Private ruling: TOFA - Eligibility of Elective Method
Ruling period: Year ended 31 December 2010
Date scheme commenced: 1 January 2010

Ruling: Q1: Is the Consolidated Statement of Financial Condition for the period to 31 December 2010 of Ultimate Holding Company (UHC) a financial report prepared, in accordance with comparable standards for accounting made under a foreign law that apply to the preparation of the financial report under a foreign law within the meaning of subparagraph 230-395(2)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) for the taxpayer? | A1: No

Relevant facts and circumstances: The taxpayer and the Subsidiary are eligible Tier-1 companies of a multiple entry consolidated group (the MEC Group), of which the taxpayer is the provisional head company. UHC wholly owns the MEC Group. UHC is also a parent entity of an accounting consolidated group that prepares a Consolidated Statement of Financial Condition in the foreign country UHC has produced a Consolidated Statement of Financial Condition for the year to 31 December 2009 . In that Statement it has declined to disclose certain matters required under one of the accounting standards that constitute the principles of that foreign country. The taxpayer has prepared a Special Purpose Annual Financial Report for the year ended 31 December 2010 in compliance with paragraph 292(2)(b) of the Corporations Act 2001. In this Report the taxpayer has declined to disclose certain matters required under Australian equivalents to International Reporting Standards (AIFRs). The Subsidiary has prepared a Special Purpose Annual Financial Report for the year ended 31 December 2010 in compliance with paragraph 292(2)(b) of the Corporations Act 2001. In this Report the Subsidiary has declined to disclose certain matters required under AIFRS. The taxpayer has a 31 December year end for accounting purposes, and has been granted a substituted accounting period ending 31 December for tax purposes by the Commissioner. Division 230 of the ITAA 1997 applies to the taxpayer from 1 January 2010 as it made an election under sub-item 103(2) of Part 3 of Schedule 1 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 . The taxpayer will make the election within subsection 230-395(1) and, if eligible, the election will apply from 1 January 2010. The applicant has advised that UHC is a connected entity of taxpayer, and the Consolidated Statement of Financial Condition for the period to 31 December 2010 prepared by UHC will deal with and properly reflect the affairs of both the MEC Group and UHC. Assumptions For the following reports in the list below: · Each will be prepared on exactly the same basis, · The reports will be prepared using the same comparable standards for accounting made under a foreign law that apply to the preparation of the financial report under a foreign law, · The reports will be prepared using the same comparable standards for auditing made under a foreign law, and The notes to and the opinions of the auditor in the reports will be practically identical. List of reports Consolidated Statement of Financial Condition for the period to 31 December 2009 of UHC Consolidated Statement of Financial Condition for the period to 31 December 2010 of UHC

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 230 | Income Tax Assessment Act 1997 Subdivision 230-F | Income Tax Assessment Act 1997 Subsection 230-395(1) | Income Tax Assessment Act 1997 Subsection 230-395(2) | Income Tax Assessment Act 1997 Paragraph 230-395(2)(a) | Income Tax Assessment Act 1997 Subparagraph 230-395(2)(a)(i) | Income Tax Assessment Act 1997 Subparagraph 230-395(2)(a)(ii) | Income Tax Assessment Act 1997 Section 230-525 | Income Tax Assessment Act 1936 Section 701-1 | Income Tax Assessment Act 1936 Section 719-2 | Income Tax Assessment Act 1936 Subsection 995-1(1)

