Some in the financial services industry still wonder how they ever got caught up in the Taxation of Financial Arrangements (TOFA) legislation. Some lament that the Australian Custodial Services Association was not more successful in its lobbying for exclusion from obligations seen as primarily aimed at corporate finance. However now that TOFA has been live for more than six months, some indirect benefits are being hailed by practitioners. MICHAEL BAILEY reports.

TOFA might have been in force for eight months as you read this, but according to David Rhind, the solutions manager for asset servicing at DST Global Solutions (DST), the new tax reporting regime’s true acid test will not occur until after June 30, 2011. “Nobody will really know how successfully TOFA has been implemented until July, when 2010/11 reports are submitted to the Australian Tax Office (ATO),” he says. “That being said, the ATO would already have received some provisional reporting under the TOFA regime, and we’re very pleased with how it’s all been going. Of course the work is far from over, because changes to the regime will no doubt be made as unintended consequences are discovered.”

DST has been working towards implementing TOFA, the new Taxation of Financial Arrangements legislation, since 2008, when the Government, under then Assistant Treasurer Nick Sherry, first released industry discussion papers on the changes. As the 10-tonne gorilla loomed in front of the Australian investment administration market, DST knew that its HiPortfolio system – still the weapon of choice for most of Australia’s major custodian/fund administrators – had to be ready for the new regime. “This was the biggest change to Australia’s investment tax regime that many of my colleagues had seen in their working lives; you’d need to go back to the introduction of capital gains tax for something comparable. So since 2008 there have been 35,000 hours of development contributed to the project from us, and a further 5,000 from members of our advanced user group (AUG),” Rhind reports. Those AUG members on the record as now being live for TOFA on HiPortfolio include BNP Paribas Securities Services, JPMorgan Worldwide Securities Services, NAB Asset Servicing and Suncorp Life.

Within the TOFA Act, there are six methods of bringing tax gains and losses to account, supported by a balancing adjustment to arrive at a final result when the taxpaying entity ceases to hold the arrangement. Four of these methods are optional and the remaining two occur by default. “We found the default compounding accruals method to be the most complete in relation to the assets managed by our clients,” Rhind says. He points out that the four elective tax-timing methods – hedging, financial reports, fair value and foreign exchange retranslation – can be accommodated within the compounding accruals approach. Rhind predicted that where TOFA could make the most impact is around capital gains tax (CGT) discounts for profits made on equities. Where a taxpayer holds equities at fair value (for accounting standards purposes) their entry into TOFA needs to be carefully thought through, as an inappropriate entry could result in the loss of the CGT provisions for discounting. A major challenge for HiPortfolio clients that emerged in TOFA’s first six months was caused by the winning of new custodial contracts.

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