocating them to appropriate periods of time; and

 (b) to reduce compliance costs by reflecting commercial accounting concepts where appropriate; and

 (c) to minimise tax deferral.

When accruals method or realisation method applies

230100  When accruals method or realisation method applies

When accruals method applies and when realisation method applies

 (1) This section tells you when to apply the accruals method and when to apply the realisation method if this Subdivision applies to gains and losses from a *financial arrangement.

Accruals method—sufficiently certain overall gain or loss at start time

 (2) The accruals method provided for in this Subdivision applies to a gain or loss you have from a *financial arrangement if:

 (a) the gain or loss is an overall gain or loss from the arrangement; and

 (b) the gain or loss is sufficiently certain at the time when you start to have the arrangement; and

 (c) you choose to apply the accruals method to the gain or loss, or subsection (4) applies to the gain or loss.

Note: Subsection 230105(1) tells you when you have a sufficiently certain overall gain or loss.

Accruals method—sufficiently certain particular gain or loss

 (3) 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:

 (i) is sufficiently certain before or at the time when you start to have the arrangement and before you are to receive or provide the benefit; or

 (ii) becomes sufficiently certain after the time when you start to have the arrangement and before you are to receive or provide the benefit; and

 (c) the benefit has not already been taken into account in applying:

 (i) the accruals method provided for in this Subdivision; or

 (ii) the realisation method provided for in this Subdivision;

  to another gain or loss from the arrangement.

This subsection has effect subject to subsection (4).

Note: Subsection 230110(1) tells you when you have a sufficiently certain gain or loss at a particular time.

Accruals method—particular gain or loss becomes sufficiently certain

 (3A) 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.

This subsection has effect subject to subsection (4).

Note 1: Subsection 230110(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 230130(3) to (5).

Accruals method—particular gain or loss from qualifying security

 (4) Subsection (3) or (3A) does not apply to a gain or loss that you have from a *financial arrangement if:

 (a) you are:

 (i) an individual; or

 (ii) an entity (other than an individual) that satisfies subsection 230455(2), (3) or (4) for the income year in which you start to have the arrangement; and

 (b) the arrangement is a *qualifying security; and

 (c) you have not made an election under subsection 230455(7).

Realisation method—gain or loss not sufficiently certain

 (5) The realisation method provided for in this Subdivision applies to a gain or loss that you have from a *financial arrangement if the accruals method provided for in this Subdivision does not apply to that gain or loss.

Note: Section 230180 tells you how to apply the realisation method to the gain or loss.

230105  Sufficiently certain overall gain or loss

 (1) You have a sufficiently certain overall gain or loss from a *financial arrangement at the time when you start to have the arrangement only if it is sufficiently certain at that time that you will make an overall gain or loss from the arrangement of:

 (a) a particular amount; or

 (b) at least a particular amount.

The amount of the gain or loss is the amount referred to in paragraph (a) or (b).

Note: Sections 23070 and 23075 (about apportionment of financial benefits) only apply in working out whether you make, or will make, a gain or loss (and the amount of the gain or loss) when particular events happen. They do not apply in working out, at the time when you start to have a financial arrangement, whether it is sufficiently certain that you will make an overall gain or loss from the arrangement.

 (2) In applying subsection (1), you must:

 (a) assume that you will continue to have the *financial arrangement for the rest of its life; and

 (b) have regard to the extent of the risk that a *financial benefit that you are not sufficiently certain to provide or receive under the arrangement may reduce the amount of the gain or loss.

230110  Sufficiently certain gain or loss from particular event

 (1) You have a sufficiently certain gain or loss from a *financial arrangement at a particular time if it is sufficiently certain at that time that you make, or will make, a gain or loss from the arrangement of:

 (a) a particular amount; or

 (b) at least a particular amount;

when one of the following occurs:

 (c) you receive a particular *financial benefit under the arrangement or one of your rights under the arrangement ceases;

 (d) you provide a particular financial benefit under the arrangement or one of your obligations under the arrangement ceases.

The amount of the gain or loss is the amount referred to in paragraph (a) or (b).

 (2) In applying subsection (1) to work out whether you have a sufficiently certain gain or loss at a particular time:

 (a) have regard to the extent of the risk that a *financial benefit that you are not sufficiently certain to provide or receive under the arrangement may reduce the amount of the gain or loss, and the extent to which such a financial benefit is, for the purposes of subsection 23070(2) or 23075(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); and

 (b) disregard any financial benefit that has already been taken into account, under subsection 230105(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

 (c) disregard any financial benefit (or that part of any financial benefit) that has already been taken into account in working out the amount of a sufficiently certain gain or loss from the *financial arrangement under subsection (1).

Note: Sections 23070 and 23075 allow you to apportion financial benefits provided and financial benefits received in working out the amount of a gain or loss.

230115  Sufficiently certain financial benefits

 (1) In deciding for the purposes of this Subdivision whether it is sufficiently certain at a particular time that you make, or will make, a gain or loss from a *financial arrangement:

 (a) have regard only to:

 (i) *financial benefits that you are sufficiently certain to receive; and

 (ii) financial benefits that you are sufficiently certain to provide; and

 (b) have regard to those financial benefits only to the extent that the amount or value of the benefits is, at that time, fixed or determinable with reasonable accuracy.

Note: The particular time may be the time at which you start to have the arrangement.

 (2) A *financial benefit that you are to receive or provide is to be treated as one that you are sufficiently certain to receive or to provide only if:

 (a) it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the *financial arrangement for the rest of its life); and

 (b) at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy.

 (3) In applying subsection (2) to the *financial benefit:

 (a) you must have regard to:

 (i) the terms and conditions of the *financial arrangement; and

 (ii) accepted pricing and valuation techniques; and

 (iii) the economic or commercial substance and effect of the arrangement; and

 (iv) the contingencies that attach to the other financial benefits that are to be provided or received under the arrangement; and

 (b) you must treat the financial benefit as if it were not contingent if it is appropriate to do so having regard to the contingencies that attach to the other financial benefits that are to be received or provided under the arrangement.

 (4) In applying paragraph (2)(b) at a particular time (the reference time) to a *financial benefit that depends on a variable that is based on:

 (a) an interest rate; or

 (b) a rate that solely or primarily reflects the time value of money; or

 (c) a rate that solely or primarily reflects a consumer price index; or

 (d) a rate that solely or primarily reflects an index prescribed by the regulations for the purposes of this paragraph;

you must assume that that variable will continue to have the value it has at the reference time.

 (5) Despite subsection (4), in applying paragraph (2)(b) at a particular time to a *financial benefit that depends on a rate of change to a variable that is based on:

 (a) a rate that solely or primarily reflects a consumer price index; or

 (b) a rate that solely or primarily reflects an index prescribed by the regulations for the purposes of this paragraph;

you must assume that the rate of change to that variable will continue to be the rate of change that is current at that time.

 (6) If subsection (4) or (5) applies to a gain or loss and you are determining the amount of the gain or loss at a particular time, you must also assume that that variable will continue to have the value that it has at that time.

 (7) Subsections (4) and (5) do not limit paragraph (2)(b).

 (8) If all of the *financial benefits provided and received under the *financial arrangement are denominated in a particular *foreign currency, those financial benefits are not to be translated into:

 (a) your *applicable functional currency; or

 (b) if you do not have an applicable functional currency—Australian currency;

for the purposes of applying subsection (2) to the arrangement.

 (9) To avoid doubt:

 (a) a *financial benefit that you have already provided at a particular time is taken to be one that it is, at that time, a financial benefit that you are sufficiently certain to provide; and

 (b) a financial benefit that you have already received at a particular time is taken to be one that it is, at that time, a financial benefit that you are sufficiently certain to receive.

230120  Financial arrangements with notional principal

 (1) This section applies to a *financial arrangement that you have if, in substance or effect, and having regard to the pricing, terms and conditions of the arrangement:

 (a) the arrangement consists of these things:

 (i) a leg, the *financial benefits to be provided or received in respect of which are calculated by reference to, or are reasonably related to, a notional principal;

 (ii) another leg, the financial benefits to be provided or received in respect of which also are calculated by reference to, or are reasonably related to, a notional principal;

 (iii) if the arrangement includes one or more other things—those things; and

 (b) when you start to have the arrangement, the value of the notional principal in relation to one leg is equal to the value of the notional principal in relation to the other leg; and

 (c) all or part of the notional principal in relation to each leg is provided or received at a time, regardless of whether that time is different in relation to each leg.

Example: A swap contract.

 (2) To avoid doubt, the *financial benefits mentioned in subparagraphs (1)(a)(i) and (ii), and the notional principal in relation to each leg, need not actually be provided or received.

 (3) In applying this Subdivision to the *financial arrangement:

 (a) work out the *financial benefits from the arrangement as follows:

 (i) work out the financial benefits from each thing of which the arrangement consists separately from the financial benefits from each other thing of which the arrangement consists;

 (ii) ensure that results under subparagraph (i) are consistent with the timing and amount of financial benefits to be actually provided or received under the arrangement; and

 (b) work out your gains and losses from the arrangement as follows:

 (i) work out the gains and losses from each thing of which the arrangement consists separately from the gains and losses from each other thing of which the arrangement consists;

 (ii) treat the gains and losses mentioned in subparagraph (i) for all of those things as your gains and losses from the arrangement; and

 (c) in working out a gain or loss from a thing for the purposes of subparagraph (b)(i), and, if the accruals method applies to the gain or loss, how it is to be spread and allocated:

 (i) if the thing is a leg—take into account the amount of the notional principal at a time and in a manner that properly reflects the way in which the financial benefits in respect of that leg are calculated; and

 (ii) if the thing is not a leg—take into account an amount relevant to the thing at a time and in a manner that properly reflects the way in which the financial benefits in respect of that thing are calculated.

The accruals method

230125  Overview of the accruals method

  If the accruals method applies to a gain or loss you have from a *financial arrangement:

 (a) you use section 230130 to work out the period over which the gain or loss is to be spread; and

 (b) you use section 230135 to work out how to allocate the gain or loss to particular intervals within the period over which the gain or loss is to be spread; and

 (c) if an interval to which part of the gain or loss is allocated straddles 2 income years, you use section 230170 to work out how to allocate that part of the gain or loss allocated between those 2 income years.

230130  Applying accruals method to work out period over which gain or loss is to be spread

Period over which overall gain or loss is to be spread

 (1) If you have a sufficiently certain overall gain or loss from a *financial arrangement under subsection 230105(1), the period over which the gain or loss is to be spread is the period that:

 (a) starts when you start to have the arrangement; and

 (b) ends when you will cease to have the arrangement.

In applying paragraph (b), you must assume that you will continue to have the arrangement for the rest of its life.

Period over which particular gain or loss is to be spread

 (3) If you have a sufficiently certain gain or loss from a *financial arrangement under subsection 230110(1), the period over which the gain or loss is to be spread is the period to which the gain or loss relates. Have regard to the pricing, terms and conditions of the arrangement in working out the period to which the gain or loss relates. This subsection has effect subject to subsections (4) and (5).

 (4) The start of the period over which a gain or loss to which subsection (3) applies is to be spread must:

 (a) not start earlier than the time when you start to have the *financial arrangement; and

 (b) other than in the case of a gain or loss to which subsection 230100(3A) or subsection (4A) of this section applies—not start earlier than the start of the income year during which it becomes sufficiently certain that you will make the gain or loss.

 (4A) This subsection applies to a gain or loss to which subsection (3) applies, if:

 (a) there is 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; and

 (b) because of the impairment, you make a reassessment under section 230185 in relation to the arrangement; and

 (c) you determine on the reassessment that the gain or loss is not sufficiently certain (whether or not the gain or loss was sufficiently certain before the reassessment); and

 (d) there is a reversal of the impairment loss (within the meaning of the accounting principles) that resulted from the impairment; and

 (e) because of the reversal, you make a reassessment under section 230185 in relation to the arrangement; and

 (f) you determine on the reassessment that the gain or loss has become sufficiently certain.

Note: For the income years to which the gain or loss is allocated, see section 230170.

 (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.

230135  How gain or loss is spread

How to spread gain or loss

 (1) This section tells you how to spread a gain or loss to which the accruals method applies.

Compounding accruals or approximation

 (2) The gain or loss is to be spread using:

 (a) compounding accruals; or

 (b) a method whose results approximate those obtained using the method referred to in paragraph (a) (having regard to the length of the period over which the gain or loss is to be spread).

 (3) The following subsections of this section clarify the way in which the gain or loss is to be spread in accordance with paragraph (2)(a).

Intervals to which parts of gain or loss allocated

 (4) The intervals to which parts of the gain or loss are allocated must:

 (a) not exceed 12 months; and

 (b) all be of the same length.

Paragraph (b) does not apply to the first and last intervals. These may be shorter than the other intervals.

Fixing of amount and rate for interval

 (5) For each interval:

 (a) determine a rate of return; and

 (b) determine an amount to which you apply the rate of return.

 (6) For the purposes of paragraph (5)(b), in determining the amount to which you apply the rate of return for an interval, have regard to:

 (a) the amount or value; and

 (b) the timing;

of *financial benefits that are to be taken into account in working out the amount of the gain or loss, and were provided or received by you during the interval.

 (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.

Assumption of continuing to hold arrangement for rest of its life

 (7) The gain or loss is to be spread assuming that you will continue to have the *financial arrangement for the rest of its life.

Regard to be had to financial benefits provided or received in interval

 (8) In allocating the gain or loss to intervals, have regard to the *financial benefits to be provided or received in each of those intervals.

230140  Method of spreading gain or loss—effective interest method

 (1) This section clarifies that the method mentioned in subsection (2) of spreading gains and losses is a method covered by paragraph 230135(2)(b) (methods approximating compounding accruals).

 (2) The method is the effective interest method mentioned in *accounting standard AASB 139 (or another accounting standard prescribed by the regulations for the purposes of this subsection).

 (3) However, this section applies to a particular *financial arrangement you have only if:

 (a) in a case where there is a discount or premium under the arrangement—when you start to have the arrangement, the annually compounded rate of return applicable to the discount or premium does not exceed 1%; and

 (b) when you start to have the arrangement, neither the maximum life of the arrangement (as determined under the terms and conditions of the arrangement) nor the expected life of the arrangement exceeds:

 (i) unless subparagraph (ii) applies—30 years; or

 (ii) if the regulations prescribe a different period for the purposes of this subparagraph—that period; and

 (c) each *financial benefit that you have an obligation to provide or a right to receive under the arrangement, and that gives rise to a gain or loss from the arrangement (other than a gain or loss that is attributable to any discount or premium):

 (i) relates to a period not exceeding 12 months; and

 (ii) is to be provided or received in the period to which it relates; and

Note: Different financial benefits may relate to different periods.

 (d) you prepare a financial report for the year in which you start to have the arrangement; and

 (e) that financial report is:

 (i) prepared in accordance with paragraph 230210(2)(a); and

 (ii) audited in accordance with paragraph 230210(2)(b); and

 (f) all gains and losses from the arrangement to which the accrual method applies are spread in a way that is consistent with that financial report.

 (4) For the purposes of paragraph (3)(a), assume that you will continue to have the arrangement for the rest of its expected life.

230145  Application of effective interest method where differing income and accounting years

 (1) This section applies if:

 (a) you prepare a financial report for a year (the first year); and

 (b) you prepare a financial report for the subsequent year (the second year); and

 (c) your income year starts in the first year and ends in the second year; and

 (d) both the financial report for the first year and the financial report for the second year are:

 (i) prepared in accordance with paragraph 230210(2)(a); and

 (ii) audited in accordance with paragraph 230210(2)(b); and

 (e) the auditor’s reports are unqualified for both the financial report for the first year and the financial report for the second year.

 (2) For the purposes of paragraph 230140(3)(d), treat yourself as having prepared a financial report for the income year in which you start to have the arrangement.

 (3) Work out the gain or loss you make from the arrangement for the income year as follows:

 (a) firstly, work out the gain or loss you make from the arrangement for the first year in accordance with paragraph 230140(3)(f) (treating the first year as an income year);

 (b) next, work out how much of the gain or loss mentioned in paragraph (a) is attributable to the income year in accordance with subsection (4);

 (c) next, work out the gain or loss you make from the arrangement for the second year in accordance with paragraph 230140(3)(f) (treating the second year as an income year);

 (d) next, work out how much of the gain or loss mentioned in paragraph (c) is attributable to the income year in accordance with subsection (4);

 (e) next:

 (i) if the amounts worked out under paragraphs (b) and (d) are both gains—add them together to work out the gain from the arrangement for the income year; or

 (ii) if the amounts worked out under paragraphs (b) and (d) are both losses—add them together to work out the loss from the arrangement for the income year; or

 (iii) if one of the amounts worked out under paragraphs (b) and (d) is a loss and the other is a gain—subtract the loss from the gain. If the result is positive, this is the gain from the arrangement for the income year. If the result is negative, this is the loss from the arrangement for the income year.

 (4) For the purposes of paragraphs (3)(b) and (d), work out how much of the gain or loss is attributable to the income year by:

 (a) using a methodology that is reasonable; and

 (b) using the same methodology for the first and second years.

230150  Election for portfolio treatment of fees

 (1) You may make an election for an income year under this section if:

 (a) you prepare a financial report for the income year in accordance with:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting made under a *foreign law that apply to the preparation of the financial report under a foreign law; and

 (b) the financial report is audited in accordance with:

 (i) the *auditing principles; or

 (ii) if the auditing principles do not apply to the auditing of the financial report—comparable standards for auditing made under a foreign law.

 (2) An election under this section is irrevocable.

230155  Election for portfolio treatment of fees where differing income and accounting years

 (1) This section applies if:

 (a) you prepare a financial report for a year (the first year); and

 (b) you prepare a financial report for the subsequent year (the second year); and

 (c) your income year starts in the first year and ends in the second year; and

 (d) both the financial report for the first year and the financial report for the second year are:

 (i) prepared in accordance with paragraph 230150(1)(a); and

 (ii) audited in accordance with paragraph 230150(1)(b); and

 (e) the auditor’s reports are unqualified for both the financial report for the first year and the financial report for the second year.

 (2) Treat yourself as eligible to make an election for the income year under subsection 230150(1).

 (3) Work out the gain or loss you make from the arrangement for the income year as follows:

 (a) firstly, work out the gain or loss you make from the arrangement for the first year in accordance with subsections 230160(3) and (4) or 230165(3) and (4) (treating the first year as an income year);

 (b) next, work out how much of the gain or loss mentioned in paragraph (a) is attributable to the income year in accordance with subsection (4);

 (c) next, work out the gain or loss you make from the arrangement for the second year in accordance with subsections 230160(3) and (4) or 230165(3) and (4) (treating the second year as an income year);

 (d) next, work out how much of the gain or loss mentioned in paragraph (c) is attributable to the income year in accordance with subsection (4);

 (e) next:

 (i) if the amounts worked out under paragraphs (b) and (d) are both gains—add them together to work out the gain from the arrangement for the income year; or

 (ii) if the amounts worked out under paragraphs (b) and (d) are both losses—add them together to work out the loss from the arrangement for the income year; or

 (iii) if one of the amounts worked out under paragraphs (b) and (d) is a loss and the other is a gain—subtract the loss from the gain. If the result is positive, this is the gain from the arrangement for the income year. If the result is negative, this is the loss from the arrangement for the income year.

 (4) For the purposes of paragraphs (3)(b) and (d), work out how much of the gain or loss is attributable to the income year by:

 (a) using a methodology that is reasonable; and

 (b) using the same methodology for the first and second years.

230160  Portfolio treatment of fees

 (1) This section applies in relation to a *financial arrangement if:

 (a) you have made an election under section 230150 in an income year; and

 (b) you start to have the financial arrangement in that income year or a later income year; and

 (c) the financial arrangement is part of a portfolio of similar financial arrangements; and

 (d) a gain or loss to which subsection 230130(3) applies arises in part from fees in respect of the *financial arrangement; and

 (e) the fees play an integral role in determining the amount of the gain or loss; and

 (f) the net amount of the fees is not expected to be significant relative to an overall gain or loss from the arrangement.

 (2) For the purposes of this Division, split the gain or loss mentioned in paragraph (1)(d) as follows:

 (a) to the extent that it arises from the fees, treat it as a gain or loss from the *financial arrangement (the fees gain or loss) to which subsection 230130(3) applies;

 (b) to the extent that it does not arise from the fees, treat it as a separate gain or loss from the financial arrangement to which subsection 230130(3) applies.

Note: The separate gain or loss mentioned in paragraph (b) may itself be split under subsection 230165(2) (premium/discount gain or loss).

Determination of period for fees gain or loss

 (3) The period over which the fees gain or loss is to be spread is the period that you determine to be the expected life of the portfolio, if:

 (a) the basis on which you determine the period accords with the spreading of the fees gain or loss for the purposes of the profit or loss statement of the financial report mentioned in paragraph 230150(1)(a); and

 (b) the basis on which you determine the period is set and recorded before any fees in respect of the *financial arrangement fall due; and

 (c) the period can be justified objectively; and

 (d) the period is reasonable in the circumstances.

