ATO ID 2010/127: Taxation of financial arrangements: choosing to spread an overall gain or loss as a series of particular gains or losses
Date of decision: 1 June 2010
Year of income: Year ended 30 June 2011
Business line: Finance and Investment Centre of Expertise

Issue
Does paragraph 230-110(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) prevent a taxpayer from being able to spread a sufficiently certain 'overall' gain or loss from a financial arrangement as a series of sufficiently certain 'particular' gains and losses pursuant to a choice available under subsection 230-130(2) of the ITAA 1997?

Decision
No. Paragraph 230-110(2)(b) does not prevent the taxpayer from spreading a sufficiently certain overall gain or loss from a financial arrangement as if it were a series of particular gains and losses pursuant to a choice available under subsection 230-130(2) of the ITAA 1997. As a result of making this choice, the taxpayer can spread the gain or loss from the financial arrangement over the period to which the gain or loss relates in accordance with subsection 230-130(3) of the ITAA 1997.

Facts
A company (the borrower) is a special purpose vehicle created to finance a specific project. The borrower enters into a syndicated loan facility agreement with arms length parties (lenders) to fund the specific project. The borrower determines that it has a sufficiently certain overall gain or loss arising from the syndicated loan facility as defined by section 230-105 of the ITAA 1997 at the start of the arrangement. The borrower seeks to make the choice under subsection 230-130(2) of the ITAA 1997 to spread the overall gain or loss in accordance with subsection 230-130(3) of the ITAA 1997 as a series of particular gains and losses over the period to which they relate.

Reasons for decision
Summary: The accruals and the realisation methods under Subdivision 230-B of the ITAA 1997 are the default methods which apply to financial arrangements that are not subject to any of the elective tax timing methods of Division 230 of the ITAA 1997. The accruals method in Subdivision 230-B of the ITAA 1997 applies broadly to sufficiently certain gains and losses made from a financial arrangement. A gain or loss that is brought to account under the accruals method can either be an overall gain or loss under section 230-105 of the ITAA 1997 (where the gain or loss is sufficiently certain at the time the taxpayer starts to have the arrangement) or a gain or loss at a particular time (particular gain or loss) under section 230-110 of the ITAA 1997, but it cannot be both. Paragraph 230-110(2)(b) of the ITAA 1997 provides that a financial benefit that has already been taken into account in working out the amount of a sufficiently certain overall gain or loss is to be disregarded in working out whether you have a particular gain or loss. In this way, there is a strict demarcation between the identity of overall gains and losses and particular gains and losses. Section 230-130 of the ITAA 1997 sets out rules to determine the period over which gains and losses that are subject to the accruals method are to be spread. For overall gains and losses, the general rule for determining the period is set out in subsection 230-130(1) of the ITAA 1997, which is the life of the arrangement. The exception to this rule is set out in subsection 230-130(2) of the ITAA 1997 which states: In applying paragraph 230-130(2)(a) and subsection 230-130(3) of the ITAA 1997 it is necessary to consider subsection 230-110(1) of the ITAA 1997. In applying subsection 230-110(1) of the ITAA 1997 to work out whether you have a sufficiently certain gain or loss at a particular time, it is on first appearance necessary to consider paragraph 230-110(2)(b) of the ITAA 1997. This has the effect that to the extent to which financial benefits have been considered in determining if there is an overall gain or loss, particular gains and losses cannot also arise with respect to the same financial benefits. Paragraph 230-110(2)(b) ensures that there is no double counting of financial benefits provided or received under the financial arrangement. However, the statutory context of subsection 230-130(2) of the ITAA 1997 when read together with subsection 230-130(3) of the ITAA 1997 evinces a clear intention to allow taxpayers to choose to spread an overall gain or loss as if it were a series of particular gains and losses. To be excluded from determining a series of particular gains or losses because of the inability to have regard to the financial benefits that have already been taken into account in working out the overall gain or loss would in this context defeat the clear purpose of subsection 230-130(2) and render that subsection nugatory. Accordingly, the reference to a 'sufficiently certain gain or loss ... under subsection 110(1)' in subsection 230-130(3) of the ITAA 1997 does not also import the requirements of subsection 230-110(2) of the ITAA 1997 when applied for the purposes of determining the relevant period over which to spread gains and losses under subsection 230-130(2) of the ITAA 1997. Where a taxpayer satisfies the conditions in paragraphs 230-130(2)(a) and 230-130(2)(b) of the ITAA 1997, the period over which the particular gains and losses are to be spread is the period to which the gain or loss relates. In determining the period, regard must be had to the pricing, terms and conditions of the arrangement (see subsection 230-130(3) of the ITAA 1997). The start of the period and end of the period is determined under subsections 230-130(4) to 230-130(5) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 230-105 section 230-110 subsection 230-110(1) paragraph 230-110(2)(b) section 230-115 section 230-130 subsection 230-130(1) subsection 230-130(2) paragraph 230-130(2)(a) subsection 230-130(3) subsection 230-130(4) subsection 230-130(5)
Related ATO interpretative decisions: ATOID 2009/115
Subject references: Taxation of Financial Arrangements (TOFA) Accruals method Sufficiently certain Financial benefit