Time to act are you ready?

Transcription

1 Taxation of Financial Arrangements Time to act are you ready? New tax rules for financial arrangements affect most corporate groups and will have a whole-of-business impact: it s not just a tax matter. The new Taxation of Financial Arrangements (TOFA) rules will commence from 1 July 2010 for most entities with a 30 June year end. Early balancing entites (31 December) have a few months to choose to adopt early from 1 January 2010 or plan for the mandatory start date of 1 January Seen traditionally as a tax-only issue, many business and finance leaders may be unaware of the potential benefits and risks TOFA presents. Here we share our views about the critical strategic and practical issues to help you make well-informed decisions about TOFA for your business.

2 How to make the right decisions for your business For some businesses, this legislation could be one of the biggest changes to taxation law since the introduction of GST. It affects nearly all business, requires thorough review of financial arrangements and could have a far reaching effect across an organisation. Greg Pratt National TOFA Tax Leader Ernst & Young Under the law, TOFA decisions are generally irrevocable and can have significant implications for your business. While TOFA is a tax change, it is also likely to impact cash flows, franking account balances, financial accounting outcomes, treasury and hedging strategies, tax compliance requirements and, for some businesses, product development strategies and customer relations. For 30 June balancing entities, the new rules apply from 1 July 2010, or 1 July 2009 by election 1. For 31 December balancing entities the start dates are 1 January 2011 or 1 January To fully understand the impacts of TOFA on your business, you need to begin a structured decision-making process, if it s not already underway. We recommend you identify and involve key stakeholders to assess the true business impacts, involving parts of your business outside of the tax function. These might include: Business units Operations Treasury Risk Accounting/audit IT/business systems Ernst & Young is working with a number of businesses to identify their affected stakeholders and facilitate workshops to uncover benefits and operational impacts. Only by looking at business drivers, priorities and deliverables within your organisation will you be able to make your TOFA decisions, realise the potential opportunities, and manage risks that may emerge. Key questions to answer How will your business systems cope? How will your cash flows and franking credits be impacted? What hedging decisions will you need to make? How will your treasury strategy be affected? Are your remuneration arrangements impacted? How will TOFA affect new product development? Are there benefits in adopting early? How will your decision be supported and communicated to the board and shareholders? 1. The rules apply prima facie to financial arrangements which start to be held in the first income year commencing on or after the relevant date. However it is possible to elect to also bring pre-existing financial arrangement in Ernst & Young 2

3 TOFA brings the definitions and methods of calculating income for tax and accounting on financial instruments/ arrangements closer together. However, there are some significant differences. Warrick Van Zyl Assurance TOFA Leader Ernst & Young With the right team assembled, you will be able make the critical TOFA decisions so that you don t miss any opportunities or face unwanted surprises. Five key decisions 1. Does TOFA apply to my organisation? Only relatively small entities will fall outside the mandatory TOFA regime however they still can elect for TOFA to apply. 2. What are my organisation s financial arrangements? The tax definition is different to the accounting standards definition of financial instrument. Therefore, you cannot rely on accounting determinations and processes alone. 3. Which methods of calculation should I adopt? There are two default methods and four elective methods that can be applied under TOFA, and analysis is required to know what elections, if any, to make. 4. How should existing financial arrangements be treated? By electing not to bring existing financial arrangements into TOFA, present tax reporting methods will need to be maintained alongside the new TOFA-compliant methods. This needs to be balanced against transitional advantages or disadvantages. 5. Should entities with a 31 December tax year elect for TOFA to apply in 2010 or 2011? To make this decision, you will need to know the benefits and costs of TOFA for your organisation. If you choose to adopt early, formal elections are required soon and your business systems and resources will need to be capturing TOFA-compliant information from 1 January 2010 for the 31 December 2010 tax return. Scenarios to consider Big Co has a material investment in a portfolio of listed shares. It holds those shares for resale but not as trading stock for tax purposes. In the current economic environment the value of the shares is significantly lower than their cost. Under TOFA, Big Co can elect to bring the equity portfolio into the TOFA regime in such a way that would allow it to claim a tax deduction for 25% of the loss of value in each of the next 4 years even though the shares remain unsold. While the tax deduction sounds attractive, Big Co must also consider the ongoing implications of making the election as it is irrevocable. OS Co with overseas investments uses forward contracts to hedge its investment values in AUD. It currently does not apply hedge accounting. TOFA will allow the character of hedge gains to match the investment thus potentially making them non-taxable (rather than being assessable) but only if hedge accounting is applied. OS Co needs to assess whether a new treasury accounting system is required. A Corp has a significant deferred tax asset balance relating to realised capital losses which it intends to offset against capital gains it expects to make in the future. With the passing of TOFA, A Corp has to reconsider its deferred tax asset balance as many of the gains under TOFA will be on revenue account (which capital losses cannot offset) Ernst & Young 3

4 How we can help with your TOFA transition Ernst & Young has been working closely with clients, Treasury, the ATO and industry bodies throughout the consultative process on the TOFA legislation. We know the intricacies of TOFA and can facilitate a tailored workshop to discuss its impact and help provide a road map for managing your implementation. Our recent experience with groups applying TOFA means we can share our collective learning across tax, assurance and systems/change management disciplines to assist your project team. If you have any questions or concerns about TOFA, please contact your Ernst & Young advisor or our national TOFA leaders below. Tax Adelaide Sean van der Linden (08) sean.van.der.linden@au.ey.com Brisbane John Seccombe (07) john.seccombe@au.ey.com Perth Matthew Davidson (08) matthew.davidson@au.ey.com Greg Pratt (02) greg.pratt@ey.com.au Assurance Warrick Van Zyl (02) Warrick.Van.Zyl@au.ey.com Vincent Sheehan (03) vincent.sheehan@au.ey.com Systems and change management National Andrew Sprague (03) andrew.sprague@au.ey.com Bradley Farrell (08) Bradley.farrell@au.ey.com Dale Judd (03) dale.judd@au.ey.com Paula Houvardas (02) paula.houvardas@au.ey.com Andrew van Dinter (03) andrew.vandinter@au.ey.com Simon Jenner (02) simon.jenner@au.ey.com 2010 Ernst & Young 4

5 Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit SCORE NO. AU AU This document has been updated in March 2010 from its original publication titled Not if, but when (March 2009). Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Liability limited by a scheme approved under Professional Standards Legislation Adelaide 121 King William Street Adelaide SA 5000 Tel: Fax: Brisbane 1 Eagle Street Brisbane QLD 4000 Tel: Fax: Canberra Ernst & Young House 51 Allara Street Canberra ACT 2600 Tel: Fax: Gold Coast Marine Parade Southport QLD 4215 Tel: Fax: Exhibition Street VIC 3000 Tel: Fax: Perth 11 Mounts Bay Road Perth WA 6000 Tel: Fax: Ernst & Young Centre 680 George Street NSW 2000 Tel: Fax: Ernst & Young 5