Spreading the fees gain or loss

 (4) The method by which the fees gain or loss is to be spread is the method that you determine, if:

 (a) the basis on which you determine the method accords with the spreading of the fees gain or loss for the purposes of the profit or loss statement of the financial report mentioned in paragraph 230150(1)(a); and

 (b) the method is determined before any fees in respect of the *financial arrangement fall due; and

 (c) the method can be justified objectively; and

 (d) the method is reasonable in the circumstances.

 (5) To avoid doubt, subsections (3) and (4) apply despite sections 230130 and 230135.

230165  Portfolio treatment of premiums and discounts for acquiring portfolio

 (1) This section applies in relation to a *financial arrangement if:

 (a) you have made an election under section 230150 in an income year; and

 (b) you start to have the financial arrangement in that income year or a later income year; and

 (c) the financial arrangement is part of a portfolio of similar financial arrangements; and

 (d) a gain or loss to which subsection 230130(3) applies arises in part from a premium or discount in starting to have the portfolio; and

 (e) the gain or loss is not expected to be significant relative to the amount of the gain or loss on the portfolio.

 (2) For the purposes of this Division, split the gain or loss mentioned in paragraph (1)(d) as follows:

 (a) to the extent that it arises from the premium or discount, treat it as a gain or loss from the *financial arrangement (the premium/discount gain or loss) to which subsection 230130(3) applies;

 (b) to the extent that it does not arise from the premium or discount, treat it as a separate gain or loss from the financial arrangement to which subsection 230130(3) applies.

Note: The separate gain or loss mentioned in paragraph (b) may itself be split under subsection 230160(2) (portfolio fees gain or loss).

Determination of period for premium/discount gain or loss

 (3) The period over which the premium/discount gain or loss is to be spread is the period that you determine to be the expected life of the portfolio, if:

 (a) the basis on which you determine the period accords with the spreading of the premium/discount gain or loss for the purposes of the profit or loss statement of the financial report mentioned in paragraph 230150(1)(a); and

 (b) the basis on which you determine the period is set and recorded before you start to have the *financial arrangement; and

 (c) the period can be justified objectively; and

 (d) the period is reasonable in the circumstances.

Spreading the premium/discount gain or loss

 (4) The method by which the premium/discount gain or loss is to be spread is the method that you determine, if:

 (a) the basis on which you determine the method accords with the spreading of the premium/discount gain or loss for the purposes of the profit or loss statement of the financial report mentioned in paragraph 230150(1)(a); and

 (b) the method is determined before you start to have the *financial arrangement; and

 (c) the method can be justified objectively; and

 (d) the method is reasonable in the circumstances.

 (5) To avoid doubt, subsections (3) and (4) apply despite sections 230130 and 230135.

230170  Allocating gain or loss to income years

 (1) You are taken, for the purposes of section 23015, to make, for an income year, a gain or loss equal to a part of a gain or loss if:

 (a) that part of the gain or loss is allocated to an interval under section 230135; and

 (b) that interval falls wholly within that income year.

 (2) If:

 (a) a part of a gain or loss is allocated to an interval under section 230135; and

 (b) that interval straddles 2 income years;

you are taken, for purposes of section 23015, to make a gain or loss equal to so much of that part of the gain or loss as is allocated between those income years on a reasonable basis.

 (2A) Subsections (1) and (2) do not apply to a part of a gain or loss if:

 (a) subsection 230100(3A) or 230130(4A) applies to the gain or loss; and

 (b) that part of the gain or loss is allocated to an interval under section 230135; and

 (c) that interval ends before or during the income year during which the gain or loss becomes sufficiently certain (as mentioned in paragraph 230100(3A)(b) or 230130(4A)(f), whichever is applicable).

Instead, you are taken, for the purposes of section 23015, to make, for that income year, a gain or loss equal to that part of that gain or loss.

 (3) If:

 (a) a *head company of a *consolidated group or *MEC group has a *financial arrangement; and

 (b) a subsidiary member of the group ceases to be a member of the group at a particular time (the leaving time); and

 (c) immediately after the leaving time, the head company no longer has the arrangement because the subsidiary member ceased to be a member of the group;

an income year of the group is taken, for the purposes of applying this section to the group and the arrangement, to end at the leaving time.

230172  Applying accruals method to loss resulting from impairment

 (1) This section applies if:

 (a) there is an impairment (within the meaning of the *accounting principles) of:

 (i) a *financial arrangement; or

 (ii) a financial asset or financial liability that forms part of a financial arrangement; and

 (b) you make a loss from the financial arrangement as a result of the impairment; and

 (c) the accruals method applies to the loss.

 (2) You cannot deduct a loss you make for an income year under section 23015, to the extent that the loss results from the impairment (including as affected by any later reversal of the impairment loss (within the meaning of the *accounting principles) that resulted from the impairment).

 (3) Disregard subsection (2) for the purposes of paragraph (c) of step 1 of the method statement in subsection 230445(1).

230175  Running balancing adjustments

Overestimate of financial benefit to be received

 (1) You are taken for the purposes of this Division to make a loss from a *financial arrangement if:

 (a) a provision of this Subdivision has applied on the basis that you were sufficiently certain, at a particular time, to receive a *financial benefit of, or of at least, a particular amount under the arrangement; and

 (b) when you receive the benefit (or the time comes for you to receive the benefit), the amount you receive (or are to receive) is nil or is less than the amount estimated.

The amount of the loss is equal to the difference between the amount estimated and the amount you receive (or are to receive). You are taken to have made the loss for the income year in which you receive the benefit (or in which the time comes for you to receive the benefit).

 (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).

Underestimate of financial benefit to be received

 (2) You are taken for the purposes of this Division to make a gain from a *financial arrangement if:

 (a) a provision of this Subdivision has applied on the basis that you were sufficiently certain at a particular time to receive a *financial benefit of, or of at least, a particular amount under the arrangement; and

 (b) when you receive the benefit, or the time comes for you to receive the benefit, the amount you receive, or are to receive, is more than the amount estimated.

The amount of the gain is equal to the difference between the amount estimated and the amount you receive or are to receive. You are taken to have made that gain in the income year in which you receive the benefit or in which the time comes for you to receive the benefit.

 (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.

Overestimate of financial benefit to be provided

 (3) You are taken for the purposes of this Division to make a gain from a *financial arrangement if:

 (a) a provision of this Subdivision has applied on the basis that you were sufficiently certain at a particular time to provide a *financial benefit of, or of at least, a particular amount under the arrangement; and

 (b) when you provide the benefit, or the time comes for you to provide the benefit, the amount you provide, or are to provide, is nil or is less than the amount estimated.

The amount of the gain is equal to the difference between the amount estimated and the amount you provide or are to provide. You are taken to have made that gain in the income year in which you provide the benefit or in which the time comes for you to provide the benefit.

Underestimate of financial benefit to be provided

 (4) You are taken for the purposes of this Division to make a loss from a *financial arrangement if:

 (a) a provision of this Subdivision has applied on the basis that you were sufficiently certain at a particular time to provide a *financial benefit of, or of at least, a particular amount under the arrangement; and

 (b) when you provide the benefit, or the time comes for you to provide the benefit, the amount you are to provide is more than the estimated amount referred to in paragraph (a).

The amount of the loss is equal to the difference between the amount estimated and the amount you are to provide. You are taken to have made that loss in the income year in which you provide the benefit or in which the time comes for you to provide the benefit.

Realisation method

230180  Realisation method

 (1) If a gain or loss is to be taken into account using the realisation method, you are taken, for the purposes of section 23015, to make the gain or loss for the income year in which the gain or loss occurs.

Note: Sections 23070 and 23075 allow you to apportion financial benefits provided and financial benefits received in working out the amount of the gain or loss.

 (2) For the purposes of subsection (1), a gain or loss from a *financial arrangement is taken to occur at:

 (a) if the last of the *financial benefits, rights and obligations taken into account in determining the amount of the gain or loss is a financial benefit—the time the 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) if the last of the financial benefits, rights and obligations taken into account in determining the amount of the gain or loss is a right to receive a financial benefit or an obligation to provide a financial benefit—the time:

 (i) if the right or obligation ceases before the financial benefit is provided—the right or obligation ceases; or

 (ii) otherwise—the financial benefit is provided.

This subsection has effect subject to subsection (3).

 (3) For the purposes of subsection (1), you make a loss from a *financial arrangement from writing off, as a bad debt, a right to a *financial benefit (or a part of a financial benefit) if:

 (a) the financial benefit was taken into account in working out the amount of a gain from the arrangement and the gain has been included in your assessable income under this Division; or

 (b) the right is one in respect of money that you lent in the ordinary course of your *business of lending money; or

 (c) the right is one that you bought in the ordinary course of your business of lending money.

 (4) The loss referred to in subsection (3) occurs when you write off the right to the *financial benefit (or the part of the financial benefit) as a bad debt.

 (5) The amount of the loss referred to in subsection (3) is:

 (a) if paragraph (3)(a) applies—so much of the gain referred to in that paragraph as is reasonably attributable to the *financial benefit (or the part of the financial benefit); or

 (b) if paragraph (3)(b) applies—the amount of the financial benefit (or the part of the financial benefit); or

 (c) if paragraph (3)(c) applies—the amount of the financial benefit (or the part of the financial benefit) but only up to the value of the financial benefit you provided to acquire the right to the financial benefit (or the part of the financial benefit).

 (6) For the purposes of this Act, a deduction for the loss referred to in subsection (3) is to be treated as a deduction of a bad debt.

Note: Various provisions in this Act and the Income Tax Assessment Act 1936 restrict the availability of deductions for bad debts and make provision in relation to the recoupment of amounts in relation to bad debts that have been written off. These provisions are set out in subsection 2535(5).

Reassessment and reestimation

230185  Reassessment

 (1) You must make a fresh assessment of which gains and losses from a *financial arrangement the accruals method should apply to, and which gains and losses from that arrangement the realisation method should apply to, if:

 (a) the accruals method, or the realisation method, provided for in this Subdivision applies to gains and losses from the arrangement; and

 (b) there is a material change to:

 (i) the terms and conditions of the arrangement; or

 (ii) circumstances that affect the arrangement.

 (2) Without limiting subsection (1), the following changes are material changes to the terms and conditions of, or circumstances that affect, the *financial arrangement:

 (a) a change to the terms or conditions of the arrangement in a way that alters the essential nature of the arrangement (for example, by altering it from a *debt interest to an *equity interest or from an equity interest to a debt interest);

 (b) a change to the terms or conditions of the arrangement in a way that materially affects the contingencies on which significant obligations and rights under the arrangement are dependent (for example, by introducing such a contingency or removing such a contingency);

 (c) a change in circumstances that makes something that:

 (i) materially affects significant obligations and rights under the arrangement; and

 (ii) was previously dependent on a contingency;

  no longer dependent on a contingency (because, for example, only one of a number of previously possible contingencies is realised);

 (d) a change to:

 (i) the terms on which credit is to be provided to an entity that is not a party to the arrangement; or

 (ii) the credit rating of an entity that is not a party to the arrangement;

  if a significant obligation or right under the arrangement is dependent on that credit being provided or that rating being maintained;

 (e) if the arrangement is, or includes, a financial asset or financial liability and you prepare your financial reports in accordance with:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting made under a *foreign law that apply to the preparation of the financial report under a foreign law;

  a change to the terms or conditions of, or circumstances that affect, the arrangement that are sufficient for the financial asset or financial liability to be treated as impaired for the purposes of those principles or standards.

 (3) You do not need to make a reassessment under this section merely because of a change in the fair value of the *financial arrangement.

230190  Reestimation

When reestimation necessary

 (1) You reestimate a gain or loss from a *financial arrangement under subsection (5) if:

 (a) the accruals method applies to the gain or loss; and

 (b) circumstances arise that materially affect:

 (i) the amount or value; or

 (ii) the timing;

  of *financial benefits that were taken into account in working out the amount of the gain or loss; and

 (c) the circumstances do not give rise to a reestimation under section 230200.

 (2) You must reestimate 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.

 (3) Without limiting subsection (1), the following are circumstances of the kind referred to in paragraph (1)(b):

 (a) a material change in market conditions that are relevant to the amount or value of the *financial benefits to be received or provided under the *financial arrangement;

 (b) cash flows that were previously estimated becoming known and the difference between the cash flows that become known and the cash flows that were previously estimates is not insignificant;

 (c) a right to, or a part of a right to, a financial benefit under the arrangement is written off as a bad debt;

 (d) you have made a reassessment under section 230185 in relation to gains or losses under the arrangement and you have determined on the reassessment under that section that the accruals method should continue to apply to those gains or losses.

 (3A) You also reestimate 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 230135(2)(b) in accordance with section 230140 (effective interest method); and

 (b) you recalculate the effective interest rate in accordance with that method; and

 (c) the terms and conditions of the arrangement provide for reset dates to occur no more than 12 months apart; and

 (d) the maximum life of the arrangement (as determined under the terms and conditions of the arrangement) is more than 12 months.

 (3B) You must reestimate the gain or loss at the relevant reset date if subsection (3A) applies.

 (4) You do not reestimate the gain or loss from a *financial arrangement under subsection (5) merely because of a change in the credit rating, or the creditworthiness, of a party or parties to the arrangement.

Nature of reestimation

 (5) Making a reestimation in relation to a gain or loss under this subsection involves:

 (a) a fresh determination of the amount of the gain or loss; and

 (b) a reapplication of the accruals method to the redetermined gain or loss to make a fresh allocation of the part of the redetermined gain or loss that has not already been allocated to intervals ending before the reestimation is made to intervals ending after the reestimation is made.

Basis for reestimation

 (6) You may make the fresh allocation of the gain or loss under subsection (5) on these bases:

 (a) if you satisfy subsection (7) in relation to the *financial arrangement—by maintaining the rate of return being used and adjusting the amount to which you apply the rate of return to the present value of the estimated future cash flows discounted at the maintained rate of return;

 (b) in any case—by adjusting the rate of return and maintaining the amount to which the adjusted rate of return is to be applied.

The object to be achieved by both bases is to allow you to bring the remainder of the gain or loss based on the new estimates properly to account over the remainder of the period over which you spread the gain or loss.

Note: The amount referred to in paragraph (b) is the amount to which the previous rate of return was being applied immediately before the reestimation.

 (7) You satisfy this subsection in relation to a *financial arrangement if every reestimation you make under subsection (5) in relation to a gain or loss from the arrangement is made in accordance with:

 (a) financial reports of the kind referred to in paragraph 230395(2)(a) that are audited as referred to in paragraph 230395(2)(b) (regardless of whether Subdivision 230F (reliance on financial reports method) is to apply to a particular financial arrangement); and

 (b) *accounting standard AASB 139 (or another accounting standard prescribed by the regulations for the purposes of this paragraph).

230192  Reestimation—impairments and reversals

 (1) This section applies if the reestimation mentioned in section 230190 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 230190(6)(a), you must make the fresh allocation in accordance with paragraph 230190(6)(b).

Losses nondeductible

 (3) You cannot deduct a loss you make for an income year under section 23015, 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 (7).

 (4) Disregard subsection (3) for the purposes of paragraph (c) of step 1 of the method statement in subsection 230445(1).

Reversals

 (5) Subsections (7) and (8) apply to the part of the gain or loss that is to be reallocated in accordance with paragraph 230190(6)(b), if:

 (a) the fresh determination under paragraph 230190(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 230172(2) or subsection (3) of this section.

 (6) Paragraph (5)(b) does not apply to a loss to the extent that:

 (a) the loss reflects the amount of a loss you make under paragraph 230195(1)(b) or (c); and

 (b) the loss you make under paragraph 230195(1)(b) or (c) relates to you writing off, as a bad debt, a right to receive a *financial benefit (or a part of a financial benefit).

 (7) Treat the fresh determination as having resulted in that part being a loss, if the total of the losses mentioned in paragraph (5)(b) of this section exceeds the amount of the gain mentioned in paragraph (5)(a). The amount of the loss is equal to the amount of the excess.

 (8) Otherwise, reduce the amount of that gain by the total of those losses.

230195  Balancing adjustment if rate of return maintained on reestimation

 (1) If you make a fresh allocation of the gain or loss on the basis referred to in paragraph 230190(6)(a), you must make the following balancing adjustment:

 (a) if you reestimate a gain and the amount to which you apply the rate of return increases—you make a gain from the *financial arrangement, for the income year in which you make the reestimation, equal to the amount of the increase;

 (b) if you reestimate a gain and the amount to which you apply the rate of return decreases—you make a loss from the arrangement, for the income year in which you make the reestimation, equal to the amount of the decrease;

 (c) if you reestimate a loss and the amount to which you apply the rate of return increases—you make a loss from the arrangement, for the income year in which you make the reestimation, equal to the amount of the increase;

 (d) if you reestimate a loss and the amount to which you apply the rate of return decreases—you make a gain from the arrangement, for the income year in which you make the reestimation, equal to the amount of the decrease.

 (2) Subsection (3) applies if:

 (a) the reestimation is made wholly or partly on the basis that you have written off, as a bad debt, a right to receive a *financial benefit (or a part of a financial benefit); and

 (b) the right:

 (i) is not one in respect of money that you lent in the ordinary course of your *business of lending money; and

 (ii) is not one that you bought in the ordinary course of your business of lending money.

 (3) The balancing adjustment to be made under paragraph (1)(b), to the extent that it relates to the writing off of the bad debt, must not exceed so much of the gain in relation to the *financial arrangement as:

 (a) has been assessed under this Division; and

 (b) is reasonably attributable to the *financial benefit (or the part of the financial benefit).

 (4) Subsection (5) applies if:

 (a) the reestimation is made wholly or partly on the basis that you have written off, as a bad debt, a right to receive a *financial benefit; and

 (b) the right is one that you bought in the ordinary course of your *business of lending money.

 (5) The balancing adjustment to be made under paragraph (1)(b), to the extent that it relates to the writing off of the bad debt, must not exceed the value of the *financial benefit you provided to acquire the right to the financial benefit (or the part of the financial benefit).

 (6) For the purposes of this Act, a deduction for the balancing adjustment referred to in subsection (3) is to be treated as a deduction of a bad debt.

Note: Various provisions in this Act and the Income Tax Assessment Act 1936 restrict the availability of deductions for bad debts and make provision in relation to the recoupment of amounts in relation to bad debts that have been written off. These provisions are set out in subsection 2535(5).

230200  Reestimation if balancing adjustment on partial disposal

Reestimation if balancing adjustment on partial disposal

 (1) You also reestimate a gain or loss from a *financial arrangement under subsection (2) if:

 (a) the accruals method applies to the gain or loss; and

 (b) a balancing adjustment is made in relation to the arrangement under Subdivision 230G because you transfer to another entity:

 (i) a proportionate share of all of your rights and/or obligations under the arrangement; or

 (ii) a right or obligation that you have under the arrangement to a specifically identified *financial benefit; or

 (iii) a proportionate share of a right or obligation that you have under the arrangement to a specifically identified financial benefit.

You must reestimate the gain or loss as soon as reasonably practicable after the transfer occurs.

Nature of reestimation

 (2) Making a reestimation in relation to a gain or loss under this subsection involves:

 (a) a fresh determination of the amount of the gain or loss disregarding:

 (i) *financial benefits; and

 (ii) amounts of the gain or loss that have already been allocated to intervals ending before the reestimation is made;

  to the extent to which they are reasonably attributable to the proportionate share, or the right or obligation, referred to in paragraph (1)(b); and

 (b) a reapplication of the accruals method to the redetermined gain or loss to make a fresh allocation of the part of that gain or loss that has not already been allocated to intervals ending before the reestimation is made to intervals ending after the reestimation is made.

Basis for reestimation

 (3) You make the fresh allocation of the gain or loss under subsection (2) by maintaining the rate of return being used and adjusting the amount to which you apply the rate of return to the present value of the estimated future cash flows discounted at the maintained rate of return. The object to be achieved by the fresh allocation is to allow you to bring the redetermined gain or loss properly to account over the remainder of the period over which you spread the gain or loss.

Subdivision 230CFair value method

Table of sections

230205 Objects of this Subdivision

230210 Fair value election

230215 Fair value election where differing income and accounting years

230220 Financial arrangements to which fair value election applies

230225 Financial arrangements to which election does not apply

230230 Applying fair value method to gains and losses

230235 Splitting financial arrangements into 2 financial arrangements

230240 When election ceases to apply

230245 Balancing adjustment if election ceases to apply

230205  Objects of this Subdivision

  The objects of this Subdivision are:

 (a) to allow you to align the tax treatment of gains and losses from *financial arrangements with the accounting treatment that applies where assets and liabilities are classified or designated as at fair value through profit or loss; and

 (b) to facilitate efficient pricemaking; and

 (c) to achieve the above objects without allowing you to obtain an inappropriate tax benefit.

230210  Fair value election

Election

 (1) You may make a fair value election under this section if you are eligible under subsection (2) to make the election for the income year in which you make the election.