Reasons for decision: Summary: Unless otherwise indicated, references to legislative provisions are to the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Issue 1: Division 230 contains rules for determining gains and losses from financial arrangements. There are two default tax-timing methods and four elective tax-timing methods for determining gains and losses from financial arrangements, one of which is the financial reports method. The financial reports method is contained in Subdivision 230-F and broadly allows taxpayers to rely on gains and losses recognised under accounting standards for the purposes of calculating gains and losses from financial arrangements under Division 230. | Detailed Reasoning - Eligibility to make election to rely on financial reports: In order to elect to use the financial reports method, the taxpayer must satisfy the eligibility criteria set out in subsection 230-395(2). For present purposes, the relevant part of that subsection provides: You are eligible to make an election to rely on financial reports for an income year if : (a) you prepare a financial report for that income year in accordance with i. the *accounting principles; or ii. if the accounting principles do not apply to the preparation of the financial report--comparable standards for accounting made under a *foreign law that apply to the preparation of the financial report under a foreign law; ….. * denotes a term defined in section 995-1 of the ITAA 1997. In addition, where the relevant financial report is not one of the taxpayer's, but instead of a consolidated group (for accounting purposes), section 230-525 will be relevant. That section provides: For the purposes of this Division, treat a financial report prepared by another entity as being prepared by you if: (a) the other entity is a *connected entity of yours; and (b) the report is a consolidated financial report that deals with both your affairs and the affairs of the connected entity; and (c) the report properly reflects your affairs. 'Connected entity' is defined in subsection 995-1(1) as: an associate of the entity; or another member of the same wholly owned group if the entity is a company and is a member of such a group. The applicant has submitted that the requirements in section 230-525 have been satisfied in relation to UHC's Consolidated Statement of Financial Condition for the period to 31 December 2010 . The relevant question is therefore whether UHC's Consolidated Statement of Financial Condition for the period to 31 December 2010 is a financial report prepared within the meaning of subparagraph 230-395(2)(a)(ii). | Detailed Reasoning - Requirement to prepare a financial report in accordance with comparable standards for accounting: It is therefore necessary to consider whether the UHC's Consolidated Statement of Financial Condition for the period to 31 December 2010 is a financial report that is prepared in accordance with the foreign country standards. As UHC has declined to disclose certain matters required under one of the foreign country accounting standards, when preparing the Consolidated Statement of Financial Condition for the period to 31 December 2010 , it cannot be said that it is a financial report that has been prepared in accordance with the foreign country standards for the purposes of subparagraph 230-395(2)(a)(ii). | Detailed Reasoning - Eligibility to make election to rely on financial reports: This issue raises the question of whether the taxpayer can instead rely on other financial reports (the taxpayer's Special Purpose Annual Financial Report for the year ended 31 December 2010 and the Subsidiary's Special Purpose Annual Financial Report for the year ended 31 December 2010 ) for the purpose of satisfying the eligibility requirements in subsection 230-395(2). Those two reports consolidate and report on all entities within the MEC Group. Therefore, the MEC Group may rely on the two reports for the purposes of considering the application of subparagraph 230-395(2)(a)(i). In other words, where there are multiple financial reports that together report on all members of the tax consolidated group or the multiple entry consolidated group, they may together be considered for the purposes of working out whether the taxpayer has satisfied the eligibility requirements to make the election to rely on financial reports. This is the case as a result of the operation of the single entity rule contained within section 701-1, and section 719-2. | Detailed Reasoning - Requirement to prepare a financial report in accordance with the accounting principles: Subsection 995-1(1) ascribes a meaning to accounting principles in the following manner: accounting principles: A matter is in accordance with accounting principles if it is in accordance with: (a) *accounting standards; or (b) if there are no accounting standards applicable to the matter - authoritative pronouncements of the Australian Accounting Standards Board that apply to the preparation of financial statements. In the present case, both the taxpayer and the Subsidiary have declined to disclose certain matters required under AIFRs, when preparing their respective Special Purpose Annual Financial Report for the year ended 31 December 2010 . As a consequence, the taxpayer's Special Purpose Annual Financial Report for the year ended 31 December 2010 and the Subsidiary's Special Purpose Annual Financial Report for the year ended 31 December 2010 cannot be said to be financial reports that have been prepared in accordance with accounting principles, within the meaning of subparagraph 230-395(2)(a)(i).

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | If the Commissioner's answer to question in Issue 1 is no, are the Special Purpose Annual Financial Report for the year ended 31 December 2010 of the taxpayer and the Special Purpose Annual Financial Report for the year ended 31 December 2010 of a Subsidiary, financial reports prepared, in accordance with accounting principles within the meaning of subparagraph 230-395(2)(a)(i) of the ITAA 1997 for the taxpayer? | This ruling applies for the following periods: Year ended 30 December 2010 | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.