TOFA: The Unfinished Agenda

Abstract

Financial arrangements have played an important role in commercial transactions since long before the adoption of Commonwealth income taxation in Australia. The ad hoc, inconsistent and often arbitrary tax rules that apply to them cause considerable confusion and add greatly to complexity. Commercial enterprises hoped the proposal for a comprehensive TOFA (taxation of financial arrangements) regime announced 17 years ago would bring an end to continuous change and complexity. The first two tranches of TOFA reforms failed comprehensively to achieve this aim and tranche three, scheduled to be implemented this year, also looks destined to fail. Rules to deal with embedded debt, discounted instruments, finance leases, foreign exchange gains and losses, and tax minimisation schemes that promise borrowers the ability to deduct loan principals look to be inadequately designed and poorly drafted. Complexity and confusion may be exacerbated, not reduced, by the changes.