Eligibility to make fair value election for an income year

 (2) You are eligible to make a fair value election for an income year if:

 (a) you prepare a financial report for that income year in accordance with:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting made under a *foreign law that apply to the preparation of the financial report under a foreign law; and

 (b) the financial report is audited in accordance with:

 (i) the *auditing principles; or

 (ii) if the auditing principles do not apply to the auditing of the financial report—comparable standards for auditing made under a foreign law.

Note: Section 230500 allows regulations to be made specifying particular foreign accounting and auditing standards as ones that are to be treated as comparable with Australian accounting and auditing principles for the purposes of this Division.

Election irrevocable

 (3) A *fair value election is irrevocable.

Note: The election may cease to have effect, or cease to apply to a particular financial arrangement, under section 230240.

230215  Fair value election where differing income and accounting years

 (1) This section applies if:

 (a) you prepare a financial report for a year (the first year); and

 (b) you prepare a financial report for the subsequent year (the second year); and

 (c) your income year starts in the first year and ends in the second year; and

 (d) both the financial report for the first year and the financial report for the second year are:

 (i) prepared in accordance with paragraph 230210(2)(a); and

 (ii) audited in accordance with paragraph 230210(2)(b); and

 (e) the auditor’s reports are unqualified for both the financial report for the first year and the financial report for the second year.

 (2) Treat yourself as eligible to make an election for the income year under subsection 230210(2).

 (3) Work out the gain or loss you make from the *financial arrangement for the income year as follows:

 (a) firstly, work out the gain or loss you make from the arrangement for the first year in accordance with section 230230 (treating the first year as an income year);

 (b) next, work out how much of the gain or loss mentioned in paragraph (a) is attributable to the income year in accordance with subsection (4);

 (c) next, work out the gain or loss you make from the arrangement for the second year in accordance with section 230230 (treating the second year as an income year);

 (d) next, work out how much of the gain or loss mentioned in paragraph (c) is attributable to the income year in accordance with subsection (4);

 (e) next:

 (i) if the amounts worked out under paragraphs (b) and (d) are both gains—add them together to work out the gain from the arrangement for the income year; or

 (ii) if the amounts worked out under paragraphs (b) and (d) are both losses—add them together to work out the loss from the arrangement for the income year; or

 (iii) if one of the amounts worked out under paragraphs (b) and (d) is a loss and the other is a gain—subtract the loss from the gain. If the result is positive, this is the gain from the arrangement for the income year. If the result is negative, this is the loss from the arrangement for the income year.

 (4) For the purposes of paragraphs (3)(b) and (d), work out how much of the gain or loss is attributable to the income year by:

 (a) using a methodology that is reasonable; and

 (b) using the same methodology for the first and second years.

 (5) For the purposes of paragraph (4)(a), treat a methodology that attributes the gain or loss on a prorata basis as not being reasonable.

230220  Financial arrangements to which fair value election applies

 (1) A *fair value election applies in relation to *financial arrangements that:

 (a) are *Division 230 financial arrangements; and

 (b) are recognised in financial reports of the kind referred to in paragraph 230210(2)(a) that are audited, or required to be audited, as referred to in paragraph 230210(2)(b); and

 (c) are assets or liabilities that you are required (whether or not as a result of a choice you make) by:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting that apply to the preparation of the financial report under a *foreign law;

  to classify, designate or (in whole or in part) otherwise treat, in the financial reports, as at fair value through profit or loss; and

 (d) you start to have in the income year in which you make the election or in a later income year.

This subsection has effect subject to section 230225.

 (2) If, but for this subsection, paragraphs (1)(b) and (c) would not be satisfied in relation to a *financial arrangement because the arrangement is an intragroup transaction for the purposes of:

 (a) *accounting standard AASB 127 (or another accounting standard prescribed by the regulations for the purposes of this paragraph); or

 (b) if that standard does not apply to the preparation of the financial report—a comparable accounting standard that applies to the preparation of the financial report under a *foreign law;

paragraphs (1)(b) and (c) are taken to be satisfied in relation to the arrangement.

Note: Financial arrangements between members of a consolidated group or MEC group are not covered by this subsection because the single entity rule in subsection 7011(1) operates to treat them as not being financial arrangements for the purposes of this Division.

 (3) If:

 (a) the *financial arrangement would not be a financial arrangement if the following provisions were disregarded:

 (i) Division 9A of Part III of the Income Tax Assessment Act 1936 (which deals with offshore banking units);

 (ii) Part IIIB of that Act (which deals with Australian branches of foreign banks etc.); and

 (b) paragraphs (1)(b) and (c) would be satisfied in relation to the financial arrangement if the arrangement had been between 2 separate entities; and

 (c) the *fair value election is made by:

 (i) if section 121EB of the Income Tax Assessment Act 1936 applies—the OBU mentioned in that section (disregarding the operation of that section); or

 (ii) if section 160ZZW of that Act applies—the bank mentioned in that section (disregarding the operation of that section);

paragraphs (1)(b) and (c) are taken to be satisfied in relation to the arrangement.

230225  Financial arrangements to which election does not apply

 (1) A *fair value election does not apply to a *financial arrangement if:

 (a) the arrangement is an *equity interest; and

 (b) you are the issuer of the equity interest.

 (2) A *fair value election does not apply to a *financial arrangement if:

 (a) you are:

 (i) an individual; or

 (ii) an entity (other than an individual) that satisfies subsection 230455(2), (3) or (4) for the income year in which you start to have the arrangement; and

 (b) the arrangement is a *qualifying security; and

 (c) you have not made an election under subsection 230455(7).

 (3) A *fair value election does not apply to a *financial arrangement if:

 (a) the election is made by the *head company of a *consolidated group or *MEC group; and

 (b) the election specifies that the election is not to apply to financial arrangements in relation to *life insurance business carried on by a member of the consolidated group or MEC group; and

 (c) the arrangement is one that relates to the life insurance business carried on by a member of the consolidated group or MEC group.

 (4) A *fair value election does not apply to a *financial arrangement if the arrangement is associated with a business of a kind specified in regulations made for the purposes of this subsection.

230230  Applying fair value method to gains and losses

 (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 230210(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 230220(1)(c); or

 (b) in the case of an arrangement to which subsection 230220(2) applies—the principles or standards referred to in paragraph 230220(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 230220(1)(c) if the arrangement had not been an intragroup transaction for the purposes of the standard referred to in paragraph 230220(2)(b); or

 (c) in the case of an arrangement to which subsection 230220(3) applies—the principles or standards referred to in paragraph 230220(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 230220(1)(c) if the arrangement had been between 2 separate entities.

Note: Subsection 23040(7) provides that an election under Subdivision 230E (hedging financial arrangements method) or Subdivision 230F (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).

 (2) Subsection (3) applies if:

 (a) a *head company of a *consolidated group or *MEC group has a *financial arrangement; and

 (b) a *fair value election applies to the arrangement; and

 (c) a subsidiary member of the group ceases to be a member of the group at a particular time (the leaving time); and

 (d) immediately after the leaving time, the head company no longer has the arrangement because the subsidiary member ceased to be a member of the group.

 (3) The gain or loss the group makes from the arrangement for the income year in which the leaving time occurs is taken to be the gain or loss that the principles or standards referred to in paragraph 230210(2)(a) would require the group to recognise as at fair value through profit or loss for the income year from the asset or liability mentioned in paragraph 230220(1)(c) if:

 (a) the circumstances that existed in relation to the arrangement (including its value) immediately before the leaving time had continued to exist until the end of the income year; and

 (b) any circumstances that arise in relation to the financial arrangement after the leaving time were disregarded.

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 230220(1)(c), to otherwise treat as at fair value through profit and loss the assets or liabilities that the financial arrangement is; and

 (b) the principles or standards referred to in paragraph 230210(2)(a) do not require you to recognise the gain or loss as at fair value through profit or loss.

Note: See also subsection 23040(5).

230235  Splitting financial arrangements into 2 financial arrangements

 (1) If:

 (a) a *financial arrangement is constituted only in part by an asset or liability mentioned in paragraph 230220(1)(c); and

 (b) a *fair value election would apply to the arrangement if it were constituted solely by that asset or liability;

the provisions of this Division (other than this section) apply to the arrangement as if it were instead 2 separate financial arrangements.

 (2) The 2 separate *financial arrangements are:

 (a) one consisting of the part referred to in paragraph (1)(a); and

 (b) one consisting of the remaining part.

230240  When election ceases to apply

 (1) A *fair value election ceases to have effect from the start of an income year if you cease to be eligible under subsection 230210(2) to make the fair value election for that income year.

 (2) Subsection (1) does not prevent you from making a new *fair value election at a later time if you become, at that later time, eligible under subsection 230210(2) to make a fair value election for an income year.

Note: The new election will only apply to financial arrangements you start to have after the start of the income year in which the new election is made.

 (3) A *fair value election ceases to apply to a particular *financial arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of paragraph 230220(1)(b) or (c) during that income year.

 (4) If the election ceases to apply to a particular *financial arrangement under subsection (3), the election cannot subsequently reapply to that arrangement (even if the requirements of paragraphs 230220(1)(b) and (c) are satisfied once more in relation to the arrangement).

230245  Balancing adjustment if election ceases to apply

 (1) You must make balancing adjustments under subsection (2) if a *fair value election ceases to have effect under subsection 230240(1).

 (2) The balancing adjustments under this subsection are the balancing adjustments you would make under Subdivision 230G for each of the *financial arrangements to which the election applied if you disposed of the arrangement for its fair value when the election ceases to have effect.

 (3) You must make a balancing adjustment under subsection (4) if a *fair value election ceases to apply to a particular *financial arrangement under subsection 230240(3).

 (4) The balancing adjustment under this subsection is the balancing adjustment you would make under Subdivision 230G if you disposed of the *financial arrangement for its fair value when the election ceases to apply to the arrangement.

 (5) If a balancing adjustment is made under subsection (2) or (4) in relation to a *financial arrangement, you are taken, for the purposes of this Division, to have reacquired the arrangement at its fair value immediately after the election ceased to have effect or ceased to apply to the arrangement.

 (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 230220(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 230210(2)(a) do not require you to recognise the changes as at fair value through profit or loss.

Subdivision 230DForeign exchange retranslation method

Table of sections

230250 Objects of this Subdivision

230255 Foreign exchange retranslation election

230260 Foreign exchange retranslation election where differing income and accounting years

230265 Financial arrangements to which general election applies

230270 Financial arrangements to which general election does not apply

230275 Balancing adjustment for election in relation to qualifying forex accounts

230280 Applying foreign exchange retranslation method to gains and losses

230285 When election ceases to apply

230290 Balancing adjustment if election ceases to apply

230250  Objects of this Subdivision

  The objects of this Subdivision are:

 (a) to allow you to align the tax treatment of gains and losses from foreign exchange rate changes with the accounting treatment of profits and losses from such changes; and

 (b) to achieve this without allowing you to obtain an inappropriate tax benefit.

230255  Foreign exchange retranslation election

General election

 (1) You may make a foreign exchange retranslation election under this subsection if you are eligible under subsection (2) to make the election for the income year in which you make the election.

Eligibility to make election

 (2) You are eligible to make a *foreign exchange retranslation election for an income year if:

 (a) you prepare a financial report for that income year in accordance with:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting made under a *foreign law that apply to the preparation of the financial report under a foreign law; and

 (b) the financial report is audited in accordance with:

 (i) the *auditing principles; or

 (ii) if the auditing principles do not apply to the auditing of the financial report—comparable standards for auditing made under a foreign law.

Note: Section 230500 allows regulations to be made specifying particular foreign accounting and auditing standards as ones that are to be treated as comparable with Australian accounting and auditing principles for the purposes of this Division.

Election in relation to qualifying forex accounts

 (3) You may make a foreign exchange retranslation election under this subsection in relation to a *financial arrangement if:

 (a) the arrangement is a *qualifying forex account; and

 (b) you have not made a *foreign exchange retranslation election under subsection (1) that applies to the account.

You may make the election even if you start to have the arrangement before you make the election.

Financial arrangements to which election in relation to qualifying forex accounts applies

 (4) The election under subsection (3) applies to the *financial arrangement:

 (a) from the time when you start to have the arrangement if the election is made before you start to have the arrangement; or

 (b) from the start of the income year in which the election is made if you make the election after you start to have the arrangement.

Election irrevocable

 (5) A *foreign exchange retranslation election is irrevocable.

Note: The election may cease to apply under section 230285.

230260  Foreign exchange retranslation election where differing income and accounting years

 (1) This section applies if:

 (a) you prepare a financial report for a year (the first year); and

 (b) you prepare a financial report for the subsequent year (the second year); and

 (c) your income year starts in the first year and ends in the second year; and

 (d) both the financial report for the first year and the financial report for the second year are:

 (i) prepared in accordance with paragraph 230255(2)(a); and

 (ii) audited in accordance with paragraph 230255(2)(b); and

 (e) the auditor’s reports are unqualified for both the financial report for the first year and the financial report for the second year.

 (2) Treat yourself as eligible to make an election for the income year under subsection 230255(2).

 (3) Work out the gain or loss you make from the arrangement for the income year as follows:

 (a) firstly, work out the gain or loss you make from the arrangement for the first year in accordance with section 230280 (treating the first year as an income year);

 (b) next, work out how much of the gain or loss mentioned in paragraph (a) is attributable to the income year in accordance with subsection (4);

 (c) next, work out the gain or loss you make from the arrangement for the second year in accordance with section 230280 (treating the second year as an income year);

 (d) next, work out how much of the gain or loss mentioned in paragraph (c) is attributable to the income year in accordance with subsection (4);

 (e) next:

 (i) if the amounts worked out under paragraphs (b) and (d) are both gains—add them together to work out the gain from the arrangement for the income year; or

 (ii) if the amounts worked out under paragraphs (b) and (d) are both losses—add them together to work out the loss from the arrangement for the income year; or

 (iii) if one of the amounts worked out under paragraphs (b) and (d) is a loss and the other is a gain—subtract the loss from the gain. If the result is positive, this is the gain from the arrangement for the income year. If the result is negative, this is the loss from the arrangement for the income year.

 (4) For the purposes of paragraphs (3)(b) and (d), work out how much of the gain or loss is attributable to the income year by:

 (a) using a methodology that is reasonable; and

 (b) using the same methodology for the first and second years.

 (5) For the purposes of paragraph (4)(a), treat a methodology that attributes the gain or loss on a prorata basis as not being reasonable.

230265  Financial arrangements to which general election applies

 (1) A *foreign exchange retranslation election under subsection 230255(1) applies to each of your *financial arrangements:

 (a) that are *Division 230 financial arrangements; and

 (b) that are recognised in financial reports of a kind referred to in paragraph 230255(2)(a) that are audited, or required to be audited, as referred to in paragraph 230255(2)(b); and

 (c) in relation to which you are required by:

 (i) *accounting standard AASB 121 (or another accounting standard prescribed by the regulations for the purposes of this paragraph); or

 (ii) if that standard does not apply to the preparation of the financial report—a comparable accounting standard that applies to the preparation of the financial report under a *foreign law;

  to recognise, in the financial reports, amounts in profit or loss (if any) that are attributable to changes in currency exchange rates; and

 (d) that you start to have in the income year in which you make the election or in a later income year.

This subsection has effect subject to section 230270.

Note: The election also has consequences under Subdivision 775F for arrangements that are not Division 230 financial arrangements.

 (2) If, but for this subsection, paragraphs (1)(b) and (c) would not be satisfied in relation to a *financial arrangement because the arrangement is an intragroup transaction for the purposes of:

 (a) *accounting standard AASB 127 (or another accounting standard prescribed by the regulations for the purposes of this paragraph); or

 (b) if that standard does not apply to the preparation of the financial report—a comparable accounting standard that applies to the preparation of the financial report under a *foreign law;

paragraphs (1)(b) and (c) are taken to be satisfied in relation to the arrangement.

Note: Financial arrangements between members of a consolidated group or MEC group are not covered by this subsection because the single entity rule in subsection 7011(1) operates to treat them as not being financial arrangements for the purposes of this Division.

 (3) If:

 (a) the *financial arrangement would not be a financial arrangement if the following provisions were disregarded:

 (i) Division 9A of Part III of the Income Tax Assessment Act 1936 (which deals with offshore banking units);

 (ii) Part IIIB of that Act (which deals with Australian branches of foreign banks etc.); and

 (b) paragraphs (1)(b) and (c) would be satisfied in relation to the financial arrangement if the arrangement had been between 2 separate entities; and

 (c) the *foreign exchange retranslation election under subsection 230255(1) is made by:

 (i) if section 121EB of the Income Tax Assessment Act 1936 applies—the OBU mentioned in that section (disregarding the operation of that section); or

 (ii) if section 160ZZW of that Act applies—the bank mentioned in that section (disregarding the operation of that section);

paragraphs (1)(b) and (c) are taken to be satisfied in relation to the arrangement.

230270  Financial arrangements to which general election does not apply

 (1) For the purposes of this Division, a *foreign exchange retranslation election under subsection 230255(1) does not apply to a *financial arrangement if the arrangement is a financial arrangement under section 23050 (equity interests etc.).

 (2) For the purposes of this Division, a *foreign exchange retranslation election under subsection 230255(1) does not apply to a *financial arrangement if:

 (a) you are:

 (i) an individual; or

 (ii) an entity (other than an individual) that satisfies subsection 230455(2), (3) or (4) for the income year in which you start to have the arrangement; and

 (b) the arrangement is a *qualifying security; and

 (c) you have not made an election under subsection 230455(7).

 (3) A *foreign exchange retranslation election under subsection 230255(1) does not apply to a *financial arrangement if:

 (a) the election is made by the *head company of a *consolidated group or *MEC group; and

 (b) the election specifies that the election is not to apply to financial arrangements in relation to *life insurance business carried on by a member of the consolidated group or MEC group; and

 (c) the arrangement is one that relates to the life insurance business carried on by a member of the consolidated group or MEC group.

 (4) A *foreign exchange retranslation election does not apply to a *financial arrangement if the arrangement is associated with a business of a kind specified in regulations made for the purposes of this subsection.

230275  Balancing adjustment for election in relation to qualifying forex accounts

 (1) If you make a *foreign exchange retranslation election under subsection 230255(3) in relation to a *financial arrangement after you start to have the arrangement, you must make a balancing adjustment under subsection (2).

 (2) The balancing adjustment under this subsection is the balancing adjustment you would make under Subdivision 230G if you ceased to have the arrangement for its fair value at the time when the election started to apply to the arrangement (but only to the extent to which the balancing adjustment is reasonably attributable to a *currency exchange rate effect).

230280  Applying foreign exchange retranslation method to gains and losses

General election

 (1) You make a gain or loss from a *financial arrangement for an income year if:

 (a) a *foreign exchange retranslation election under subsection 230255(1) applies to the arrangement; and

 (b) any of the following subparagraphs apply:

 (i) the standard referred to in paragraph 230265(1)(c) requires you to recognise a particular amount in profit or loss in relation to that arrangement for that income year;

 (ii) if subsection 230265(2) applies to the arrangement—the standard referred to in paragraph 230265(1)(c) would have required you to recognise a particular amount in profit or loss in relation to that arrangement for that income year if the arrangement had not been an intragroup transaction for the purposes of the standard referred to in paragraph 230265(2)(b);

 (iii) if subsection 230265(3) applies to the arrangement—the standard referred to in paragraph 230265(1)(c) would have required you to recognise a particular amount in profit or loss for the year that is attributable to currency exchange rates mentioned in paragraph 230265(1)(c) if the arrangement had been between 2 separate entities.

The amount of the gain or loss is the amount the standard requires, or would have required, you to recognise.

Note: See subsection 23040(6).

Election in relation to qualifying forex accounts

 (2) You make a gain or loss from a *financial arrangement for an income year if:

 (a) a *foreign exchange retranslation election under subsection 230255(3) applies to the arrangement; and

 (b) the standard referred to in paragraph 230265(1)(c):

 (i) requires you to recognise a particular amount in profit or loss in relation to that arrangement for that income year; or

 (ii) would require you to recognise a particular amount in profit or loss in relation to that arrangement for that income year if that standard applied to the arrangement; or

 (iii) would require you to recognise a particular amount in profit or loss in relation to that arrangement for that income year if the arrangement had not been an intragroup transaction for the purposes of the standard referred to in paragraph 230265(2)(b); or

 (iv) would require you to recognise a particular amount in profit or loss in relation to that arrangement for that income year if the arrangement had not been an intragroup transaction for the purposes of the standard referred to in paragraph 230265(2)(b) and if that standard applied to the arrangement.

The amount of the gain or loss is the amount the standard requires, or would require, you to recognise.

Subsidiary leaving group

 (3) Subsection (4) applies if:

 (a) a *head company of a *consolidated group or *MEC group has a *financial arrangement; and

 (b) a *foreign exchange retranslation election under subsection 230255(1) or (3) applies to the arrangement; and

 (c) a subsidiary member of the group ceases to be a member of the group at a particular time (the leaving time); and

 (d) immediately after the leaving time, the head company no longer has the arrangement because the subsidiary member ceased to be a member of the group.

