On 12 October 2018, the Government released exposure draft legislation (Treasury Laws Amendment (Measures for a later sitting) Bill 2018: Tax Treatment of Concessional Loans Involving Tax Exempt Entities) to remedy the impact of unintended tax deductions that arise in respect of repayments made to principals in certain circumstances.
The deductions currently arise due to the interaction between the taxation of financial arrangement (TOFA) rules and the rules dealing with deemed market values for tax exempt entities that later become taxable entities. The draft legislation proposes to amend the Income Tax Assessment Act 1936 (Cth) to:
- specify the basis for working out the market value of TOFA assets and liabilities entered into on concessional terms held at the transition time for the purposes of applying the TOFA provisions; and
- modify the operation of the TOFA balancing adjustment that is made when the entity ceases to have such a TOFA asset or liability.
The proposed amendments are intended to apply where a relevant taxpayer becomes a non-tax exempt entity after 8 May 2018.
Submissions can be made during the consultation period up until 2 November 2018.
When a tax exempt entity is transferred to the private sector, for the purpose of applying the TOFA provisions to an asset or a liability that is a Division 230 financial arrangement that is entered into on concessional terms, the market value of the relevant asset (including an asset that corresponds to a liability) is taken to be the amount that the holder provided in relation to starting to have the asset:
reduced by repayments of principal made before the transition time and the amount of any impairment; and increased by the amount of the cumulative amortisation (worked out using the effective interest method) of any difference between the initial amount and the amount payable on the maturity of the asset.
This market value is used to determine the amount of the financial benefits to the taxpayer that the transition is taken to have received or provided in relation to the Division 230 financial arrangement that it holds at the transition time for the purposes of applying the TOFA provisions after that time.