Commonwealth: Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 (Cth)

Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 No. 15, 2009 as amended Compilation start date: 30 November 2011 Includes amendments up to: Act No. 85, 2013 About this compilation This compilation This is a compilation of the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 as in force on 30 November 2011. It includes any commenced amendment affecting the compilation to that date. This compilation was prepared on 21 August 2013. The notes at the end of this compilation (the endnotes) include information about amending laws and the amendment history of each amended provision. Uncommenced amendments The effect of uncommenced amendments is not reflected in the text of the compiled law but the text of the amendments is included in the endnotes. Application, saving and transitional provisions for provisions and amendments If the operation of a provision or amendment is affected by an application, saving or transitional provision that is not included in this compilation, details are included in the endnotes. Modifications If a provision of the compiled law is affected by a modification that is in force, details are included in the endnotes. Provisions ceasing to have effect If a provision of the compiled law has expired or otherwise ceased to have effect in accordance with a provision of the law, details are included in the endnotes. Contents 1 Short title 2 Commencement 3 Schedule(s) Schedule 1—Amendments Part 1—Main amendments Income Tax Assessment Act 1997 Part 2—Consequential amendments Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Income Tax (Transitional Provisions) Act 1997 Taxation Administration Act 1953 Part 3—Application and transitional provisions Part 4—Amendments relating to Division 775 Income Tax Assessment Act 1997 New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003 Endnotes Endnote 1—About the endnotes Endnote 2—Abbreviation key Endnote 3—Legislation history Endnote 4—Amendment history Endnote 5—Uncommenced amendments [none] Endnote 6—Modifications [none] Endnote 7—Misdescribed amendments [none] Endnote 8—Miscellaneous [none] An Act to amend the law relating to taxation, and for related purposes 1 Short title This Act may be cited as the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009. 2 Commencement (1) Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms. Commencement information Column 1 Column 2 Column 3 Provision(s) Commencement Date/Details 1. Sections 1 to 3 and anything in this Act not elsewhere covered by this table The day on which this Act receives the Royal Assent. 26 March 2009 2. Schedule 1, Parts 1, 2 and 3 The day on which this Act receives the Royal Assent. 26 March 2009 3. Schedule 1, Part 4 Immediately after the commencement of the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003. 17 December 2003 Note: This table relates only to the provisions of this Act as originally passed by both Houses of the Parliament and assented to. It will not be expanded to deal with provisions inserted in this Act after assent. (2) Column 3 of the table contains additional information that is not part of this Act. Information in this column may be added to or edited in any published version of this Act. 3 Schedule(s) Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—Amendments Part 1—Main amendments Income Tax Assessment Act 1997 1 Before Division 240 Insert: Division 230—Taxation of financial arrangements Table of Subdivisions Guide to Division 230 230‑A Core rules 230‑B The accruals/realisation methods 230‑C Fair value method 230‑D Foreign exchange retranslation method 230‑E Hedging financial arrangements method 230‑F Reliance on financial reports 230‑G Balancing adjustment on ceasing to have a financial arrangement 230‑H Exceptions 230‑I Other provisions 230‑J Additional operation of Division Guide to Division 230 230‑1 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. 230‑5 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, 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: (iv) 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 230‑50 (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 230‑455 provides for the exceptions referred to in paragraph (a). Subdivision 230‑A—Core rules Table of sections Objects 230‑10 Objects of this Division Tax treatment of gains and losses from financial arrangements 230‑15 Gains are assessable and losses deductible 230‑20 Gain or loss to be taken into account only once under this Act 230‑25 Associated financial benefits to be taken into account only once under this Act 230‑30 Treatment of gains and losses related to exempt income and non‑assessable non‑exempt income 230‑35 Treatment of gains and losses of private or domestic nature Method to be applied to take account of gain or loss 230‑40 Methods for taking gain or loss into account Financial arrangement concept 230‑45 Financial arrangement 230‑50 Financial arrangement (equity interest or right or obligation in relation to equity interest) 230‑55 Rights, obligations and arrangements (grouping and disaggregation rules) General rules 230‑60 When financial benefit provided or received under financial arrangement 230‑65 Amount of financial benefit relating to more than one financial arrangement etc. 230‑70 Apportionment when financial benefit received or right ceases 230‑75 Apportionment when financial benefit provided or obligation ceases 230‑80 Consistency in working out gains or losses (integrity measure) 230‑85 Rights and obligations include contingent rights and obligations Objects 230‑10 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 230‑15 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 230‑H. 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 230‑H. (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 *non‑assessable non‑exempt income under section 23AI, 23AJ 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 820‑40(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 820‑40(1)(a). Note: This Division does not apply to losses that are subject to exceptions under Subdivision 230‑H. (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 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. (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 25‑85(6) provide that a specified number of basis points is to apply for the purposes of applying subsection 25‑85(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 230‑485 and 230‑490. 230‑20 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 230‑310(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 230‑310(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. 230‑25 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 230‑20(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 25‑35 in relation to the financial benefit; subsection (2) does not prevent that bad debt deduction from being allowed under section 25‑35 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. 