 (4) The gain or loss the group makes from the *financial arrangement for the income year in which the leaving time occurs is taken to be the gain or loss that the standard referred to in paragraph 230265(1)(c) would require the group to recognise in profit or loss in relation to the arrangement for that income year if:

 (a) the circumstances that existed in relation to the arrangement (including its value) immediately before the leaving time had continued to exist until the end of the income year; and

 (b) any circumstances that arise in relation to the arrangement after the leaving time were disregarded.

230285  When election ceases to apply

General election

 (1) A *foreign exchange retranslation election under subsection 230255(1) ceases to have effect from the start of an income year if you cease to be eligible under subsection 230255(2) to make a foreign exchange retranslation election under subsection 230255(1) for that income year.

 (2) Subsection (1) does not prevent you from making a new *foreign exchange retranslation election at a later time if you become, at that later time, eligible under subsection 230255(2), to make a foreign exchange retranslation election under subsection 230255(1) for that income year.

Note: The new election will only apply to financial arrangements you start to have after the start of the income year in which the new election is made.

 (3) A *foreign exchange retranslation election under subsection 230255(1) ceases to apply to a *financial arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of paragraph 230265(1)(b) or (c) during that income year.

 (4) If the election ceases to apply to a particular *financial arrangement under subsection (3), the election cannot subsequently reapply to that arrangement (even if the requirements of paragraphs 230265(1)(b) and (c) are satisfied once more in relation to the arrangement).

Election in relation to qualifying forex accounts

 (5) A *foreign exchange retranslation election under subsection 230255(3) ceases to apply to a *financial arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of subsection 230255(3) during that income year.

 (6) If the election ceases to apply to a particular *financial arrangement under subsection (5), the election cannot subsequently reapply to that arrangement (even if the requirements of subsection 230255(3) are satisfied once more in relation to the arrangement).

230290  Balancing adjustment if election ceases to apply

 (1) You must make balancing adjustments under subsection (2) if a *foreign exchange retranslation election ceases to have effect under subsection 230285(1).

 (2) The balancing adjustments under this subsection are the balancing adjustments you would make under Subdivision 230G for each of the *financial arrangements to which the election applied if you disposed of the arrangement for its fair value when the election ceases to have effect (but only to the extent to which the balancing adjustment is reasonably attributable to a *currency exchange rate effect).

 (3) You must make a balancing adjustment under this section if a *foreign exchange retranslation election ceases to apply to a particular *financial arrangement under subsection 230285(3) or (5).

 (4) The balancing adjustment under this subsection is the balancing adjustment you would make under Subdivision 230G if you disposed of the *financial arrangement for its fair value when the election ceases to apply to the arrangement (but only to the extent to which the balancing adjustment is reasonably attributable to a *currency exchange rate effect).

 (5) If a balancing adjustment is made under subsection (2) or (4) in relation to a *financial arrangement, you are taken, for the purposes of this Division, to have reacquired the arrangement at its fair value immediately after the election ceased to have effect or ceased to apply to the arrangement.

Subdivision 230EHedging financial arrangements method

Table of sections

230295 Objects of this Subdivision

230300 Applying hedging financial arrangement method to gains and losses

230305 Table of events and allocation rules

230310 Aligning tax classification of gain or loss from hedging financial arrangement with tax classification of hedged item

230315 Hedging financial arrangement election

230320 Hedging financial arrangement election where differing income and accounting years

230325 Hedging financial arrangements to which election applies

230330 Hedging financial arrangements to which election does not apply

230335 Hedging financial arrangement and hedged item

230340 Generally whole arrangement must be hedging financial arrangement

230345 Requirements not satisfied because of honest mistake or inadvertence

230350 Derivative financial arrangement and foreign currency hedge

230355 Recording requirements

230360 Determining basis for allocating gain or loss

230365 Effectiveness of the hedge

230370 When election ceases to apply

230375 Balancing adjustment if election ceases to apply

230380 Commissioner may determine that requirement met

230385 Consequences of failure to meet requirements

230295  Objects of this Subdivision

  The objects of this Subdivision are:

 (a) to facilitate the efficient management of financial risk by reducing aftertax mismatches and better aligning tax treatment where hedging takes place; and

 (b) to minimise tax deferral and tax motivated practices (including tax deferral arising from such practices as tax advantaged selection from among possible hedges and inappropriate selection of tax treatment).

230300  Applying hedging financial arrangement method to gains and losses

 (1) If you have a *hedging financial arrangement to which a *hedging financial arrangement election applies, the gain or loss you make for an income year from the arrangement is worked out under this section and section 230310 instead of under Subdivision 230B, 230C, 230D, 230F or 230G.

 (2) Except where subsection (5) applies, the gain or loss you make from the *hedging financial arrangement is equal to the overall gain or loss you make from the arrangement.

 (3) The gain or loss you make from the *hedging financial arrangement is allocated over income years according to the determination referred to in subsection 230360(1).

Note 1: The allocation is capable of extending to income years after you cease to have the hedging financial arrangement (see subsection 230360(3)).

Note 2: The determination must be included in the record made under section 230355.

 (4) If the *hedging financial arrangement is a *foreign currency hedge and is a *debt interest, split a gain or loss you make from the arrangement as follows:

 (a) to the extent to which the gain or loss represents a *currency exchange rate effect attributable to the outstanding balance in relation to the debt interest, treat it as a separate gain or loss to which subsections (1) and (2) apply;

 (b) to the extent that it does not represent that effect, treat it as a separate gain or loss from the financial arrangement that is allocated under Subdivision 230B, 230F or 230G.

 (5) If an event listed in the table in subsection 230305(1) occurs:

 (a) the gain or loss you make from the *hedging financial arrangement is equal to any gain or loss that you would have made:

 (i) while the arrangement was hedging the *hedged item or items; and

 (ii) on ceasing to have the arrangement;

  if you ceased to have the arrangement for its fair value at the time of the event; and

 (b) this Division further applies as if, just after the event, you had acquired the arrangement for its fair value at the time of the event.

Despite subsection (3), the gain or loss referred to in paragraph (a) is allocated over income years according to the table.

 (7) Subsection (8) applies if the *hedging financial arrangement:

 (a) is a *financial arrangement under section 23050 (equity interests etc.); and

 (b) is a *foreign currency hedge; and

 (c) is one that you issue.

 (8) Split a gain or loss you make from the arrangement as follows:

 (a) to the extent to which the gain or loss represents a *currency exchange rate effect, treat it as a separate gain or loss to which subsections (1) and (2) apply;

 (b) to the extent that it does not represent that effect, treat it as a separate gain or loss from the financial arrangement to which this Division does not apply.

 (9) Subsections (10) and (11) apply if:

 (a) a *head company of a *consolidated group or *MEC group has a *hedging financial arrangement; and

 (b) a *hedging financial arrangement election applies to the arrangement; and

 (c) a subsidiary member of the group ceases to be a member of the group at a particular time (the leaving time); and

 (d) immediately after the leaving time:

 (i) the head company no longer has the arrangement because the subsidiary member ceased to be a member of the group; and

 (ii) the head company no longer has the *hedged item (or all of the hedged items) because the subsidiary member ceased to be a member of the group.

 (10) The gain or loss the group makes from the arrangement for the income year in which the leaving time occurs is taken to be the gain or loss that would be allocated to the group in accordance with this section (disregarding subsection (5)) if:

 (a) the circumstances that existed in relation to the arrangement (including its value) immediately before the leaving time had continued to exist until the end of the income year; and

 (b) any circumstances that arise in relation to the *financial arrangement after the leaving time were disregarded.

 (11) For the purposes of applying paragraph (5)(a) to the *head company of the group at the leaving time, disregard item 2 of the table in subsection 230305(1).

230305  Table of events and allocation rules

 (1) For the purposes of paragraph 230300(5)(a), the following table lists events and their consequences:

 

Table of events and allocation rules

Item

If this event occurs …

Your gain or loss is allocated …

1

(a) you revoke the hedging designation; or

(b) you redesignate your *hedging financial arrangement; or

(c) you cease to meet the requirement of section 230365 in relation to your hedging financial arrangement

over income years according to the basis determined under subsection 230360(1).

2

(a) you cease to have the *hedged item or all of the hedged items; or

(b) you cease to expect that the hedged item or items will come into existence; or

(c) you cease to expect that you will have the hedged item or items

to the income year in which the event occurs.

2A

(a) you cease to have one or more (but not all) of the *hedged items; or

(b) you cease to expect that one or more (but not all) of the hedged items will come into existence; or

(c) you cease to expect that you will have one or more (but not all) of the hedged items

(a) to the extent to which the gain or loss is reasonably attributable to those one or more hedged items—to the income year in which the event occurs; and

(b) to the extent to which the gain or loss is reasonably attributable to the remaining hedged item or items—over income years according to the basis determined under subsection 230360(1).

3

a risk being hedged by your *hedging financial arrangement ceases to exist

to the income year in which the risk ceases to exist.

 (2) For the purposes of item 2A of the table in subsection (1), determine the extent to which the gain or loss is reasonably attributable to a particular *hedged item having regard to the following:

 (a) the fair value of the hedged item;

 (b) the length of the period over which you have held the hedged item;

 (c) commercially accepted valuation principles;

 (d) any other relevant factors.

230310  Aligning tax classification of gain or loss from hedging financial arrangement with tax classification of hedged item

 (1) The object of this section is to better align, in particular circumstances, the tax classification of a gain or loss you make from a *hedging financial arrangement with the tax classification of the *hedged item.

 (2) This section applies if:

 (a) you make a gain or loss from a *hedging financial arrangement for an income year; and

 (b) a *hedging financial arrangement election applies to the arrangement.

 (3) Subject to subsection (4):

 (a) if you make a gain from the arrangement—your assessable income includes the gain in accordance with subsection 23015(1); and

 (b) if you make a loss from the arrangement—you may deduct the loss in accordance with subsections 23015(2) and (3).

Note: Section 230300 tells you how to allocate the gain or loss to an income year or years.

 (4) A gain or loss you make from a *hedging financial arrangement, to the extent to which it is reasonably attributable to a *hedged item referred to in the following table, is dealt with in the way indicated in that item:

 

Special tax classification for gains and losses

Item

For a hedged item that is or produces …

the gain …

the loss …

1

a *CGT asset any *net capital gain in relation to which would be assessable under Parts 31 and 33 in relation to which a *CGT event (the hedged item CGT event) occurs

is treated as a *capital gain from a CGT event (but only to the extent to which the gain is reasonably attributable to the hedged item CGT event)

is treated as a *capital loss from a CGT event (but only to the extent to which the loss is reasonably attributable to the hedged item CGT event)

2

a *CGT asset that is *taxable Australian property

is treated as a *capital gain from a *CGT event for a CGT asset that is taxable Australian property

is treated as a *capital loss from a CGT event for a CGT asset that is taxable Australian property

3

a *CGT asset your capital gains and losses in relation to which are disregarded, or reduced by a particular percentage, under Division 855

is disregarded or reduced by the same percentage

is disregarded or reduced by the same percentage

4

*exempt income

is treated as exempt income

is not deductible

5

*nonassessable nonexempt income of an Australian resident

is treated as nonassessable nonexempt income

is not deductible

6

a share in a company that is a foreign resident if the capital gain or loss you make from a *CGT event that happens to the share is reduced by a particular percentage under Subdivision 768G

is treated as a *capital gain from a CGT event that is reduced by the same percentage

is treated as a *capital loss from a CGT event that is reduced by the same percentage

7

*ordinary income or *statutory income from an *Australian source

is treated as ordinary income or statutory income from an Australian source

is treated as a loss incurred in gaining or producing ordinary income or statutory income from an Australian source

8

*ordinary income or *statutory income from a source out of Australia

is treated as ordinary income or statutory income from a source out of Australia

is treated as a loss incurred in gaining or producing ordinary income or statutory income from a source out of Australia

9

a loss or outgoing incurred in gaining or producing *ordinary income or *statutory income from a source out of Australia

is treated as ordinary income or statutory income from a source out of Australia

is treated as a loss incurred in gaining or producing ordinary income or statutory income from a source out of Australia

10

a loss or outgoing incurred in gaining or producing *ordinary income or *statutory income from an *Australian source

is treated as ordinary income or statutory income from an Australian source

is treated as a loss incurred in gaining or producing ordinary income or statutory income from an Australian source

11

a loss or outgoing that is not allowed as a deduction

is treated as *nonassessable nonexempt income

is treated as a loss that is not allowed as a deduction

12

a net investment in a foreign operation (within the meaning of the *accounting principles) that is not carried on through:

(a) a company in which you hold shares; or

(b) a company that is a subsidiary of yours (within the meaning of the Corporations Act 2001).

(a) to the extent that the net investment would give rise to income that is *nonassessable nonexempt income under section 23AH of the Income Tax Assessment Act 1936—is treated as nonassessable nonexempt income; and

(b) otherwise—is treated in accordance with the item or items in this table that are applicable to the gain.

(a) to the extent that the net investment would give rise to income that is nonassessable nonexempt income under section 23AH of the Income Tax Assessment Act 1936—is not deductible; and

(b) otherwise—is treated in accordance with the item or items in this table that are applicable to the loss.

 

 (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.

230315  Hedging financial arrangement election

Election

 (1) You can make a hedging financial arrangement election if you are eligible under subsection (2) to make the election for the income year in which you make the election.

Eligibility to make hedging financial arrangement election for an income year

 (2) You are eligible to make a hedging financial arrangement election for an income year if:

 (a) you prepare a financial report for that income year in accordance with:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting made under a *foreign law that apply to the preparation of the financial report under a foreign law; and

 (b) the financial report is audited in accordance with:

 (i) the *auditing principles; or

 (ii) if the auditing principles do not apply to the auditing of the financial report—comparable standards for auditing made under a foreign law.

Note: Section 230500 allows regulations to be made specifying particular foreign accounting and auditing standards as ones that are to be treated as comparable with Australian accounting and auditing principles for the purposes of this Division.

Election irrevocable

 (3) The *hedging financial arrangement election is irrevocable.

Note: The election may cease to apply under section 230385.

230320  Hedging financial arrangement election where differing income and accounting years

 (1) This section applies if:

 (a) you prepare a financial report for a year (the first year); and

 (b) you prepare a financial report for the subsequent year (the second year); and

 (c) your income year starts in the first year and ends in the second year; and

 (d) both the financial report for the first year and the financial report for the second year are:

 (i) prepared in accordance with paragraph 230315(2)(a); and

 (ii) audited in accordance with paragraph 230315(2)(b); and

 (e) the auditor’s reports are unqualified for both the financial report for the first year and the financial report for the second year.

 (2) Treat yourself as eligible to make an election for the income year under subsection 230315(2).

230325  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 230330.

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 230355 and 230360 and paragraph 230365(c) in relation to a hedging financial arrangement to which the election does apply: see section 230385. See also subsection 230305(1).

230330  Hedging financial arrangements to which election does not apply

 (1) A *hedging financial arrangement election does not apply to a *financial arrangement if the arrangement is a financial arrangement under section 23050 (equity interests etc.).

 (2) Subsection (1) does not apply to a *hedging financial arrangement if:

 (a) the hedging financial arrangement is a *foreign currency hedge; and

 (b) you issue the hedging financial arrangement.

 (3) A *hedging financial arrangement election does not apply to a *financial arrangement if:

 (a) you are:

 (i) an individual; or

 (ii) an entity (other than an individual) that satisfies subsection 230455(2), (3) or (4) for the income year in which you start to have the arrangement; and

 (b) the arrangement is a *qualifying security; and

 (c) you have not made an election under subsection 230455(7).

 (4) A *hedging financial arrangement election does not apply to a *financial arrangement if:

 (a) the election is made by the *head company of a *consolidated group or *MEC group; and

 (b) the election specifies that the election is not to apply to financial arrangements in relation to *life insurance business carried on by a member of the consolidated group or MEC group; and

 (c) the arrangement is one that relates to the life insurance business carried on by a member of the consolidated group or MEC group.

 (5) A *hedging financial arrangement election does not apply to a *financial arrangement if the arrangement is associated with a business of a kind specified in regulations made for the purposes of this subsection.

230335  Hedging financial arrangement and hedged item

Hedging financial arrangement

 (1) A *financial arrangement that you have that is a *derivative financial arrangement, or is not a derivative financial arrangement but is a *foreign currency hedge, is a hedging financial arrangement if:

 (a) you create, acquire or apply the arrangement for the purpose of hedging a risk or risks in relation to a *hedged item or items; and

 (b) at the time you create, acquire or apply the arrangement, the arrangement satisfies the requirements of the principles or standards referred to in paragraph 230315(2)(a) to be a hedging instrument; and

 (c) the arrangement is recorded as a hedging instrument in:

 (i) your financial report (including documents and records on which the report is based); or

 (ii) if the arrangement hedges a risk in relation to *foreign currency—your financial report or the financial report of a consolidated entity in which you are included (including documents and records on which the report is based);

  for the income year in which the rights and/or obligations are created, acquired or applied.

Note: For document and record, see section 2B of the Acts Interpretation Act 1901.

 (2) If:

 (a) the *financial arrangement would not be a financial arrangement if the following provisions were disregarded:

 (i) Division 9A of Part III of the Income Tax Assessment Act 1936 (which deals with offshore banking units);

 (ii) Part IIIB of that Act (which deals with Australian branches of foreign banks etc.); and

 (b) paragraphs (1)(b) and (c) would be satisfied in relation to the financial arrangement if the arrangement had been between 2 separate entities;

paragraphs (1)(b) and (c) are taken to be satisfied in relation to the arrangement.

 (3) A *financial arrangement that is a *derivative financial arrangement, or is not a derivative financial arrangement but is a *foreign currency hedge, is a hedging financial arrangement if:

 (a) you create, acquire or apply the arrangement for the purpose of hedging a risk or risks in relation to something; and

 (b) one or more of subsections (4), (5), (6) or (7) is satisfied; and

 (c) the requirements of paragraphs (1)(b) or (c) are not able to be satisfied:

 (i) because of the requirements of the principles or standards referred to in paragraph 230315(2)(a); and

 (ii) not because of any act or omission on your part to deliberately fail to satisfy those requirements; and

 (d) in a case in which none of subsections (5), (6) and (7) are satisfied—you satisfy the additional recording requirements of subsection 230355(5); and

 (e) in any case—you satisfy the requirements (if any) prescribed by the regulations for the purposes of this paragraph.

 (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.

 (4) This subsection is satisfied if:

 (a) the *financial arrangement hedges a foreign currency risk in relation to an anticipated *foreign equity distribution from a *connected entity; and

 (b) the distribution is *nonassessable nonexempt income under section 7685.

 (5) This subsection is satisfied if:

 (a) you enter into a *financial arrangement with a *connected entity; and

 (b) the principles or standards referred to in paragraph 230315(2)(a) require that a consolidated financial report be prepared that deals with both your affairs and the affairs of the connected entity; and

 (c) the report properly reflects your affairs; and

 (d) the arrangement satisfies the requirements of paragraph (1)(a); and

 (e) the arrangement would satisfy the requirements of paragraph (1)(b) or (c) but for the fact that the consolidated report disregards the arrangement.

 (6) This subsection is satisfied if:

 (a) the period for which the risk or risks are hedged does not straddle 2 or more income years; and

 (b) the *financial arrangement satisfies the requirements of paragraph (1)(a); and

 (c) the arrangement would satisfy the requirements of paragraph (1)(c) if the period for which the risk or risks that are hedged did straddle 2 or more income years.

 (7) This subsection is satisfied if the requirements prescribed by the regulations for the purposes of this subsection are satisfied.

Financial arrangement hedging more than one type of risk

 (8) A *financial arrangement that hedges more than one type of risk may only be a hedging financial arrangement if the principles or standards referred to in paragraph (1)(b) allow the arrangement to be designated as a hedge of those risks.

More than one financial arrangement hedging the same risk or risks

 (9) If 2 or more *financial arrangements hedge the same risk or risks, each of the arrangements may only be a hedging financial arrangement if the principles or standards referred to in paragraph (1)(b) allow those arrangements to be viewed in combination and jointly designated as hedging that risk or those risks.

Hedged item

 (10) If a *financial arrangement that you have hedges a risk in relation to:

 (a) an asset or a part of an asset; or

 (b) a liability or a part of a liability; or

 (c) a firm commitment (within the meaning of the *accounting principles) or a part of such a commitment; or

 (d) a highly probable forecast transaction (within the meaning of the accounting principles) or a part of such a transaction; or

 (e) a net investment in a foreign operation (within the meaning of the accounting principles) or a part of such an investment; or

 (f) something prescribed by the regulations for the purposes of this paragraph;

the asset (or that part of the asset), the liability (or that part of the liability), the commitment (or that part of the commitment), the transaction (or that part of the transaction) or the investment (or that part of the investment) is a hedged item for the arrangement.

