Jan McLucas (Queensland, Australian Labor Party, Parliamentary Secretary to the Minister for Health and Ageing) Share this | Hansard source

I continue the summing up of the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008I am following on from Senator Sherry—and in particular address some of the questions that Senator Coonan and Senator Joyce raised. I thank honourable senators for their contributions to the debate. The Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, commonly known as the TOFA bill, is a significant bill which will provide much needed certainty and coherence to the tax treatment of financial arrangements. The bill will reduce tax distortions by generally ignoring the capital revenue distinction and by taxing financial arrangements based on economic substance rather than legal form.

The bill is the final stage of the TOFA reforms which were first announced in the 1992 budget. The reforms have progressively been implemented, with stage 1 legislated in 2001 and stage 2 in 2003. This bill implements stages 3 and 4. I note that the bill has been examined by the Senate Standing Committee on Economics, which recommended that the Senate pass the bill. Additional comments by coalition senators did raise concerns about the impact of a broader aggregated turnover threshold test compared to the draft legislation that was developed by the previous government.

Senator Coonan has asked for an explanation to the Senate of the reasoning behind the broadening of the aggregated turnover threshold test. The aggregated turnover threshold test was broadened because it relies on the ordinary income that an entity derives in the ordinary course of carrying on a business. If reliance were placed solely on an aggregated turnover threshold test, an entity that does not carry on a business or has only statutory and no ordinary income but has substantial assets could escape accruals tax treatment on its income from financial arrangements. Thus the threshold test was broadened to bring within the TOFA rules entities that have substantial assets. In particular, TOFA will apply to an entity if it has assets of $350 million or more or has financial assets of $100 million or more. Such entities would be expected to have a relatively substantial capacity to defer tax in the absence of the TOFA provisions. They would also be sufficiently sophisticated to deal with the TOFA provisions.

Senator Coonan also asked for details on any assessment of the regulatory burden that the government and Treasury have undertaken. I can advise that public consultation in October 2008 identified the anomalous and unintended outcomes that were mentioned above. The additional tests were incorporated to ensure that the TOFA rules apply to the taxpayers intended. The design of the TOFA rules, which have been the subject of extensive consultation over a very long period, has taken into account the cost of complying with the rules. Comments during consultation indicated that the various optional methods in TOFA have the potential to substantially enhance the compliance task of businesses in dealing with TOFA rules. Since the TOFA bill was introduced into parliament in December last year, the Investment and Financial Services Association, for example, has said that it will ‘act to reduce compliance costs for the financial services industry’.

More generally, the explanatory memorandum to the bill contains a detailed regulation impact statement which sets out the compliance advantage of the TOFA rules, including closer alignment with financial accounting and policy coherency. Compliance costs will also be reduced due to increased certainty of tax treatment. The regulation impact statement also notes that the Australian Taxation Office estimates that taxpayers affected by the TOFA rules will experience a medium decrease in compliance costs during the ongoing stage. The government has embarked on considerable consultation on this bill over the last 12 months and it is much anticipated by the business sector. As this is a complex area of the law, the government intends to monitor the implementation of this reform to Australia’s financial taxation system and will consider the need for any refinements. I commend the bill to the Senate.

Question agreed to.

Bill read a second time.