ATO ID 2010/168: Taxation of Financial Arrangements: hierarchy of provisions and the balancing adjustment in Subdivision 230-G
Date of decision: 10 September 2010
Year of income: Year ended 30 June 2011
Business line: Finance and Investment Centre of Expertise

Issue
For the purposes of subsection 230-40(2) of the Income Tax Assessment Act 1997 (ITAA 1997), will a sufficiently certain gain or loss made from a financial arrangement that is allocated to an interval which ends at the same time the financial arrangement ceases, be included in a taxpayer's assessable income or allowed as a deduction under section 230-15 of the ITAA 1997 by the balancing adjustment method in Subdivision 230-G of the ITAA 1997?

Decision
Yes. The part of the sufficiently certain gain or loss which is allocated to an interval which ends at the same time that the financial arrangement ceases will be brought to account under the balancing adjustment method pursuant to subsection 230-40(2) of the ITAA 1997.

Facts
The taxpayer is the head company of a consolidated group with effect from 1 July 2002. The taxpayer is an Australian resident for tax purposes. On 1 July 2010, the taxpayer entered into a loan which is a financial arrangement for the purposes of Division 230 of the ITAA 1997. Interest is payable under the loan at a fixed rate monthly in arrears and the loan principal is repayable on 30 June 2012. Division 230 of the ITAA 1997 applies to the taxpayer from 1 July 2010 as the taxpayer has not elected to apply Division 230 to its financial arrangements from 1 July 2009. The taxpayer has also not elected to use any of the elective tax timing methods under Division 230. The accruals method in Subdivision 230-B of the ITAA 1997 will apply to the loan as all the financial benefits under the loan financial arrangement are sufficiently certain. The taxpayer uses monthly intervals to allocate gains and losses from its financial arrangements.

Reasons for decision
Summary: All legislative references are to the ITAA 1997 unless otherwise indicated. Under section 230-105, there is a sufficiently certain overall loss from the financial arrangement. (Note; the analysis is equally applicable to an overall gain from a financial arrangement and/or particular gains and losses). The overall loss will be spread over a period of time under subsection 230-130(1). Generally, the period over which the loss is to be spread is the period that starts when you start to have the arrangement and ends when you cease to have the arrangement. The loss will be spread over the period using the compounding accruals method or a method that reasonably approximates that method; subsection 230-135(1). The loss must be allocated to intervals that are the same length and do not exceed 12 months under the compounding accruals method. However, the first and last interval may be shorter than the other intervals. Generally, the loss allocated to that interval will be an allowable deduction under section 230-15 when it is allocated. The taxpayer uses monthly intervals to allocate parts of the overall loss from the loan. Therefore, some of the overall loss will have been allowed as a deduction to the taxpayer under section 230-15 before the loan ceases on 30 June 2012. Subsection 230-40(2) provides that where the balancing adjustment is applied to take into account a gain or loss, that gain or loss cannot be taken into account under the accruals method. Under the accruals method parts of the sufficiently certain loss made under the loan will be allocated to monthly intervals. Where part of the overall loss is allocated to an interval, the taxpayer will be taken to have made that part of the loss for the purposes of section 230-15 when it is allocated (refer to subsection 230-170(1)). Therefore, if an interval ends before the balancing adjustment occurs that part of the loss allocated to that interval will be allowable as a deduction under section 230-15 prior to the balancing adjustment occurring. Gains and losses previously included in assessable income and allowable as a deduction under section 230-15 are not included in the gain or loss calculated under the method statement in subsection 230-445(1). Therefore, these amounts are not included in any gain or loss made when the balancing adjustment occurs. Accordingly, that part of the sufficiently certain overall loss which is allocated to an interval which ends before the balancing adjustment occurs will be brought to account under the accruals method, while that part of the sufficiently certain overall loss which is allocated to an interval which ends at the same time that the balancing adjustment happens will be brought to account under the balancing adjustment.

Legislative references: Income Tax Assessment Act 1997 Division 230 Subdivision 230-B section 230-15 subsection 230-40(2) section 230-105 subsection 230-130(1) subsection 230-135(1) subsection 230-170(1) subsection 230-445(1)
Subject references: Taxation of Financial Arrangements CoE Balancing adjustments Losses