 (11) If a *financial arrangement is a *hedging financial arrangement because of paragraph (4)(a), the anticipated dividend referred to in that subparagraph is a hedged item for the arrangement even if subsection (10) is not satisfied in relation to the anticipated dividend.

230340  Generally whole arrangement must be hedging financial arrangement

 (1) Subject to subsections (2), (3) and (4), the whole of a *financial arrangement must satisfy the requirements of subsection 230335(1) or (3) for the arrangement to be a hedging financial arrangement.

Partial hedges

 (2) If a *financial arrangement:

 (a) is an options contract; and

 (b) hedges risk only in part by reference to changes in the intrinsic value of the options contract;

the arrangement may be treated as a hedging financial arrangement to the extent to which the part of the arrangement referred to in paragraph (b) satisfies the requirements of subsection 230335(1) or (3).

 (3) If a *financial arrangement:

 (a) is a forward contract; and

 (b) has a spot price element and an interest element;

the arrangement may be treated as a hedging financial arrangement to the extent to which the spot price element satisfies the requirements of subsection 230335(1) or (3).

Proportionate hedges

 (4) A specified proportion of a *financial arrangement may be treated as a hedging financial arrangement to the extent to which that proportion of the arrangement satisfies the requirements of subsection 230335(1) or (3).

Separate financial arrangements if partial or proportionate hedge

 (5) If a part (or parts), or a proportion (or proportions), of a *financial arrangement is (or are) treated as a *hedging financial arrangement under subsection (2), (3) or (4):

 (a) the part (or each of the parts), or the proportion (or each of the proportions), of the arrangement that is (or are) treated as a hedging financial arrangement is taken to be a separate financial arrangement for the purposes of this Division; and

 (b) the remaining part or proportion (if any) of the arrangement is taken to be a separate financial arrangement for the purposes of this Division.

 (6) Subsection (5) has effect even if there would not be separate *arrangements under subsection 23055(4).

230345  Requirements not satisfied because of honest mistake or inadvertence

  If a *derivative financial arrangement, or a *foreign currency hedge, that you have would not be a *hedging financial arrangement only because the requirements of paragraph 230335(1)(b) or (c), or both, are not satisfied because of an honest mistake or inadvertence, it is nevertheless a hedging financial arrangement if the Commissioner considers this appropriate having regard to:

 (a) your documented risk management practices and policies; and

 (b) your record keeping practices; and

 (c) your accounting systems and controls; and

 (d) your internal governance processes; and

 (e) the circumstances surrounding the mistake or inadvertence (including the steps (if any) taken to correct or address the mistake or inadvertence and the steps (if any) taken to prevent a recurrence); and

 (f) the extent to which the requirements of paragraphs 230335(1)(b) and (c) have been met; and

 (g) the objects of this Subdivision.

230350  Derivative financial arrangement and foreign currency hedge

Derivative financial arrangement

 (1) A derivative financial arrangement is a *financial arrangement that you have where:

 (a) its value changes in response to changes in a specified variable or variables; and

 (b) there is no requirement for a net investment, or there is such a requirement but the net investment is smaller than would be required for other types of financial arrangement that would be expected to have a similar response to changes in market factors.

Note: Paragraph (a)—a specified variable includes an interest rate, foreign exchange rate, credit rating, index or commodity or financial instrument price.

Foreign currency hedge

 (2) A foreign currency hedge is a *financial arrangement that you have if:

 (a) paragraph (1)(a) is satisfied but paragraph (1)(b) is not; and

 (b) the arrangement hedges a risk in relation to movements in currency exchange rates.

230355  Recording requirements

 (1) The requirement of this section is that you must make, or have in place, a record that:

 (a) contains a description of the following:

 (i) the *hedging financial arrangement in relation to which the election is made;

 (ii) the nature of the risk or risks being hedged;

 (iii) the *hedged item or items;

 (iv) how you will assess the effectiveness of hedging the risk in reducing your exposure to changes in the fair value of the hedged item or items or cash flows or foreign currency exposure attributable to them;

 (v) the risk management objective for, and the risk management strategy to be followed in, acquiring, creating or applying the arrangement; and

 (b) contains any further details that the *accounting principles require, by way of documentation, for an arrangement to be recorded in a financial report as a hedging instrument; and

 (c) sets out the terms of the determinations you make under section 230360.

To avoid doubt, paragraph (b) applies even if the arrangement is not recorded in your financial report as a hedging instrument.

 (2) To avoid doubt, the record may consist of a single document or 2 or more documents.

 (3) The record must be made or in place:

 (a) at, or soon after, the time when you create, acquire or apply the *hedging financial arrangement; or

 (b) at such other time as is provided for in the regulations for the purposes of this paragraph.

 (4) The description must be sufficiently precise and detailed that the following are clear:

 (a) that the risk in respect of the particular *hedged item or items was the one hedged by the *hedging financial arrangement;

 (b) the extent to which the risk was hedged;

 (c) that the rights and/or obligations comprising the hedging financial arrangement were in fact those created, acquired or applied for the purpose of hedging the risk.

 (5) If a *financial arrangement is a *hedging financial arrangement under subsection 230335(2) or (3), the following requirements must be met in addition to the requirements of subsections (1), (3) and (4):

 (a) you must make or have in place, at, or soon before or soon after, the time when you create, acquire or apply the arrangement, a record that sets out:

 (i) a statement of why, and the way in which, the arrangement operates commercially or economically as a hedge of the *hedged item or items; and

 (ii) the reasons why the arrangement does not satisfy the requirements of the principles or standards referred to in paragraph 230315(2)(a) to be a hedging instrument;

 (b) you must, at the end of each income year during which you have the arrangement, make a record of the accumulated gains and/or losses (whether realised or unrealised) as at the end of that income year from the arrangement or arrangements relating to the hedged item or items that are yet to be included in your assessable income or allowed to you as deductions;

 (c) you must have, at the time when you create, acquire or apply the arrangement, a record that sets out your risk management policies and practices;

 (d) you must have in place, at the time when you create, acquire or apply the arrangement, internal risk management systems and controls that record the arrangement and the hedged item or items.

 (6) For the purposes of paragraph (5)(b), you must assume that:

 (a) all the gains from the *financial arrangement would be assessable income; and

 (b) all the losses from the financial arrangement would be allowed to you as deductions.

230360  Determining basis for allocating gain or loss

 (1) A requirement of this section is that you must determine the basis on which your gain or loss from the *hedging financial arrangement is to be allocated to an income year, or over 2 or more income years, for the purposes of this Division.

 (2) It is also a requirement of this section that the basis that you determine must:

 (a) fairly and reasonably correspond with the basis on which gains, losses or other amounts in relation to the *hedged item or items are recognised or allocated under this Act; and

 (b) be objective; and

 (c) be sufficiently precise and detailed that, when your gain, loss or other amount from the *hedged item or items is taken into account for the purposes of this Act, the following will be clear from the record made under section 230355:

 (i) the time at which the gain or loss from the *hedging financial arrangement is to be taken into account for the purposes of this Division;

 (ii) the way in which that gain or loss will be dealt with under section 230310.

Note: Paragraph (a) refers to an amount in relation to the hedged item or items being recognised or allocated under this Act. This would include an amount being allowed as a deduction or an amount being included in assessable income. If the hedged item were an asset, an amount referable to a part of the cost of the asset might, for example, be allowed as a deduction for a particular income year.

 (3) To avoid doubt, the income years over which your gain or loss is to be allocated may include an income year that starts after you cease to have the *hedging financial arrangement.

230365  Effectiveness of the hedge

  The requirement of this section is that:

 (a) hedging the risk must be expected to be highly effective (within the meaning of the principles or standards referred to in paragraph 230315(2)(a)), for the period for which you expect to have the *hedging financial arrangement, in reducing your exposure to changes in the fair value of the *hedged item or items or cash flows attributable to your hedged risk; and

 (b) the fair value of the hedged item or items or cash flows relating to them and the fair value of the arrangement must be able to be reliably measured; and

 (c) you must assess the hedging of the risk by the arrangement:

 (i) on a regular basis in accordance with the *accounting principles; and

 (ii) at least once in each 12 month period; 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 230315(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.

230370  When election ceases to apply

 (1) A *hedging financial arrangement election ceases to have effect from the start of an income year if you cease to be eligible under subsection 230315(2) to make the election for that income year.

 (2) Subsection (1) does not prevent you from making a new *hedging financial arrangement election at a later time if you become, at that later time, eligible under subsection 230315(2) to make an election for an income year.

Note: The new election will only apply to financial arrangements you start to have after the start of the income year in which the new election is made.

230375  Balancing adjustment if election ceases to apply

 (1) This section applies if a *hedging financial arrangement election ceases to have effect under subsection 230370(1).

 (2) You are taken, for the purposes of this Division, to have:

 (a) disposed of each *hedging financial arrangement to which the election applies for its fair value immediately before the election ceases to have effect; and

 (b) reacquired the arrangement at its fair value immediately after the election ceases to have effect.

 (3) To avoid doubt, this Subdivision applies, for the purposes of working out the consequences of the disposal referred to in paragraph (2)(a), as if the *hedging financial arrangement were one to which the *hedging financial arrangement election applied at the time of the disposal.

230380  Commissioner may determine that requirement met

Commissioner may determine that requirement met

 (1) If (apart from this section) the requirements of sections 230355 to 230365 are not met in relation to a *hedging financial arrangement that you have, treat those requirements as having been so met if the Commissioner makes a determination under subsection (1A) in relation to the arrangement.

 (1A) The Commissioner may make the determination if the Commissioner considers that this is appropriate, having regard to:

 (a) the respects in which the arrangement does not meet those requirements; and

 (b) the extent to which it does not meet those requirements; and

 (c) the reasons why it does not meet those requirements; and

 (d) if the Commissioner is considering whether to impose conditions under subsection (2)—the likelihood that you will comply with those conditions; and

 (e) the objects of this Subdivision.

Commissioner may impose additional record keeping requirements

 (2) The Commissioner may make a determination under subsection (1A) conditional on your keeping records in addition to those required by section 230355.

 (3) A determination under subsection (1A) ceases to have effect if you breach a condition imposed under subsection (2).

 (4) Subsection (3) ceases to apply to you if the Commissioner determines that that subsection ceases to apply to you. The determination takes effect from the date specified in the determination.

 (5) In deciding whether to make the determination under subsection (4), 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 breaches of the kind referred to in subsection (3) do not happen again; and

 (d) any other relevant matter.

Commissioner may determine matter under section 230360

 (6) If:

 (a) the Commissioner makes a determination under subsection (1A) in relation to a *hedging financial arrangement; and

 (b) either or both of the following applies:

 (i) you fail to determine a matter in relation to the arrangement under section 230360;

 (ii) you determine a matter in relation to the arrangement under section 230360 but the determination does not satisfy the requirements of subsection 230360(2);

the Commissioner may determine that matter, in a way that satisfies the requirements of section 230360. The Commissioner’s determination has effect as if you had made the determination and recorded it under that section.

230385  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 230355 or 230360 or paragraph 230365(c) in relation to the arrangement.

 (2) For the purposes of paragraph (1)(b), treat the requirement in paragraph 230365(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 230360

 (3) If:

 (a) you fail to determine a matter in relation to the *hedging financial arrangement under section 230360; or

 (b) you determine a matter in relation to the arrangement under section 230360 but the determination does not satisfy the requirements of subsection 230360(2);

the Commissioner may determine that matter, in a way that satisfies the requirements of section 230360. 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 230355 or 230360 or paragraph 230365(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 230380

 (7) This section does not prevent the Commissioner from exercising the Commissioner’s powers under section 230380 in relation to the *hedging financial arrangement mentioned in subsection (1).

Subdivision 230FReliance on financial reports

Table of sections

230390 Objects of this Subdivision

230395 Election to rely on financial reports

230400 Financial reports election where differing income and accounting years

230405 Commissioner discretion to waive requirements in paragraphs 230395(2)(c) and (e)

230410 Financial arrangements to which the election applies

230415 Financial arrangements not covered by election

230420 Effect of election to rely on financial reports

230425 When election ceases to apply

230430 Balancing adjustment if election ceases to apply

230390  Objects of this Subdivision

  The objects of this Subdivision are:

 (a) to reduce administration and compliance costs by allowing you to align the tax treatment of your gains and losses from a *financial arrangement with the accounting treatment that applies to the arrangement; and

 (b) to achieve those objects without your obtaining inappropriate tax benefits.

230395  Election to rely on financial reports

Election

 (1) You may make an election to rely on financial reports if you are eligible under subsection (2) to make the election for the income year in which you make the election.

Eligibility to make election

 (2) You are eligible to make an election to rely on financial reports for an income year if:

 (a) you prepare a financial report for that income year in accordance with:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting made under a *foreign law that apply to the preparation of the financial report under a foreign law; and

 (b) the financial report is audited in accordance with:

 (i) the *auditing principles; or

 (ii) if the auditing principles do not apply to the auditing of the financial report—comparable standards for auditing made under a foreign law; and

 (c) your auditor has not qualified the auditor’s report on your financial report for that income year or any of the last 4 financial years in a respect that is relevant to the taxation treatment of *financial arrangements; and

 (d) your accounting systems and controls and your internal governance processes are reliable; and

 (e) no report of an audit or review conducted in the income year, or any of the preceding 4 income years, has included an adverse assessment of your accounting systems in a respect that is relevant to the taxation treatment of financial arrangements.

Note 1: Paragraph (b)—section 230500 allows regulations to be made specifying particular foreign accounting and auditing standards as ones that are to be treated as comparable with Australian accounting and auditing principles for the purposes of this Division.

Note 2: For the purposes of paragraphs (c) and (e), a qualification or assessment may be relevant to the taxation treatment of financial arrangements even though it does not deal with the amount or timing of recognition of gains or losses (but relates, for example, to the reliability of the accounting systems through which information about financial arrangements is recorded).

 (3) Paragraph (2)(e) does not apply to a report of:

 (a) an internal audit or review that you conduct; or

 (b) an audit or review of a kind prescribed by the regulations for the purposes of this paragraph.

Election irrevocable

 (4) An election under subsection (1) is irrevocable.

Note: The election may cease to apply under section 230425.

230400  Financial reports election where differing income and accounting years

 (1) This section applies if:

 (a) you prepare a financial report for a year (the first year); and

 (b) you prepare a financial report for the subsequent year (the second year); and

 (c) your income year starts in the first year and ends in the second year; and

 (d) both the financial report for the first year and the financial report for the second year are:

 (i) prepared in accordance with paragraph 230395(2)(a); and

 (ii) audited in accordance with paragraph 230395(2)(b); and

 (e) the auditor’s reports are unqualified for both the financial report for the first year and the financial report for the second year.

 (2) Treat yourself as eligible to make an election for the income year under subsection 230395(2).

 (3) Work out the gain or loss you make from the arrangement for the income year as follows:

 (a) firstly, work out the gain or loss you make from the arrangement for the first year in accordance with section 230420 (treating the first year as an income year);

 (b) next, work out how much of the gain or loss mentioned in paragraph (a) is attributable to the income year in accordance with subsection (4);

 (c) next, work out the gain or loss you make from the arrangement for the second year in accordance with section 230420 (treating the second year as an income year);

 (d) next, work out how much of the gain or loss mentioned in paragraph (c) is attributable to the income year in accordance with subsection (4);

 (e) next:

 (i) if the amounts worked out under paragraphs (b) and (d) are both gains—add them together to work out the gain from the arrangement for the income year; or

 (ii) if the amounts worked out under paragraphs (b) and (d) are both losses—add them together to work out the loss from the arrangement for the income year; or

 (iii) if one of the amounts worked out under paragraphs (b) and (d) is a loss and the other is a gain—subtract the loss from the gain. If the result is positive, this is the gain from the arrangement for the income year. If the result is negative, this is the loss from the arrangement for the income year.

 (4) For the purposes of paragraphs (3)(b) and (d), work out how much of the gain or loss is attributable to the income year by:

 (a) using a methodology that is reasonable; and

 (b) using the same methodology for the first and second years.

 (5) For the purposes of paragraph (4)(a), treat a methodology that attributes the gain or loss on a prorata basis as not being reasonable.

230405  Commissioner discretion to waive requirements in paragraphs 230395(2)(c) and (e)

 (1) Paragraph 230395(2)(c) or (e) does not apply in relation to your *election to rely on financial reports for a particular income year or income years if the Commissioner determines that the paragraph does not apply to the election for that income year or those income years.

 (2) In deciding whether to make the determination under subsection (1), the Commissioner must have regard to:

 (a) the reasons for the noncompliance with the principles or standards concerned; and

 (b) the remedial action (if any) that you have undertaken to ensure that noncompliance with those principles or standards does not occur in future (such as changes to your accounting systems and controls or to your internal governance structures); and

 (c) if you, or your activities, are subject to regulatory oversight or review—any opinions expressed by the regulator about the adequacy of remedial action of the kind referred to in paragraph (b); and

 (d) any other relevant matter.

230410  Financial arrangements to which the election applies

 (1) An *election to rely on financial reports applies in relation to a *financial arrangement that you have if:

 (a) the arrangement is a *Division 230 financial arrangement; and

 (b) you start to have the arrangement in the income year in which you make the election or in a later income year; and

 (c) the arrangement is recognised in financial reports of the kind referred to in paragraph 230395(2)(a) that are audited as referred to in paragraph 230395(2)(b); and

 (d) if the arrangement is a financial arrangement under section 23050—the arrangement is an asset or liability that you are required (whether or not as a result of a choice you make) by:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting that apply to the preparation of the financial report under a *foreign law;

  to classify or designate, in the financial reports, as at fair value through profit or loss; and

 (e) it is reasonably expected that the following is, or will be, the same:

 (i) the amount of the overall gain or loss you make from the arrangement (as determined in accordance with the financial reports);

 (ii) the amount of the overall gain or loss you make from the arrangement (as determined in accordance with the provisions of this Division if the election under this subsection did not apply to the arrangement); and

 (f) the differences between the results of the following methods would reasonably be expected not to be substantial:

 (i) the method used in your financial reports to work out the amounts of the gain or loss you make from the arrangement for each income year;

 (ii) the method that would be applied by this Division to work out the amounts of those gains or losses if the election did not apply to the arrangement.

This subsection has effect subject to section 230415.

 (2) In applying paragraph (1)(f) at the time when you start to have the *financial arrangement, disregard any differences between the results of the methods referred to in subparagraphs (1)(f)(i) and (ii) that are attributable solely to the provision for the possible impairment of debts required by the principles or standards referred to in paragraph 230395(2)(a).

 (3) Subsections (4), (5) and (6) apply if, but for this subsection, paragraphs (1)(c) and (d) would not be satisfied in relation to a *financial arrangement because the arrangement is an intragroup transaction for the purposes of:

 (a) *accounting standard AASB 127 (or another accounting standard prescribed by the regulations for the purposes of this paragraph); or

 (b) if that standard does not apply to the preparation of the financial report—a comparable accounting standard that applies to the preparation of the financial report under a *foreign law.

Note: Financial arrangements between members of a consolidated group or MEC group are not covered by this subsection because the single entity rule in subsection 7011(1) operates to treat them as not being financial arrangements for the purposes of this Division.

 (4) Paragraphs (1)(c) and (d) are taken to be satisfied in relation to the *financial arrangement.

 (5) Paragraph (1)(e) applies as if the reference in subparagraph (1)(e)(i) to the amount of the overall gain or loss you make from the *financial arrangement (as determined in accordance with the financial reports) were a reference to the amount of that overall gain or loss (as would be determined in accordance with the financial reports if the arrangement had not been an intragroup transaction for the purposes of the standard referred to in subsection (3)).

 (6) Paragraph (1)(f) applies as if the reference in subparagraph (1)(f)(i) to the method used in your financial reports to work out the amounts of the gain or loss you make from the arrangement for each income year were a reference to the method that would be used in your financial reports to work out those amounts if the arrangement had not been an intragroup transaction for the purposes of the standard referred to in subsection (3).

 (7) For the purposes of applying subparagraphs (1)(e)(ii) and (f)(ii) to a *financial arrangement, assume that you had made any election that:

 (a) you could make under Subdivision 230C or 230D; and

 (b) could apply to the arrangement.

 (8) If:

 (a) the *financial arrangement would not be a financial arrangement if the following provisions were disregarded:

 (i) Division 9A of Part III of the Income Tax Assessment Act 1936 (which deals with offshore banking units);

 (ii) Part IIIB of that Act (which deals with Australian branches of foreign banks etc.); and

 (b) paragraphs (1)(c) and (d) would be satisfied in relation to the financial arrangement if the arrangement had been between 2 separate entities; and

 (c) the *election to rely on financial reports is made by:

 (i) if section 121EB of the Income Tax Assessment Act 1936 applies—the OBU mentioned in that section (disregarding the operation of that section); or

 (ii) if section 160ZZW of that Act applies—the bank mentioned in that section (disregarding the operation of that section);

paragraphs (1)(c) and (d) are taken to be satisfied in relation to the arrangement.