230‑30 Treatment of gains and losses related to exempt income and non‑assessable non‑exempt income (1) Despite section 230‑15, 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 *non‑assessable non‑exempt income under a provision of this Act if this Division were disregarded—is not assessable income and is not exempt income. (2) Despite section 230‑15, 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 *non‑assessable non‑exempt 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 230‑15(3)) to the extent that you make it in gaining or producing your: (a) *exempt income; or (b) *non‑assessable non‑exempt income. 230‑35 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 230‑40 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 230‑B; or (b) the fair value method provided for in Subdivision 230‑C; or (c) the foreign exchange retranslation method provided for in Subdivision 230‑D; or (d) the hedging financial arrangement method provided for in Subdivision 230‑E; or (e) the method of relying on your financial reports provided for in Subdivision 230‑F; or (f) a balancing adjustment provided for in Subdivision 230‑G. 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 230‑300(5)). Elections override accruals and realisation methods (4) Subdivision 230‑B (accruals and realisation method) does not apply to a gain or loss you make from a *financial arrangement: (a) if Subdivision 230‑C (fair value method) applies to the arrangement; or (b) to the extent that Subdivision 230‑D (foreign exchange retranslation method) applies to the gain or loss; or (c) to the extent that Subdivision 230‑E (hedging financial arrangements method) applies to the arrangement; or (d) if Subdivision 230‑F (method of relying on financial reports) applies to the arrangement; or (e) if the arrangement is a financial arrangement under section 230‑50 (equity interests etc.). Priorities among election methods (5) Subdivision 230‑C (fair value method) does not apply to a gain or loss you make from a *financial arrangement: (a) to the extent that Subdivision 230‑E (hedging financial arrangements method) applies to the arrangement; or (b) if Subdivision 230‑F (method of relying on financial reports) applies to the arrangement. (6) Subdivision 230‑D (foreign exchange retranslation method) does not apply to a gain or loss you make from a *financial arrangement: (a) if Subdivision 230‑C (fair value method) applies to the arrangement; or (b) to the extent that Subdivision 230‑E (hedging financial arrangements method) applies to the arrangement; or (c) if Subdivision 230‑F (method of relying on financial reports) applies to the arrangement. (7) Subdivision 230‑F (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 230‑E (hedging financial arrangements method) applies to the arrangement. Financial arrangement concept 230‑45 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 230‑H. 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 230‑G and section 230‑505). (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 short‑term 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 230‑50. 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 short‑term basis or on a frequent and short‑term 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) either: (i) the amount of the money or money equivalent referred to in paragraph (a) is not subject to a substantial risk of change in value; or (ii) 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 so that it may be converted or liquidated into money or a money equivalent (other than in the ordinary course of business). 230‑50 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 230‑45(1). The right, obligation or combination referred to in paragraph (a) constitutes the financial arrangement. Note 1: Paragraph 230‑40(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 230‑270(1) prevents the retranslation method being applied to something that is a financial arrangement under this section. Note 3: Subsection 230‑330(1) prevents the hedging method being applied to something that is a financial arrangement under this section. 230‑55 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 price‑linked or index‑linked 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 230‑60 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. 230‑65 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 230‑60(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). 230‑70 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, 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. (4) Despite subsection (2), no *financial benefit that you have provided, or are to provide, under the *financial arrangement is to be attributed to the benefit or right referred to in paragraph (1)(a) or (b) if: (a) you are working out the amount of a gain or loss for the purposes of Subdivision 230‑B; and (b) the gain or loss is not an overall gain or loss from the arrangement (within the meaning of that Subdivision) at the time when you start to have the arrangement; and (c) the benefit or right referred to in paragraph (1)(a) or (b) is an amount that represents, or is a right to an amount that represents: (i) interest; or (ii) a *return paid or provided on a *debt interest; or (iii) something that is in the nature of interest; or (iv) something that could reasonably be regarded as being a substitute for interest; or (v) something prescribed by the regulations for the purposes of this paragraph. Note 1: An example of something in the nature of interest is a discount on a security. Note 2: An example of something that could reasonably be regarded as being a substitute for interest is a lump sum payment received instead of payments of interest. 230‑75 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, 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. (4) Despite subsection (2), no *financial benefit that you have received, or are to receive, under the *financial arrangement is to be attributed to the benefit or obligation referred to in paragraph (1)(a) or (b) if: (a) you are working out the amount of a gain or loss for the purposes of Subdivision 230‑B; and (b) the gain or loss is not an overall gain or loss from the arrangement (within the meaning of that Subdivision) at the time when you start to have the arrangement; and (c) the benefit or obligation referred to in paragraph (1)(a) or (b) is an amount that represents, or is an obligation to provide an amount that represents: (i) interest; or (ii) a *return paid or provided on a *debt interest; or (iii) something that is in the nature of interest; or (iv) something that could reasonably be regarded as being a substitute for interest; or (v) something prescribed by the regulations for the purposes of this paragraph. Note 1: An example of something in the nature of interest is a discount on a security. Note 2: An example of something that could reasonably be regarded as being a substitute for interest is a lump sum payment made instead of payments of interest. 230‑80 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 make 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 make 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. 