Improving the operation of the TOFA tax hedging provisions

The Treasury has released a discussion paper on improving the operation of the taxation of financial arrangements (TOFA) tax hedging provisions.

One of the purposes of the discussion paper is to canvass possible implementation options for amendments relating to:

• hedge ineffectiveness; and
• hedging of a firm commitment

which were announced as part of the 2011-12 Budget.

Additionally, the paper details the following four tax hedging issues that were raised in the post enactment consultation on the TOFA Stages 3 & 4 provisions to seek clarification of and facilitate discussion of these issues:

• interactions between the tax hedging rules and other TOFA elective tax-timing methods;
• eligibility of tax hedging treatment of financial arrangements that are economic (but not accounting) hedges entered into by managed investment funds, insurance companies and superannuation funds;
• tax treatment of fair value hedges (as defined in the accounting standards) for taxpayers who do not make a TOFA fair value tax timing election; and
• the time within which to comply with certain tax hedging documentation for existing hedging financial arrangements.