230415  Financial arrangements not covered by election

 (1) An *election to rely on financial reports does not apply to a *financial arrangement if:

 (a) the arrangement is an *equity interest; and

 (b) you are the issuer of the equity interest.

 (2) An *election to rely on financial reports does not apply to a *financial arrangement if:

 (a) you are:

 (i) an individual; or

 (ii) an entity (other than an individual) that satisfies subsection 230455(2), (3) or (4) for the income year in which you start to have the arrangement; and

 (b) the arrangement is a *qualifying security; and

 (c) you have not made an election under subsection 230455(7).

 (3) An *election to rely on financial reports does not apply to a *financial arrangement if:

 (a) the election is made by the *head company of a *consolidated group or *MEC group; and

 (b) the election specifies that the election is not to apply to financial arrangements in relation to *life insurance business carried on by a member of the consolidated group or MEC group; and

 (c) the arrangement is one that relates to the life insurance business carried on by a member of the consolidated group or MEC group.

 (4) An *election to rely on financial reports does not apply to a *financial arrangement if the arrangement is associated with a business of a kind specified in regulations made for the purposes of this subsection.

230420  Effect of election to rely on financial reports

 (1) If an *election to rely on financial reports applies to a *financial arrangement, the gain or loss you make from the arrangement for an income year is:

 (a) the gain or loss that the principles or standards referred to in paragraph 230395(2)(a) require you to recognise in profit or loss from that arrangement for that income year; or

 (b) if subsection 230410(3) applies to the arrangement—the gain or loss that the principles or standards referred to in paragraph 230395(2)(a) would have required you to recognise in profit or loss from that arrangement for that income year if the arrangement had not been an intragroup transaction for the purposes of the standard referred to in paragraph 230410(3)(b); or

 (c) if subsection 230410(8) applies to the arrangement—the gain or loss that the principles or standards referred to in paragraph 230410(1)(d) would have required you to recognise in profit or loss for the year from the asset or liability mentioned in paragraph 230410(1)(d) if the arrangement had been between 2 separate entities.

Note: Subsection 23040(7) provides that this Subdivision does not apply to a gain or loss from a financial arrangement to the extent to which Subdivision 230E (hedging financial arrangements method) applies to the arrangement.

 (2) Subsection (3) applies if:

 (a) a *head company of a *consolidated group or *MEC group has a *financial arrangement; and

 (b) an *election to rely on financial reports applies to the arrangement; and

 (c) a subsidiary member of the group ceases to be a member of the group at a particular time (the leaving time); and

 (d) immediately after the leaving time, the subsidiary member has the arrangement.

 (3) The gain or loss the group makes from the *financial arrangement for the income year in which the leaving time occurs is taken to be the gain or loss that the principles or standards referred to in paragraph 230395(2)(a) would require the group to recognise in profit or loss from the arrangement for that income year if:

 (a) the circumstances that existed in relation to the arrangement (including its value) immediately before the leaving time had continued to exist until the end of the income year; and

 (b) any circumstances that arise in relation to the arrangement after the leaving time were disregarded.

230425  When election ceases to apply

 (1) An election under subsection 230395(1) ceases to have effect from the start of an income year if you cease to be eligible to make an *election to rely on financial reports for that income year.

 (2) Subsection (1) does not prevent you from making a new election under subsection 230395(1) at a later time if you become, at that later time, eligible to make an *election to rely on financial reports for an income year.

Note: The new election will only apply to financial arrangements you start to have after the start of the income year in which the new election is made.

 (3) An election under subsection 230395(1) ceases to apply to a *financial arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of paragraph 230410(1)(c), (d), (e) or (f) during that income year.

 (4) If the election ceases to apply to a particular *financial arrangement under subsection (3), the election cannot subsequently apply to that arrangement (even if the requirements of paragraphs 230410(1)(c), (d), (e) and (f) are satisfied once more in relation to the arrangement).

230430  Balancing adjustment if election ceases to apply

 (1) You must make balancing adjustments under subsection (2) if an election under subsection 230395(1) ceases to have effect under subsection 230425(1).

 (2) The balancing adjustments under this subsection are the balancing adjustments you would make under Subdivision 230G in relation to each of the *financial arrangements to which the election applied if you disposed of the arrangement for its fair value when the election ceases to have effect.

 (3) You must make balancing adjustments under subsection (5) if an election under subsection 230395(1) ceases to apply to a particular *financial arrangement under subsection 230425(3).

 (4) Subsection (3) does not apply to a *financial arrangement if:

 (a) the arrangement is not one that you are required (whether or not as a result of a choice you make) by the principles or standards referred to in paragraph 230395(2)(a) to classify or designate, in your financial reports, as at fair value through profit or loss; and

 (b) the election under subsection 230395(1) ceases to apply to the arrangement because the arrangement fails to satisfy the requirements of paragraph 230410(1)(e) or (f); and

 (c) the arrangement ceases to satisfy the requirements of that paragraph because the arrangement becomes impaired for the purposes of those principles or standards.

 (5) The balancing adjustment under this subsection is the balancing adjustment you would make under Subdivision 230G if you disposed of the *financial arrangement for its fair value when the election ceases to apply to the arrangement.

 (6) If a balancing adjustment is made under subsection (2) or (5) in relation to a *financial arrangement, you are taken, for the purposes of this Division, to have reacquired the arrangement at its fair value immediately after the election ceased to have effect or ceased to apply to the arrangement.

Subdivision 230GBalancing adjustment on ceasing to have a financial arrangement

Table of sections

230435 When balancing adjustment made

230440 Exceptions

230445 Balancing adjustment

230435  When balancing adjustment made

When balancing adjustment made

 (1) A balancing adjustment is made under this Subdivision if:

 (a) you transfer to another entity all of your rights and/or obligations under a *financial arrangement; or

 (b) all of your rights and/or obligations under a financial arrangement otherwise cease; or

 (c) you transfer to another entity:

 (i) a proportionate share of all of your rights and/or obligations under a financial arrangement; or

 (ii) a right or obligation that you have under a financial arrangement to a specifically identified *financial benefit; or

 (iii) a proportionate share of a right or obligation that you have under a financial arrangement to a specifically identified financial benefit; or

 (d) an *arrangement that is a *Division 230 financial arrangement ceases to be a financial arrangement.

 (2) Paragraphs (1)(a), (b) and (c) do not apply to a right or obligation under a *financial arrangement unless that right or obligation is one of the rights or obligations that constitute the financial arrangement.

Note: See subsections 23045(1) and 23050(1) and (2) for the rights and/or obligations that constitute a financial arrangement.

Modifications for arrangements that are assets

 (3) If the *financial arrangement is an asset of yours at the time the event referred to in subsection (1) occurs, paragraphs (1)(a) and (c) do not apply unless the effect of the transfer is to transfer to the other entity substantially all the risks and rewards of ownership of the interest transferred.

 (4) If a *financial arrangement is an asset of yours, for the purposes of applying this Subdivision to the arrangement, you are treated as transferring a right under the arrangement to another entity if:

 (a) you retain the right but assume a new obligation; and

 (b) your assumption of the new obligation has the same effect, in substance, as transferring the right to another entity; and

 (c) the new obligation arises only to the extent to which the right to *financial benefits under the arrangement is satisfied; and

 (d) you cannot sell or pledge the right (other than as security in relation to the new obligation); and

 (e) you must, under the new obligation, provide financial benefits you receive in relation to the right to the entity to which you owe the new obligation without delay.

Historic rate rollover of derivative financial arrangement

 (5) For the purposes of paragraph (1)(b), all of your rights and/or obligations under a *financial arrangement that is a *derivative financial arrangement are taken to cease if there is an historic rate rollover of the arrangement.

230440  Exceptions

Equity interests etc.

 (1) A balancing adjustment is not made under this Subdivision in relation to a *financial arrangement at a time if:

 (a) the arrangement is a financial arrangement under section 23050 (equity interests etc.); and

 (b) neither Subdivision 230C nor Subdivision 230F apply to the arrangement immediately before that time.

Financial arrangements to which hedging financial arrangement elections apply

 (2) Balancing adjustments are not made under this Subdivision in relation to a *financial arrangement in relation to which a *hedging financial arrangement election applies.

Bad debts, margining and conversion into, or exchange for, ordinary shares

 (3) A balancing adjustment is not made under this Subdivision in relation to the following events:

 (a) a *financial arrangement being written off in whole or part as a bad debt;

 (b) a financial arrangement that is a *derivative financial arrangement being settled or closed out for margining purposes;

 (c) the ceasing of obligations or rights under a financial arrangement that is a *traditional security if:

 (i) the ceasing occurs because the traditional security is converted into ordinary shares in, or transferred to, a company that is the issuer of the traditional security or a *connected entity; and

 (ii) the traditional security was issued on the basis that it will or may convert into ordinary shares in, or be transferred to, the issuer of the traditional security or the connected entity;

 (d) the ceasing of obligations or rights under a financial arrangement that is a traditional security if:

 (i) the ceasing occurs because the traditional security is exchanged for ordinary shares in a company that is neither the issuer of the traditional security nor a connected entity; and

 (ii) if the ceasing of the obligations or rights occurs because of a disposal—the disposal is to the issuer of the traditional security or a connected entity; and

 (iii) the traditional security was issued on the basis that it will or may be exchanged for ordinary shares in the company.

Note: Paragraph (a)—for the treatment of bad debts, see paragraph 230190(3)(c).

Subsidiary member leaving consolidated group or MEC group

 (4) A balancing adjustment is not made under this Subdivision in relation to a subsidiary member of a *consolidated group or *MEC group that has a *financial arrangement ceasing to be a member of the group.

230445  Balancing adjustment

Complete cessation or transfer

 (1) Use the following method statement to make the balancing adjustment if paragraph 230435(1)(a), (b) or (d) applies:

Method statement for balancing adjustment

Step 1. Add up the following:

 (a) the total of all the *financial benefits you have received under the *financial arrangement;

 Note: This would include financial benefits you receive in relation to the transfer or cessation (see paragraph 23060(2)(c)).

 (b) the total of the amounts that have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement;

 (c) the total of the other amounts that would have been allowed to you as deductions, because of circumstances that have occurred before the transfer or cessation, for losses from the arrangement if all your losses from the arrangement were allowable as deductions;

 Note: The losses from the arrangement here include losses made in gaining or producing exempt income or nonassessable nonexempt income.

 (d) the total of the amounts that will be allowed to you as deductions after the transfer or cessation because of a balancing adjustment under subitems 104(12) to (18) of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 to the extent to which those amounts are attributable to the arrangement;

 (e) the total of the amounts that will be allowed to you as deductions after the transfer or cessation because of sections 230160 and 230165 to the extent to which those amounts are attributable to the arrangement.

Step 2. Add up the following:

 (a) the total of all the *financial benefits you have provided under the *financial arrangement;

 Note: This would include financial benefits you provide in relation to the transfer or cessation (see paragraph 23060(1)(c)).

 (b) the total of the amounts that have been included in your assessable income, because of circumstances that have occurred before the transfer or cessation, as gains from the arrangement;

 (c) the total of the other amounts that would have been included in your assessable income, because of circumstances that have occurred before the transfer or cessation, as gains from the arrangement if all your gains from the arrangement were assessable;

 Note: The gains from the arrangement here include amounts of exempt income or nonassessable nonexempt income.

 (d) the total of the amounts that will be included in your assessable income after the transfer or cessation because of a balancing adjustment under subitems 104(12) to (18) of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 to the extent to which those amounts are attributable to the arrangement.

 (e) the total of the amounts that will be included in your assessable income after the transfer or cessation because of sections 230160 and 230165 to the extent to which those amounts are attributable to the arrangement.

Step 3. Compare the amount obtained under step 1 (the step 1 amount) with the amount obtained under step 2 (the step 2 amount). If the step 1 amount exceeds the step 2 amount, an amount equal to the excess is taken, as a balancing adjustment, to be a gain you make from the *financial arrangement for the purposes of this Division. If the step 2 amount exceeds the step 1 amount, an amount equal to the excess is taken, as a balancing adjustment, to be a loss that you make from the arrangement. If the step 1 amount and the step 2 amount are equal, no balancing adjustment is made.

Proportionate transfer of all rights and/or obligations under financial arrangement

 (2) If subparagraph 230435(1)(c)(i) applies, you make the balancing adjustment by applying the method statement in subsection (1) but reduce:

 (a) the amounts referred to in step 1; and

 (b) the amounts referred to in step 2;

by applying the proportion referred to in subparagraph 230435(1)(c)(i) to them.

Transfer of specifically identified right or obligation under financial arrangement

 (3) If subparagraph 230435(1)(c)(ii) applies, you make the balancing adjustment by applying the method statement in subsection (1) as if the references to:

 (a) the amounts referred to in step 1; and

 (b) the amounts referred to in step 2;

were references to those amounts to the extent to which they are reasonably attributable to the right or obligation referred to in subparagraph 230435(1)(c)(ii).

Proportionate transfer of specifically identified right or obligation under financial arrangement

 (4) If subparagraph 230435(1)(c)(iii) applies, you make the balancing adjustment by applying the method statement:

 (a) as if the references to:

 (i) the amounts referred to in step 1; and

 (ii) the amounts referred to in step 2;

  were references to those amounts to the extent to which they are reasonably attributable to the right or obligation referred to in subparagraph 230435(1)(c)(iii); and

 (b) by reducing those amounts by applying the proportion referred to in subparagraph 230435(1)(c)(iii) to them.

Attribution must reflect appropriate and commercially accepted valuation principles

 (5) Any attribution made under subsection (3) or paragraph (4)(a) must reflect appropriate and commercially accepted valuation principles that properly take into account:

 (a) the nature of the rights and obligations under the *financial arrangement; and

 (b) the risks associated with each *financial benefit, right and obligation under the arrangement; and

 (c) the time value of money.

Income year for which gain or loss is made

 (6) The gain or loss you are taken to make under subsection (1), (2), (3) or (4) is a gain or loss for the income year in which the event referred to in subsection 230435(1) occurs.

Treatment of bad debts in relation to financial arrangements

 (7) For the purposes of applying paragraph (b) of step 1 of the method statement in subsection (1) to a *financial arrangement, a bad debt deduction in relation to the arrangement to which subsection 23025(3) applies is taken to be a deduction for a loss from the arrangement.

Subdivision 230HExceptions

Table of sections

230450 Shortterm arrangements where nonmoney amount involved

230455 Certain taxpayers where no significant deferral

230460 Various rights and/or obligations

230465 Ceasing to have a financial arrangement in certain circumstances

230470 Forgiveness of commercial debts

230475 Clarifying exceptions

230480 Treatment of gains in form of franked distribution etc.

230481 Registered emissions units

230450  Shortterm arrangements where nonmoney amount involved

  This Division does not apply in relation to your gains and losses from a *financial arrangement if:

 (a) the arrangement is a financial arrangement under section 23045; and

 (b) either:

 (i) you acquired goods or other property (other than goods that are, or property that is, money or a *money equivalent) or services (other than services that are a money equivalent) from another entity and the *financial benefits you are to provide under the arrangement are consideration for those goods, that property or those services; or

 (ii) you provided goods or other property (other than goods that are, or other property that is, money or a money equivalent) or services (other than services that are a money equivalent) to another entity and the financial benefits you are to receive under the arrangement are consideration for those goods, that property or those services; and

 (c) the period between the following is not more than 12 months:

 (i) the time when you are to provide or receive the consideration (or a substantial proportion of it);

 (ii) the time when you acquired or provided the property, goods or services (or a substantial proportion of them); and

 (d) the arrangement is not a *derivative financial arrangement for any income year; and

 (e) a *fair value election does not apply to the arrangement.

230455  Certain taxpayers where no significant deferral

 (1) This Division does not apply in relation to your gains or losses from a *financial arrangement for any income year if:

 (a) you are:

 (i) an individual; or

 (ii) a superannuation entity (within the meaning of section 10 of the Superannuation Industry (Supervision) Act 1993), a *superannuation fund that is not such an entity, a managed investment scheme (within the meaning of the Corporations Act 2001) or an entity with a similar status to such a scheme under a *foreign law relating to corporate regulation; or

 (iii) an *ADI, a *securitisation vehicle, an entity that is required to register under the Financial Sector (Collection of Data) Act 2001 or an entity that would be required to register under that Act if it were a corporation; or

 (iv) an entity other than an entity of a kind mentioned in subparagraph (i), (ii) or (iii); and

 (b) where subparagraph (a)(ii) applies—you satisfy subsection (2) for the income year in which you start to have the arrangement; and

 (c) where subparagraph (a)(iii) applies—you satisfy subsection (3) for the income year in which you start to have the arrangement; and

 (d) where subparagraph (a)(iv) applies—you satisfy subsection (4) for the income year in which you start to have the arrangement; and

 (e) either:

 (i) the arrangement is to end not more than 12 months after you start to have it; or

 (ii) the arrangement is not a *qualifying security.

 (2) An entity satisfies this subsection for an income year if:

 (a) the value of the entity’s assets (see subsection (5)) for the income year (worked out at the end of the income year) is less than $100 million if the income year is the one in which the entity comes into existence; or

 (b) the value of the entity’s assets for the immediately preceding income year (worked out at the end of that immediately preceding income year) is less than $100 million if the income year is an income year after the one in which the entity comes into existence.

 (3) An entity satisfies this subsection for an income year if:

 (a) the entity’s *aggregated turnover for the income year (worked out at the end of the income year) is less than $20 million if the income year is the one in which the entity comes into existence; or

 (b) the entity’s aggregated turnover for the immediately preceding income year (worked out at the end of that immediately preceding income year) is less than $20 million if the income year is an income year after the one in which the entity comes into existence.

 (4) An entity satisfies this subsection for an income year if:

 (a) either:

 (i) the entity’s *aggregated turnover for the income year (worked out at the end of the income year) is less than $100 million if the income year is the one in which the entity comes into existence; or

 (ii) the entity’s aggregated turnover for the immediately preceding income year (worked out at the end of that immediately preceding income year) is less than $100 million if the income year is an income year after the one in which the entity comes into existence; and

 (b) either:

 (i) the value of the entity’s financial assets (see subsection (5)) for the income year (worked out at the end of the income year) is less than $100 million if the income year is the one in which the entity comes into existence; or

 (ii) the value of the entity’s financial assets for the immediately preceding income year (worked out at the end of that immediately preceding income year) is less than $100 million if the income year is an income year after the one in which the entity comes into existence; and

 (c) either:

 (i) the value of the entity’s assets (see subsection (5)) for the income year (worked out at the end of the income year) is less than $300 million if the income year is the one in which the entity comes into existence; or

 (ii) the value of the entity’s assets for the immediately preceding income year (worked out at the end of that immediately preceding income year) is less than $300 million if the income year is an income year after the one in which the entity comes into existence.

 (5) For the purposes of subsections (2) and (4), the value of the entity’s assets or financial assets is to be determined in accordance with:

 (a) if the entity applies *accounting standard AAS 25 in preparation of its financial reports—that accounting standard or another accounting standard prescribed by the regulations for the purposes of this paragraph; or

 (b) if paragraph (a) does not apply and the entity prepares its financial reports in accordance with the *accounting principles—the entity’s financial reports; or

 (c) if paragraphs (a) and (b) do not apply and the entity prepares its financial reports in accordance with an accounting standard comparable to accounting standard AAS 25 under a *foreign law—that comparable standard; or

 (d) if paragraphs (a), (b) and (c) do not apply—commercially accepted valuation principles.

 (6) Subsection (1) does not apply to your gains or losses from a *financial arrangement for an income year if:

 (a) you have made an election under subsection (7) in that income year or an earlier income year; and

 (b) you start to have the arrangement after the beginning of the income year in which you make the election.

 (7) An election under this subsection is an election to have this Division apply to all of the *financial arrangements that you start to have in the income year in which the election is made or a later income year.

 (8) An election under subsection (7) is irrevocable.

 (9) This section does not apply in relation to your gains or losses from a *financial arrangement that you start to have after a time if you are not an individual and you failed to satisfy subsection (2), (3) or (4) (as the case may be) for an income year ending before that time.

230460  Various rights and/or obligations

Rights and/or obligations subject to an exception

 (1) This Division does not apply to your gains and losses from a *financial arrangement for any income year to the extent that your rights and/or obligations under the arrangement are the subject of an exception under any of the following subsections.

Note: Further exceptions are also provided for in section 230475.

Leasing or property arrangement

 (2) A right or obligation arising under:

 (a) an *arrangement to which Division 242 (about luxury car leases) applies; or

 (b) an arrangement to which Division 240 (about arrangements treated as a sale and loan) applies; or

 (c) an arrangement that relates to an asset to which Division 250 (about assets put to tax preferred use) applies; or

 (d) an arrangement that, in substance or effect, depends on the use of a specific asset that is:

 (i) real property; or

 (ii) goods or a personal chattel (other than money or a *money equivalent); or

 (iii) intellectual property;

  and gives a right to control the use of the asset; or

 (e) an arrangement that is a licence to use:

 (i) real property; or

 (ii) goods or a personal chattel (other than money or a money equivalent); or

 (iii) intellectual property;

is the subject of an exception.