230‑85 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 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 230‑B—The accruals/realisation methods Table of sections Guide to Subdivision 230‑B 230‑90 What this Subdivision is about Objects of Subdivision 230‑95 Objects of this Subdivision When accruals method or realisation method applies 230‑100 When accruals method or realisation method applies 230‑105 Sufficiently certain overall gain or loss 230‑110 Sufficiently certain gain or loss from particular event 230‑115 Sufficiently certain financial benefits 230‑120 Financial arrangements with notional principal The accruals method 230‑125 Overview of the accruals method 230‑130 Applying accruals method to work out period over which gain or loss is to be spread 230‑135 How gain or loss is spread 230‑140 Method of spreading gain or loss—effective interest method 230‑145 Application of effective interest method where differing income and accounting years 230‑150 Election for portfolio treatment of fees 230‑155 Election for portfolio treatment of fees where differing income and accounting years 230‑160 Portfolio treatment of fees 230‑165 Portfolio treatment of premiums and discounts for acquiring portfolio 230‑170 Allocating gain or loss to income years 230‑175 Running balancing adjustments Realisation method 230‑180 Realisation method Reassessment and re‑estimation 230‑185 Reassessment 230‑190 Re‑estimation 230‑195 Balancing adjustment if rate of return maintained on re‑estimation 230‑200 Re‑estimation if balancing adjustment on partial disposal Guide to Subdivision 230‑B 230‑90 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 re‑estimation of gains and losses that the accruals method is being applied to. Objects of Subdivision 230‑95 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 230‑100 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 make 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. Note: Subsection 230‑105(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 make 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 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 230‑110(1) tells you when you have a sufficiently certain gain or loss at a particular time. (4) Subsection (3) does not apply to a gain or loss that you make from a *financial arrangement if: (a) you are: (i) an individual; or (ii) an entity (other than an individual) that satisfies subsection 230‑455(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 230‑455(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 make from a *financial arrangement if the accruals method provided for in this Subdivision does not apply to that gain or loss. Note: Section 230‑180 tells you how to apply the realisation method to the gain or loss. 230‑105 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 230‑70 and 230‑75 (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. 230‑110 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 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 (b) disregard any financial benefit that has already been taken into account in working out the amount of a sufficiently certain overall gain or loss from the *financial arrangement under subsection 230‑105(1) at the time when you started to have the arrangement; 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 230‑70 and 230‑75 allow you to apportion financial benefits provided and financial benefits received in working out the amount of a gain or loss. 230‑115 Sufficiently certain financial benefits (1) In deciding for the purposes of this Subdivision whether it is sufficiently certain at a particular time that you will make a gain or loss from a *financial arrangement, have regard only to: (a) *financial benefits that you are sufficiently certain to receive; and (b) financial benefits that you are sufficiently certain to provide. 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 your *applicable functional 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. 230‑120 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 230‑125 Overview of the accruals method If the accruals method applies to a gain or loss you make from a *financial arrangement: (a) you use section 230‑130 to work out the period over which the gain or loss is to be spread; and (b) you use section 230‑135 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 230‑170 to work out how to allocate that part of the gain or loss allocated between those 2 income years. 230‑130 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 230‑105(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. (2) However, if you have sufficiently certain gains or losses from the arrangement that: (a) can be spread under subsection (3); and (b) when considered together, represent adequately the overall gain or loss mentioned in subsection (1); you may spread those gains or losses in accordance with subsection (3) instead of spreading the overall gain or loss in accordance with subsection (1). 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 230‑110(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) not start earlier than the start of the income year during which it becomes sufficiently certain that you will make the gain or loss. (5) The end of the period over which a gain or loss to which subsection (3) applies is to be spread must: (a) not end later than the time when you will cease to have the *financial arrangement; and (b) not end later than the end of the income year during which: (i) the *financial benefit that gives rise to the gain or loss is to be received or provided; or (ii) the right or obligation whose *ceasing gives rise to the gain or loss is to cease. 230‑135 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. 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. 230‑140 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 230‑135(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) will 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 230‑210(2)(a); and (ii) audited in accordance with paragraph 230‑210(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. 230‑145 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 230‑210(2)(a); and (ii) audited in accordance with paragraph 230‑210(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 230‑140(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 230‑140(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 230‑140(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. (5) For the purposes of paragraph (4)(a), treat a methodology that attributes the gain or loss on a pro‑rata basis as not being reasonable. 230‑150 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 standards; or (ii) if those standards do not apply to the preparation of the financial report—comparable accounting standards 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 standards; or (ii) if the auditing standards do not apply to the auditing of the financial report—comparable auditing standards made under a foreign law. (2) An election under this section is irrevocable. 230‑155 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 230‑150(1)(a); and (ii) audited in accordance with paragraph 230‑150(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 230‑150(1). (3) Work out the gain or loss you make from the arrangement for the i