Fund managers, administrators and custodians have reported a smooth entry to TOFA compliance after working for more than two years with DST Global Solutions on its HiPortfolio software. PHILIPPA YELLAND reports

So, far, the cost of TOFAcompliance has just been a cost of doing business, but this may change. DST’s chief executive officer, Tom Abraham, sees “potential upsides” in the competitive capabilities, and the analytics around the impact of investment decisions. “At least one client is doing this now,” he says. DST’s David Rhind, senior manager investment accounting solutions, estimates that DST and its co-developers each invested more than 5,000 work days on the project during the past two years to ensure compliance by July 1 this year. “This was larger than any of the previous projects for GST, Y2K or CGT,” Rhind says.

“The big difficulty with the TOFA (Taxation of Financial Arrangements) work was lack of clarity about interpretation of the Act.” BNP Paribas’ head of product management, Daryl Crich, concurs, saying TOFA “is the biggest change in tax legislation in 30 years so it has been a significant piece of work for the whole financial services industry”. The enhancements to DST’s investment administration management software, HiPortfolio, were developed with members of DST’s Advanced User Group (AUG) which include National Australia Bank, BNP Paribas Securities Services and JPMorgan Worldwide Securities Services Australia and New Zealand.

JPMorgan, which recently renewed its relationship with DST with a three-year contract, uses HiPortfolio on an in-house server, says Bradley Kelly, vice-president product and strategy, JPMorgan. Industry participants have acknowledged the complexity associated with some instrument types and their treatment under TOFA, Kelly says. Data quality is also a preoccupation with NAB’s general manager asset servicing, Ray Lester. “We remained focused on data quality from the calculation engine component of the project right through to full implementation in the production environment, with the associated reporting developed and fully tested successfully.”

The TOFA rules (Tax Laws Amendment [Taxation of Financial Arrangements] Act 2009) aim to cut tax distortions, to tax financial arrangements based on economic substance, and to enhance financial risk management – especially for hedging. In addition to the Act’s complexities, there are six methods of bringing gains and losses to account (four are optional, two are by default) and the choice of method is irrevocable. In the next six months, the challenges are in the possibility of legislative change or interpretative change. JPMorgan’s Kelly says industry comfort with regulatory change always takes time to build, so he expects questions as clients digest the new calculations on TOFA-related securities.

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