Interest in partnership or trust

 (3) A right carried by an interest in a partnership or a trust, or an obligation that corresponds to such a right, is the subject of an exception if:

 (a) there is only one class of interest in the partnership or trust; or

 (b) the interest is an *equity interest in the partnership or trust; or

 (c) for a right or obligation relating to a trust—the trust is managed by a funds manager or custodian, or a responsible entity (as defined in the Corporations Act 2001) of a registered scheme (as so defined).

 (4) Subsection (3) does not apply if, assuming that the *financial arrangement were a *Division 230 financial arrangement, a *fair value election, or an *election to rely on financial reports, would apply to it.

Certain insurance policies

 (5) A right or obligation under a *life insurance policy is the subject of an exception unless:

 (a) you are not a *life insurance company that is the insurer under the policy; and

 (b) the policy is an annuity that is a *qualifying security.

 (6) A right or obligation under a *general insurance policy is the subject of an exception unless:

 (a) you are not a *general insurance company; and

 (b) the policy is a *derivative financial arrangement.

Certain workers’ compensation arrangements

 (7) A right or obligation in relation to a liability for workers’ compensation claims to which Subdivision 321C applies is the subject of an exception.

Certain guarantees and indemnities

 (8) A right or obligation under a guarantee or indemnity is the subject of an exception unless:

 (a) assuming that the *financial arrangement were a *Division 230 financial arrangement, it would be the subject of a *fair value election or an *election to rely on financial reports; or

 (b) the financial arrangement is a *derivative financial arrangement; or

 (c) the guarantee or indemnity is given in relation to a financial arrangement.

Personal arrangements and personal injury

 (9) The following rights and obligations are the subject of an exception:

 (a) a right to receive, or an obligation to provide, consideration for providing personal services;

 (b) a right, or obligation, arising from the administration of a deceased person’s estate;

 (c) a right to receive, or an obligation to provide, a gift under a deed;

 (d) a right to receive, or an obligation to provide, a *financial benefit by way of maintenance:

 (i) to an individual who is or has been the *spouse of the person liable to provide the benefit; or

 (ii) to or for the benefit of an individual who is or has been a child of the person liable to provide the benefit; or

 (iii) to or for the benefit of an individual who is or has been a child of an individual who is or has been a spouse of the person liable to provide the benefit;

 (e) a right to receive, or an obligation to provide, a financial benefit in relation to personal injury to an individual;

 (f) a right to receive, or an obligation to provide, a financial benefit in relation to an injury to an individual’s reputation.

 (10) Without limiting paragraph (9)(e), that paragraph applies:

 (a) even if the person to whom the *financial benefit is to be provided is not the individual who was injured; and

 (b) even if the personal injury to the individual takes the form of:

 (i) a wrong to the individual; or

 (ii) illness of the individual.

Note: The person referred to in paragraph (a) may, for example, be a relative of the individual who was injured.

Superannuation and pension benefits

 (11) A right to receive, or an obligation to provide, *financial benefits is the subject of an exception if the right or obligation arises from a person’s membership of a superannuation or pension scheme, including:

 (a) a right of a dependant of a member to receive financial benefits or an obligation to provide financial benefits to a dependant of a member; and

 (b) a right or obligation arising from an interest in:

 (i) a *complying superannuation fund or *noncomplying superannuation fund; or

 (ii) a *pooled superannuation trust; or

 (iii) an *approved deposit fund; or

 (iv) an *RSA.

Interest in controlled foreign companies

 (12) A right or obligation that arises under a *direct participation interest of an *attributable taxpayer in a *controlled foreign company is the subject of an exception.

Proceeds from certain business sales

 (13) A right to receive, or an obligation to provide, *financial benefits arising from the sale of:

 (a) a business; or

 (b) shares in a company that operates a business; or

 (c) interests in a trust that operates a business;

is the subject of an exception if the amounts, or the values, of those benefits are only *contingent on aspects of the economic performance of the business after the sale.

Infrastructure borrowings

 (14) A right to receive, or an obligation to provide, *financial benefits is the subject of an exception if the right or obligation arises under an *arrangement to which Division 16L of the Income Tax Assessment Act 1936 applies.

Farm management deposits

 (15) A right to receive, or an obligation to provide, *financial benefits is the subject of an exception if:

 (a) the right or obligation is the right or obligation of an *owner of a *farm management deposit; and

 (b) the right or obligation relates to the deposit.

Rights and obligations to which section 121EK of the Income Tax Assessment Act 1936 applies

 (16) A right or obligation that arises because of a payment of an amount to which section 121EK of the Income Tax Assessment Act 1936 applies is the subject of an exception.

Forestry managed investment scheme interests

 (17) A right or obligation under a *forestry interest in a *forestry managed investment scheme in relation to which you can claim deductions under Division 394 is the subject of an exception.

Exploration benefits

 (17A) A right or obligation that arises because of the provision of an *exploration benefit under a *farmin farmout arrangement is the subject of an exception.

Regulations may provide for exceptions

 (18) A right or obligation of a kind specified in the regulations for the purposes of this subsection is the subject of an exception.

230465  Ceasing to have a financial arrangement in certain circumstances

 (1) This section applies if:

 (a) you cease to have a *financial arrangement (or part of a financial arrangement); and

 (b) you make a loss from ceasing to have the arrangement (or that part of the arrangement); and

 (c) if the arrangement is a marketable security (within the meaning of section 70B of the Income Tax Assessment Act 1936):

 (i) you did not acquire the arrangement in the ordinary course of trading on a securities market (within the meaning of that section); and

 (ii) at the time you acquired the arrangement, it was not open to you to acquire an identical financial arrangement in the ordinary course of trading on a securities market; and

 (d) if the arrangement is a marketable security—you did not dispose of the arrangement in the course of trading on a securities market; and

 (e) it would be concluded that you ceased to have the arrangement wholly or partly because there was an apprehension or belief that the other party or other parties to the arrangement were, or would be likely to be, unable or unwilling to discharge all their liabilities to pay amounts under the arrangement.

 (2) The amount of the loss is reduced by so much of that amount as is a loss of capital or a loss of a capital nature.

Note: However, the amount by which the loss is reduced is a capital loss.

 (3) In applying paragraph (1)(e), you must have regard to:

 (a) the financial position of the other party or parties to the *financial arrangement; and

 (b) the perceptions of the financial position of the other party or parties to the arrangement; and

 (c) other relevant matters.

230470  Forgiveness of commercial debts

  If a gain that you make from a *financial arrangement arises from the *forgiveness of a debt to which Subdivisions 245C to 245G apply, the gain is reduced by:

 (a) if section 24590 (about agreements to forgo capital losses or deductions) applies—the debt’s provisional net forgiven amount mentioned in that section; or

 (b) if that section does not apply—the debt’s *net forgiven amount.

Note: Section 51AAA (about a net capital gains limit) of the Income Tax Assessment Act 1936 also has the effect of preventing you from deducting losses.

230475  Clarifying exceptions

Exceptions

 (1) To avoid doubt, this Division does not apply to your gains and losses from a *financial arrangement for any income year to the extent that your rights and/or obligations are the subject of an exception under any of the following subsections.

 (2) This section is not intended to limit, expand or otherwise affect the operation of sections 23045 to 23055 (which tell you what is covered by the concept of financial arrangement) in relation to rights and/or obligations other than those dealt with in this section.

Retirement village and residential or flexible care arrangements

 (3) The following rights and obligations are the subject of an exception:

 (a) a right or obligation arising under a *retirement village residence contract;

 (b) a right or obligation arising under a *retirement village services contract;

 (c) a right or obligation arising under an *arrangement under which *residential care or *flexible care is provided.

 (4) For the purposes of subsection (3):

 (a) a retirement village residence contract is a contract that gives rise to a right to occupy *residential premises in a *retirement village; and

 (b) a retirement village services contract is a contract under which a resident of a retirement village is provided with general or personal services in the retirement village.

230480  Treatment of gains in form of franked distribution etc.

 (1) This section applies if a gain you make from a *financial arrangement is in the form of:

 (a) a *franked distribution (including a franked distribution that *flows indirectly to you); or

 (b) a right to receive a franked distribution (including a franked distribution that will flow indirectly to you).

 (2) This Division does not apply to the gain to the extent that the *franked distribution has a *franked part.

230481  Registered emissions units

  A *registered emissions unit is exempt from this Division.

Subdivision 230IOther provisions

Table of sections

230485 Effect of change of residence—rules for particular methods

230490 Effect of change of residence—disposal and reacquisition etc. after ceasing to be Australian resident where no further recognised gains or losses from arrangement

230495 Effect of change of accounting principles or standards

230500 Comparable foreign accounting and auditing standards

230505 Financial arrangement as consideration for provision or acquisition of a thing

230510 Nonarm’s length dealings in relation to financial arrangement

230515 Arm’s length dealings in relation to financial arrangement—adjustment to gain or loss in certain situations

230520 Disregard gains or losses covered by value shifting regime

230525 Consolidated financial reports

230527 Elections—reporting documents of foreign ADIs

230485  Effect of change of residence—rules for particular methods

 (1) The object of this section is to deal with your gains and losses for an income year in which you change residence by:

 (a) allocating the gains and losses to your periods of Australian and foreign residence in that income year; and

 (b) determining the assessability of the gains and the deductibility of the losses according to:

 (i) your residency in each period; and

 (ii) the sources of the gains and the connection of the losses with your assessable income.

 (2) This section applies if:

 (a) you are a foreign resident for part of an income year (the foreign residency period) and an Australian resident for the other part of the income year (the Australian residency period); and

 (b) section 230490 does not apply in respect of the change of residence.

Note: See section 230490 if you change residence, and after the change the gains and losses you make from the arrangement are not assessable or deductible under this Division.

Realisation method

 (3) Subsection (4) applies if:

 (a) you have a *financial arrangement at the time (the residence change time):

 (i) you cease to be an Australian resident; or

 (ii) you become an Australian resident; and

 (b) you apply the realisation method to determine the amount of a gain or loss you make from the arrangement.

 (4) You are taken for the purposes of this Division:

 (a) to have disposed of the arrangement just before the residence change time for its fair value just before that time; and

 (b) to have acquired the arrangement again at the residence change time for its fair value at that time.

Accruals and hedging financial arrangement methods

 (5) Subsection (6) applies if:

 (a) assuming that you disregarded this section and subsection 23040(2), you would apply the accruals or hedging financial arrangement method to determine the amount of:

 (i) a gain included in your assessable income under section 23015 for the income year; or

 (ii) a loss you can deduct under section 23015 for the income year; and

 (b) subsection (4) does not apply in relation to any gain or loss under the arrangement.

 (6) Apply that method by apportioning the gain or loss on a reasonable basis between those periods so as to work out:

 (a) a gain or loss from the arrangement for the foreign residency period; and

 (b) a gain or loss from the arrangement for the Australian residency period.

Fair value, foreign exchange retranslation and financial reports methods

 (7) Subsection (8) applies if:

 (a) assuming that you disregarded this section and subsection 23040(2), you would apply the fair value or foreign exchange retranslation method or the method of relying on your financial reports to determine the amount of:

 (i) a gain included in your assessable income under section 23015 for the income year; or

 (ii) a loss you can deduct under section 23015 for the income year; and

 (b) subsection (4) does not apply in relation to any gain or loss under the arrangement.

 (8) Apply that method to work out:

 (a) a gain or loss from the arrangement for the foreign residency period; and

 (b) a gain or loss from the arrangement for the Australian residency period.

230490  Effect of change of residence—disposal and reacquisition etc. after ceasing to be Australian resident where no further recognised gains or losses from arrangement

 (1) This section applies if:

 (a) you cease to be an Australian resident at a particular time (the residence change time); and

 (b) you have a *financial arrangement at the residence change time; and

 (c) at the residence change time you expect that any gains and losses you make from the arrangement after that time will not be assessable or deductible under this Division.

 (2) You are taken for the purposes of this Division:

 (a) to have disposed of the arrangement just before that time for its fair value just before that time; and

 (b) to have acquired the arrangement again at the residence change time for its fair value at that time.

230495  Effect of change of accounting principles or standards

 (1) This section applies if:

 (a) one of these methods apply to take account of a gain or loss you make from a *financial arrangement:

 (i) the fair value method provided for in Subdivision 230C; or

 (ii) the foreign exchange retranslation method provided for in Subdivision 230D; or

 (iii) the method of relying on your financial reports provided for in Subdivision 230F; and

 (b) there is a change in, or in the application of, the relevant principles or standards (as mentioned in section 230230 (fair value method), 230280 (foreign exchange retranslation method) or 230420 (method of relying on financial reports)) that apply in relation to the arrangement; and

 (c) that change applies to a particular income year and later years; and

 (d) as a result of the change, those principles or standards require you to recognise in your statement of financial position an amount (the equity amount), in order to avoid the need to increase or decrease gains or losses recognised in profit or loss from the financial arrangement in respect of previous income years.

 (2) If the equity amount is positive, include in your assessable income for the particular income year mentioned in paragraph (1)(c) so much of it as relates to the *financial arrangement mentioned in paragraph (1)(a).

 (3) If the equity amount is negative, you are entitled to a deduction for the particular income year mentioned in paragraph (1)(c) equal to so much of it as relates to the *financial arrangement mentioned in paragraph (1)(a).

230500  Comparable foreign accounting and auditing standards

  The regulations may:

 (a) specify that particular standards that apply under a *foreign law are to be taken for the purposes of this Division to be comparable to the *accounting principles; and

 (b) specify that particular standards that apply under a foreign law are to be taken for the purposes of this Division to be comparable to the *auditing principles.

230505  Financial arrangement as consideration for provision or acquisition of a thing

 (1) This section applies if you start or cease to have a *Division 230 financial arrangement as consideration for the provision or acquisition of a thing.

 (2) Work out the *market value of the thing at the time at which you (in fact) provide or acquire it. For the purposes of applying this Act to you, treat the amount:

 (a) you obtain for providing the thing; or

 (b) you provide for acquiring the thing;

as being that market value.

Note 1: The amount may be relevant, for example, for the purposes of applying the provisions of this Act dealing with capital gains, capital allowances or trading stock to the thing.

Note 2: This subsection does not affect the financial benefits received or provided under the financial arrangement from you starting or ceasing to have it (except in the circumstances described in Note 3). However:

(a) the market value of the thing will be, or form part of, those financial benefits for the purposes of section 230445; and

(b) in the case of a non arm’s length transaction, the amount of those financial benefits may be affected by section 230510.

Note 3: If the thing is itself a Division 230 financial arrangement and subsection (3) does not apply, this subsection will determine the financial benefits received or provided under the financial arrangement from you starting or ceasing to have it.

 (3) Subsection (2) does not apply if:

 (a) you start or cease to have the *financial arrangement as mentioned in subsection (1) under an arrangement (the starting or ceasing arrangement); and

 (b) the thing is itself a *Division 230 financial arrangement; and

 (c) the starting or ceasing arrangement is not itself a Division 230 financial arrangement.

Example: An arrangement for exchanging a share subject to Subdivision 230C for another share subject to Subdivision 230C, where the arrangement itself is not a Division 230 financial arrangement.

 (4) For the purposes of this section:

 (a) treat yourself as providing a thing to another entity if:

 (i) you have provided, or are to provide, the thing to the other entity; or

 (ii) you cease to have, have ceased to have or are to cease to have, the thing; or

 (iii) the other entity starts to have, has started having or is to start to have, the thing; and

 (b) treat yourself as acquiring a thing if:

 (i) another entity has provided, or is to provide, the thing to you; or

 (ii) another entity ceases to have, has ceased to have or is to cease to have, the thing; or

 (iii) you start to have, have started to have or are to start to have, the thing.

 (5) For the purposes of this section, treat part of a *Division 230 financial arrangement as a Division 230 financial arrangement.

 (6) Without limiting subsection (1), the thing provided, or the thing acquired, need not be a tangible thing and may take the form of services, conferring a right, incurring an obligation or extinguishing or varying a right or obligation.

 (7) To avoid doubt, this section applies even if your starting or ceasing to have the *financial arrangement mentioned in subsection (1) is only part of the consideration for the provision or acquisition of the thing.

 (8) For the purposes of this section, treat your starting or ceasing to have the *financial arrangement mentioned in subsection (1) as consideration for the provision or acquisition of the thing if that starting or ceasing is, in substance or effect, done for the provision or acquisition of the thing.

Example: Starting to have a financial arrangement in satisfaction of an obligation, where the obligation itself was incurred as consideration for the thing.

230510  Nonarm’s length dealings in relation to financial arrangement

 (1) This section applies if:

 (a) a balancing adjustment is made under Subdivision 230G in relation to a *Division 230 financial arrangement you have; and

 (b) if the balancing adjustment was made because of paragraph 230435(1)(b) or (d) (cessations without transfer)—the arrangement is not a *debt interest or loan.

Nonarm’s length transaction resulting in you starting to have the arrangement

 (2) Subsection (3) applies if the parties to the dealing that resulted in you starting to have the arrangement were not dealing at *arm’s length in relation to the dealing.

 (3) For the purposes of this Division:

 (a) disregard the amount of the *financial benefit (if any) that you provided or received in relation to you starting to have the arrangement; and

 (b) instead, treat yourself as having provided or received a financial benefit in relation to you starting to have the arrangement that is equal to the amount of the financial benefit that you would have provided or received if the parties to the dealing mentioned in subsection (2) were dealing at *arm’s length in relation to the dealing.

Nonarm’s length transaction resulting in change of an amount of a financial benefit that you provided or received under the financial arrangement

 (4) Subsection (5) applies if the parties to a dealing that resulted in a change of an amount of a *financial benefit that you provide or receive under the *financial arrangement were not dealing at *arm’s length in relation to the dealing.

 (5) For the purposes of this Division:

 (a) disregard the amount of the *financial benefit (if any) that you provide or receive under the *financial arrangement as a result of the dealing; and

 (b) instead, treat yourself as providing or receiving a financial benefit under the financial arrangement as a result of the dealing that is equal to the amount of the financial benefit that you would have provided or received if the parties to the dealing were dealing at *arm’s length in relation to the dealing.

Nonarm’s length transaction resulting in balancing adjustment

 (6) Subsection (7) applies if the parties to the dealing that resulted in the balancing adjustment mentioned in subsection (1) being made were not dealing at *arm’s length in relation to the dealing.

 (7) For the purposes of this Division:

 (a) disregard the amount of the *financial benefit (if any) that you provide or receive in relation to the balancing adjustment; and

 (b) instead, treat yourself as providing or receiving a financial benefit in relation to the balancing adjustment that is equal to the amount of the financial benefit that you would have provided or received if the parties to the dealing mentioned in subsection (6) were dealing at *arm’s length in relation to the dealing.

230515  Arm’s length dealings in relation to financial arrangement—adjustment to gain or loss in certain situations

 (1) This section applies if:

 (a) disregarding this Division, a provision mentioned in subsection (2) makes an adjustment to an amount (including a nil amount) (the relevant amount); and

 (b) the relevant amount is relevant in determining the amount of a gain or loss you make from a *Division 230 financial arrangement.

 (2) The provisions are as follows:

 (a) section 52A of the Income Tax Assessment Act 1936;

 (c) Division 16J of Part III of the Income Tax Assessment Act 1936;

 (d) Division 16K of Part III of the Income Tax Assessment Act 1936;

 (e) item 3 of the table in subsection 24565(1) of this Act;

 (f) section 77540 of this Act.

 (3) In determining the amount of the gain or loss, treat the relevant amount as having been adjusted by the provision mentioned in subsection (2).

 (4) However, if the circumstances that give rise to the adjustment result in section 230510 having the effect of altering the amount of the gain or loss, do not treat the relevant amount as having been adjusted under subsection (3) to the extent of that alteration.

230520  Disregard gains or losses covered by value shifting regime

 (1) Disregard a gain or loss under this Division from a *financial arrangement to the extent that it is attributable to:

 (a) a shifting of value that has consequences under Division 723; or

 (b) a *direct value shift that has consequences under Division 725; or

 (c) an *indirect value shift that has consequences under Division 727; or

 (d) a shifting of value that has consequences analogous to those under Division 725 or 727 under a repealed provision of this Act or of the Income Tax Assessment Act 1936.

 (2) Determine whether a shifting of value has the consequences mentioned in paragraph (1)(a) on the assumption that a *realisation event in respect of all or part of the *financial arrangement happens in the income year for the gain or loss.

230525  Consolidated financial reports

  For the purposes of this Division, treat a financial report prepared by another entity as being prepared by you if:

 (a) the other entity is a *connected entity of yours; and

 (b) the report is a consolidated financial report that deals with both your affairs and the affairs of the connected entity; and

 (c) the report properly reflects your affairs.

230527  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 230150 to 230165 (election for portfolio treatment of fees);

 (b) sections 230210 to 230220 (fair value election);

 (c) sections 230255 to 230265 (foreign exchange retranslation election);

 (d) sections 230315 to 230335 (hedging financial arrangement election);

 (e) sections 230395, 230400, 230410 and 230430 (election to rely on financial reports).

Subdivision 230JAdditional operation of Division

Table of sections

230530 Additional operation of Division

230530  Additional operation of Division

Foreign currency

 (1) This Division also applies to *foreign currency as if the currency were a right that constituted a *financial arrangement.

Nonequity shares

 (2) This Division also applies to a *nonequity share in a company as if the share were a right that constituted a *financial arrangement.

Commodities held by traders

 (3) This Division also applies to a commodity that you hold as if the commodity were a right that constituted a *financial arrangement if:

 (a) you are an entity that trades or deals both in:

 (i) that commodity; and

 (ii) financial arrangements whose values change in response to changes in the price or value of that commodity; and

 (b) you hold that commodity for the purposes of dealing in the commodity; and

 (c) a *fair value election or an *election to rely on financial reports applies to financial arrangements that you start to have when you start to have the commodity; and

 (d) the commodity is an asset that you are required (whether or not as a result of a choice you make) by:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting that apply to the preparation of the financial report under a *foreign law;

  to classify or designate, in your financial reports, as at fair value through profit or loss.

Offsetting commodity contracts held by traders

 (4) This Division also applies to a contract to which you are a party as if the contract were a *financial arrangement if:

 (a) you have a right to receive or an obligation to provide a commodity under the contract; and

 (b) you have a practice of dealing in the commodity through the performance of offsetting contracts to receive and provide the commodity; and

 (c) you do not have, as your sole or dominant purpose for entering into the contract, the purpose of receiving or delivering the commodity as part of your expected purchase, sale or usage requirements; and

 (d) a *fair value election or an *election to rely on financial reports applies to financial arrangements that you start to have when you enter into the contract; and

 (e) the contract is an asset or liability that you are required (whether or not as a result of a choice you make) by:

 (i) the *accounting principles; or

 (ii) if the accounting principles do not apply to the preparation of the financial report—comparable standards for accounting that apply to the preparation of the financial report under a *foreign law;

  to classify or designate, in your financial reports, as at fair value through profit or loss.

Division 235Particular financial transactions

Table of Subdivisions

 Guide to Division 235

235I Instalment trusts

Guide to Division 235

2351  What this Division is about

This Division is about the tax treatment of particular kinds of financial transactions.

Subdivision 235IInstalment trusts

Guide to Subdivision 235I

235805  What this Subdivision is about

An entity that invests in an asset through an instalment warrant, instalment receipt, or other similar arrangement, is treated for most income tax purposes as if it had invested in the asset directly.

A regulated superannuation fund that invests in an asset through a limited recourse borrowing is treated in the same way.

Table of sections

Operative provisions

235810 Object of this Subdivision

235815 Application of Subdivision

235820 Lookthrough treatment for instalment trusts

235825 Meaning of instalment trust and instalment trust asset

235830 What trusts are covered—instalment trust arrangements

235835 Requirement for underlying investments to be listed or widely held

235840 What trusts are covered—limited recourse borrowings by regulated superannuation funds

235845 Interactions with other provisions

Operative provisions

235810  Object of this Subdivision

  The object of this Subdivision is to ensure that, for most income tax purposes, the consequences of ownership of an *instalment trust asset flow to the entity that has the beneficial interest in the asset, instead of to the trustee.

235815  Application of Subdivision

 (1) This Subdivision applies to:

 (a) the entity that has the beneficial interest in an *instalment trust asset as the beneficiary of an *instalment trust; and

 (b) the trustee of the instalment trust.

 (2) This Subdivision applies for the purposes of this Act, apart from:

 (a) Part VA of the Income Tax Assessment Act 1936 (which is about tax file numbers); and

 (b) Subdivisions 12E, 12F and 12H in Schedule 1 to the Taxation Administration Act 1953 (which are about PAYG withholding).

Joint investments

 (3) This Subdivision applies in relation to 2 or more entities that hold an interest in a trust as joint tenants, or as tenants in common, in the same way it applies in relation to a single entity that holds such an interest.

Note: Each investor that is treated by this Subdivision as jointly owning an instalment trust asset is treated for CGT purposes as owning a separate asset: see section 1087.

235820  Lookthrough treatment for instalment trusts

 (1) If an entity (the investor) has a beneficial interest in an *instalment trust asset under an *instalment trust, the asset is treated as being the investor’s asset (instead of being an asset of the trust).

Example: A dividend in respect of the asset is paid to the trustee. It is treated (but not for the purposes of the PAYG withholding provisions mentioned in paragraph 235815(2)(b)) as if it had been paid directly to the investor.

 (2) An act done in relation to an *instalment trust asset of an *instalment trust by the trustee of the trust is treated as if the act had been done by the investor (instead of by the trustee).

Example: A trustee disposes of the asset. Any capital gain or loss is made by the investor, not by the trustee.

 (3) The investor is treated as having the *instalment trust asset in the same circumstances as the investor actually has the interest in the *instalment trust.

 (4) Without limiting subsection (3), the circumstances include:

 (a) whether the interest is held on capital account or on revenue account; and

 (b) whether the interest is held as a joint tenant or tenant in common.

 (5) Any consequence arising under the *GST Act for the trustee of the *instalment trust, as a result of anything done in relation to the *instalment trust asset, is treated as if it had arisen for the investor (instead of for the trustee), even if that consequence would not have arisen had the thing been done by or to the investor.

Example: If the trustee has a net input tax credit under the GST Act, the investor must apply the credit to reduce the investor’s cost base for the instalment trust asset (even if the investor is not registered or required to be registered for GST purposes): see section 10330.

235825  Meaning of instalment trust and instalment trust asset

 (1) A trust is an instalment trust if:

 (a) the trust is covered by section 235830 (about instalment trust arrangements) and satisfies the requirements in section 235835 (about requirements for underlying investments to be listed or widely held); or

 (b) the trust is covered by section 235840 (about limited recourse borrowings by *regulated superannuation funds).

 (2) An instalment trust asset is an asset that is, or is part of, the underlying investment of an *instalment trust (as mentioned in section 235830 or 235840, as the case requires).

235830  What trusts are covered—instalment trust arrangements

 (1) This section covers a trust if, under an *arrangement:

 (a) an entity (the investor) makes a *borrowing, or is provided with credit; and

 (b) to secure the borrowing or provision of credit, the trustee of the trust acquires an asset or assets (the underlying investment); and

 (c) the investor has a beneficial interest in the underlying investment as the sole beneficiary of the trust; and

 (d) for a provision of credit—the credit was provided to the investor to acquire the asset, or one of the assets, that comprises the underlying investment; and

 (e) the investor is entitled to the benefit of all income from the underlying investment; and

 (f) the investor is entitled to acquire legal ownership of the underlying investment on discharging its obligations relating to the borrowing or provision of credit.

Note: For paragraph (c), the sole beneficiary of the trust may be 2 or more entities that have an interest in the trust as joint tenants or tenants in common: see subsection 235815(3).

 (2) However, this section does not cover a trust if the investor is a trustee of a *regulated superannuation fund and the *arrangement includes a *borrowing.

 (3) This section does not cover a trust if the underlying investment is subject to any charge, security or other encumbrance (apart from any charge securing the obligations relating to the *borrowing or provision of credit).

235835  Requirement for underlying investments to be listed or widely held

 (1) A trust satisfies the requirements in this section if:

 (a) each asset that is, or is part of, the underlying investment is:

 (i) a *share, a unit in a unit trust or a stapled security; or

 (ii) an interest in an entity that holds an interest in a share, a unit in a unit trust or a stapled security either directly, or indirectly through one or more interposed entities; and

 (b) each such share, unit or stapled security:

 (i) is listed for quotation in the official list of an *approved stock exchange; or

 (ii) meets the widely held requirement set out in the applicable item of the following table.

 

Widely held requirements

Item

Column 1
Type of asset

Column 2
Widely held requirement

1

A *share in a company

The company is a *widely held company

2

A unit in a unit trust

The unit trust is a widely held unit trust as defined in section 272105 in Schedule 2F to the Income Tax Assessment Act 1936

3

A stapled security

All companies involved are *widely held companies and all trusts involved are such widely held unit trusts

 (2) A *share, unit in a unit trust or a stapled security that fails the widely held requirement set out in the table in subsection (1) is treated as satisfying that requirement if the failure:

 (a) is of a temporary nature only; and

 (b) is caused by circumstances outside the investor’s control.

 (3) In applying subsection (1), disregard an asset, or the cash proceeds from disposing of an asset, if:

 (a) the trustee became entitled to the asset in respect of a *share, unit or stapled security that was, or was part of, the underlying investment just before the entitlement arose; and

 (b) the asset is not a *share, unit in a unit trust, or stapled security; and

 (c) if the asset is an interest in an entity, or a right, option or similar interest that gives the holder an entitlement to acquire an interest in an entity:

 (i) an interest in the entity is listed for quotation in the official list of an *approved stock exchange; or

 (ii) the entity meets a widely held requirement set out in column 2 of item 1 or 2 of the table in subsection (1); and

 (d) the underlying investment comprises one or more other assets that are not disregarded under this subsection.

Example: Examples of the types of assets disregarded by this subsection are:

(a) assets that represent distributions and capital payments in respect of the underlying investment; and

(b) bonus rights issued in respect of the underlying investment.

 (4) Despite subsections (1) to (3), the underlying investment does not satisfy the requirement in this section if an asset that is, or is part of, the underlying investment is an *ESS interest to which Subdivision 83AB or 83AC (about employee share schemes) applies.

235840  What trusts are covered—limited recourse borrowings by regulated superannuation funds

  This section covers a trust if:

 (a) under an *arrangement, an asset or assets (the underlying investment) is acquired by the trustee of the trust for the benefit of a trustee of a *regulated superannuation fund to secure a *borrowing; and

 (b) until the borrowing is repaid, the arrangement is covered by:

 (i) the exception in subsection 67A(1) of the Superannuation Industry (Supervision) Act 1993 (which is about limited recourse borrowing arrangements); or

 (ii) the exception in former subsection 67(4A) of that Act (which was about instalment warrants).

235845  Interactions with other provisions

 (1) Section 10650 (about absolutely entitled beneficiaries) does not apply to an *instalment trust asset.

 (2) Section 10660 (about securities, charges and encumbrances) does not apply to an *instalment trust asset.

 (3) Nothing in this Subdivision limits Division 247 (which is about capital protected borrowings).

Note: Division 247 may apply to an arrangement to which this Subdivision applies.

Division 240Arrangements treated as a sale and loan

Table of Subdivisions

 Guide to Division 240

240A Application and scope of Division

240B The notional sale and notional loan

240C Amounts to be included in notional seller’s assessable income

240D Deductions allowable to notional buyer

240E Notional interest and arrangement payments

240F The end of the arrangement

240G Adjustments if total amount assessed to notional seller differs from amount of interest

240H Application of Division 16E to certain arrangements

240I Provisions applying to hire purchase agreements

Guide to Division 240

2401  What this Division is about

For income tax purposes, some arrangements (such as hire purchase agreements) are recharacterised as a sale of property, combined with a loan, by the notional seller to the notional buyer, to finance the purchase price.

2403  How the recharacterisation affects the notional seller

Effect of notional sale

 (1) The consideration for the notional sale is either the price stated as the cost or value of the property or its arm’s length value. If the notional seller is disposing of the property as trading stock, the normal consequences of disposing of trading stock follow. In particular, the notional seller will be assessed on the sale price.

 (2) Where the property is not trading stock the notional seller’s assessable income will include any profit made by the notional seller on the notional sale or on the sale of the property after a notional reacquisition.

Effect of notional loan

 (3) The notional seller’s assessable income will include notional interest over the period of the loan.

Other effects

 (4) These effects displace the income tax consequences that would otherwise arise from the arrangement. For example, the actual payments to the notional seller are not included in its assessable income. Also, the notional seller loses the right to deduct amounts under Division 40 (about capital allowances).

2407  How the recharacterisation affects the notional buyer

Effect of notional purchase

 (1) The cost of the acquisition is either the price stated as the cost or value of the property or its arm’s length value. If the notional buyer is acquiring the property as trading stock, the normal consequences of acquiring trading stock follow. In particular, the notional buyer can usually deduct the purchase price.

 (2) If the property is not trading stock, the notional buyer may be able to deduct amounts for the expenditure under Division 40 (about capital allowances).

Effect of notional loan

 (3) The notional buyer may be able to deduct notional interest payments over the period of the loan.

Other effects

 (4) These effects displace the income tax consequences that would otherwise arise from the arrangement. For example, the notional buyer cannot deduct the actual payments to the notional seller.

Subdivision 240AApplication and scope of Division

Table of sections

Operative provisions

24010 Application of this Division

24015 Scope of Division

Operative provisions

24010  Application of this Division

  An *arrangement is treated as a notional sale and notional loan if:

 (a) the arrangement is listed in the table below; and

 (b) the arrangement relates to the kind of property listed in the table; and

 (c) any conditions listed in the table are satisfied.

Special provisions that apply to particular arrangements are also listed in the table.

 

This Division applies to:

 

*Arrangements of this kind:

That relate to this kind of property:

If these conditions are satisfied:

Special provisions:

1

*Hire purchase agreement

Any goods

None

See Subdivision 240I

24015  Scope of Division

  This Division has effect for the purposes of this Act and for the purposes of the Income Tax Assessment Act 1936 other than:

 (a) Parts 31 and 33 of this Act (capital gains tax); and

 (b) Division 11A of Part III of the Income Tax Assessment Act 1936 (certain payments to nonresidents etc.).

Subdivision 240BThe notional sale and notional loan

Table of sections

Operative provisions

24017 Who is the notional seller and the notional buyer?

24020 Notional sale of property by notional seller and notional acquisition of property by notional buyer

24025 Notional loan by notional seller to notional buyer

Operative provisions

24017  Who is the notional seller and the notional buyer?

 (1) An entity is the notional seller if it is a party to the *arrangement and:

 (a) actually owns the property; or

 (b) is the owner of the property because of a previous operation of this Division.

 (2) An entity is the notional buyer if it is a party to the *arrangement and, under the arrangement, has the *right to use the property.

Example: If the arrangement is a hire purchase agreement, the finance provider will be the notional seller and the hirer will be the notional buyer.

24020  Notional sale of property by notional seller and notional acquisition of property by notional buyer

 (1) The *notional seller is taken to have disposed of the property by way of sale to the *notional buyer, and the notional buyer is taken to have acquired it, at the start of the *arrangement.

 (2) The *notional buyer is taken to own the property until:

 (a) the *arrangement ends; or

 (b) the notional buyer becomes the *notional seller under a later arrangement to which this Division applies.

24025  Notional loan by notional seller to notional buyer

 (1) On entering into the *arrangement, the *notional seller is taken to have made a loan (the notional loan) to the *notional buyer.

 (2) The notional loan is for a period:

 (a) starting at the start of the *arrangement; and

 (b) ending on the day on which the arrangement is to cease to have effect or, if the arrangement is of indefinite duration, on the day on which it would be reasonable to conclude, having regard to the terms and conditions of the arrangement, that the arrangement will cease to have effect.

 (3) The notional loan is of an amount (the notional loan principal) equal to the consideration for the sale of the property less any amount paid, or credited by the *notional seller as having been paid, by the *notional buyer to the notional seller, at or before the start of the *arrangement, for the cost of the property.

Note: Section 24080 affects the amount of the notional loan principal where the arrangement is an extension or renewal of another arrangement.

 (4) The notional loan is subject to payment of interest.

 (5) The consideration for the sale of the property by the *notional seller, and the cost of the acquisition of the property by the *notional buyer, are each taken to have been:

 (a) if an amount is stated to be the cost or value of the property for the purposes of the *arrangement and the notional seller and the notional buyer were dealing with each other at *arm’s length in connection with the arrangement—the amount so stated; or

 (b) otherwise—the amount that could reasonably have been expected to have been paid by the notional buyer for the purchase of the property if:

 (i) the notional seller had actually sold the property to the notional buyer at the start of the arrangement; and

 (ii) the notional seller and the notional buyer were dealing with each other at arm’s length in connection with the sale.

 (6) The notional loan principal is taken to be repaid, and the interest is taken to be paid, by the making of the payments under the *arrangement.

Subdivision 240CAmounts to be included in notional seller’s assessable income

Guide to Subdivision 240C

24030  What this Subdivision is about

This Subdivision provides for the inclusion in the notional seller’s assessable income of:

(a) amounts (notional interest) on account of the interest for the notional loan that the notional seller is taken to have made to the notional buyer; and

(b) any profit made by the notional seller:

 (i) on the notional sale of the property to the notional buyer; or

 (ii) on a sale of the property after any notional reacquisition of the property by the notional seller.

Table of sections

Operative provisions

24035 Amounts to be included in notional seller’s assessable income

24040 Arrangement payments not to be included in notional seller’s assessable income

Operative provisions

24035  Amounts to be included in notional seller’s assessable income

Notional interest

 (1) The *notional seller’s assessable income of an income year includes the *notional interest for *arrangement payment periods, and parts of arrangement payment periods, in the income year.

Profit on notional sale

 (2) If the property is not *trading stock of the *notional seller and the consideration for the notional sale of the property exceeds the cost of the acquisition of the property by the notional seller, the excess is included in the notional seller’s assessable income of the income year of the notional sale.

Profit on actual sale after notional reacquisition

 (3) If:

 (a) the *notional seller is taken under this Division to have reacquired the property from the *notional buyer; and

 (b) the notional seller afterwards sells the property; and

 (c) the consideration for the sale exceeds the cost of the reacquisition;

the excess is included in the notional seller’s assessable income of the income year in which the sale occurred.

24040  Arrangement payments not to be included in notional seller’s assessable income

 (1) The *arrangement payments that the *notional seller receives, or is entitled to receive, under the *arrangement:

 (a) are not to be included in the *notional seller’s assessable income of any income year; but

 (b) are not taken to be *exempt income of the notional seller.

 (2) However, those *arrangement payments are taken into account in calculating *notional interest that is included in the *notional seller’s assessable income under section 24035.

 (3) A loss or outgoing incurred by the *notional seller in deriving any such *arrangement payments is not taken to be a loss or outgoing incurred by the notional seller in relation to gaining or producing *exempt income.

Subdivision 240DDeductions allowable to notional buyer

Guide to Subdivision 240D

24045  What this Subdivision is about

This Subdivision provides that the notional buyer may, in certain circumstances, be entitled to deductions for the notional interest for the notional loan that the notional seller is taken to have made to the notional buyer.

Table of sections

Operative provisions

24050 Extent to which deductions are allowable to notional buyer

24055 Arrangement payments not to be deductions

Operative provisions

24050  Extent to which deductions are allowable to notional buyer

 (1) The *notional buyer is only entitled to deduct *notional interest for an income year to the extent that the notional buyer would, apart from this Division, have been entitled to deduct *arrangement payments for that income year if no part of those payments were capital in nature.

 (2) The *notional buyer is entitled to deduct *notional interest for *arrangement payment periods, and parts of arrangement payment periods, in the income year.

24055  Arrangement payments not to be deductions

  The *notional buyer is not entitled to deduct *arrangement payments that the *notional buyer makes under the *arrangement, but those payments are taken into account in calculating *notional interest that may be deducted under section 24050.

Subdivision 240ENotional interest and arrangement payments

Table of sections

Operative provisions

24060 Notional interest

24065 Arrangement payments

24070 Arrangement payment periods

Operative provisions

24060  Notional interest

 (1) The *notional interest for an *arrangement payment period is worked out as follows:

Calculating *notional interest

Step 1. Add the *notional interest from previous *arrangement payment periods to the notional loan principal.

Step 2. Subtract any *arrangement payments that have already been made or that are due but that have not been made. The result is the outstanding notional loan principal as at the start of the *arrangement payment period.

Step 3. Work out the implicit interest rate for the *arrangement payment period, taking into account the *arrangement payments payable by the *notional buyer under the *arrangement and any *termination amounts.

Step 4. Multiply the outstanding notional loan principal by the implicit interest rate. The result is the notional interest for the *arrangement payment period.

 (2) If only part of an *arrangement payment period occurs during an income year, the *notional interest for that part of the arrangement payment period is so much of the notional interest for that arrangement payment period as may appropriately be related to that income year in accordance with generally accepted accounting principles.

 (3) In calculating the implicit interest rate, if any of the relevant amounts are not known at the start of the *arrangement, a reasonable estimate of the amount is to be made and is to be used for the purposes of calculating the implicit interest rate for each income year of the *notional seller.

 (4) If a reasonable estimate cannot be made at that time, an estimate of the amount is to be made at the end of each income year of the *notional seller for the purposes of calculating the implicit interest rate for each income year of the notional seller.

24065  Arrangement payments