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ABA TOFA submission Nov 05

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ABA TOFA submission Nov 05 Powered By Docstoc
					                        AUSTRALIAN BANKERS’ ASSOCIATION
Tony Burke                                              Level 3, 56 Pitt Street
Director                                                Sydney NSW 2000
                                                        Telephone: (02) 8298 0409
                                                        Facsimile:    (02) 8298 0402




21 November 2005



The Hon. Mal Brough MP
Minister for Revenue and Assistant Treasurer
Room M1.22
Parliament House
CANBERRA ACT 2600


Dear Minister,

                     Taxation of Financial Arrangements

1.       Introduction

Thank you for meeting w ith us on 16 November 2005 and allowing us the
opportunity to review and comment on a draft of the Tax Laws Amendment
(Taxation of Financial Arrangements) Bill 2006 (the ― Dra ft‖).

The Australian Bankers’ Association (―ABA‖) commends the Government and the
Treasury for their ongoing commit ment to the reform of the rules applicable to
the taxation of financial arrangements (―TOFA‖).

The ABA has been a consistent supporter of TOFA (which will have a major impact
on ABA members) since the inception of the process in 1991. An overhaul of the
tax rules relating to financial transactions is a much needed aspect of business
tax reform and needs to remain on the Government’s agenda.

Our high level comments on the Draft are set out in Appendix A. Please note
that given the time available to prepare this submission, these comments are not
exhaustive. Some examples of financial transactions and the ABA’s view as to
how they should be treated under the TOFA rules are contained in Appe ndix B.

Having reviewed the Draft, the ABA continues to believe that there should be an
election to allow qualifying taxpayers to essentially adopt financial accounting
rules for tax purposes in relation to financial transactions. This has been
described as the ―direct link‖ approach.

A summary of the ABA’s preferred ―model‖ for TOFA, and the benefits thereof, is
set out in Appe ndix C. The comments below should be viewed in light of the
ABA’s continued preference for a direct link election.
AUST RALIAN BANKERS’ ASSOCIATION                                                  2


2.      Comments on the Draft

In summary, the ABA believes that significant amendments are required to the
Draft before it is publicly released – regardless of whether or not an elective
―direct link‖ to accounting standards is adopted.

We consider that many of these issues w ill be of concern to taxpayers generally
and not just banks.

The ABA’s key comments on the Draft (see Appendix A for further and more
detailed analysis) are as follows:

     The scope of a ―financial arrangement‖ is far too broad and there are
       insuff icient exceptions (see Appendix A – section 2);

     There is a need for carve-outs from the fair value and foreign exchange
       rate elections to recognise consolidated collective invest ment vehicles
       (Appendix A – section 3);

     Although the ABA is pleased with the proposed discretion to allow the
       Commissioner to rely on financial accounting records, we suggest that an
       alternative approach (to ease compliance and administration burdens on
       both taxpayers and the ATO) be adopted whereby the discretion is
       reversed. That is, taxpayers would rely on their financial records unless
       the Commissioner exerc ised a discretion to the contrary (Appendix A –
       section 4);

     Even if a ―direct link‖ approach is not adopted, a number of issues set out
      in the ABA's TOFA submission of 28 January 2005 still need to be
      addressed, including the need to ensure appropriate revenue/capital
       characterisation of financial transactions. That is, even for a bank not all
       financial arrangements should be deemed to be on revenue account, given
       that a revenue/capital distinction is still maintained in tax law; and

     The Draft lacks a number of other important features, e.g. rules in relation
       to calculation of gains/losses, treatment of bad debts and non-accrual
       loans, aggregation of fee income/expense into the financial arrangement ,
       and application and transitional rules (Appendix A – section 5).


3.      The New Zealand experience

New Zealand has had considerable experience with tax reform in relation to
financial arrangements. The New Zealand equivalent to our proposed TOFA
regime first applied to income years commencing on 1 April 1985, over 20 years
ago.

It is evident that New Zealand has had considerable difficulties w ith its regime –
there have been numerous amendments over the last 20 years. In particular,
there have been, and continue to be, concerns as to the excessiv e scope and
width of the measures. A brief overview of some aspects of the New Zealand
AUST RALIAN BANKERS’ ASSOCIATION                                                   3


regime (and in particular the scope of a financial arrangement) is contained in
Appendix D.

We note with considerable concern that the scope of a financial arrangement
under the Draft appears to be wider than the New Zealand equivalent, with
considerably fewer exceptions.


4.      Summary and next steps

The ABA applauds the continued development of the remaining stages of the
TOFA reforms. In broad terms, the ABA supports a ―coherent principles‖ app roach
to writing tax law, provided a requisite level of certainty can be achieved.

Although the Draft does not adopt the ABA’s preferred ―direct link‖ approach to
financial accounting standards, it will, with further refinement , represent a major
advance over the current tax law and practice in relation to financial transactions.

The discretion to apply f inancial accounting rules for some purposes (per @ 500)
is particularly welcomed. (As noted above, we believe that this approach could be
made even more efficient from the perspective of both taxpayers and the ATO.)

The ABA recommends that the Draft be re-worked follow ing consideration of the
comments in this submission before it is released as a public exposure draft.

Some specific suggestions for the ―next steps‖ are as follows.

1. Timeline : Although the ABA and its members are keen for the TOFA project to
be finalised as soon as reasonably feasible, if it is not possible to make the much-
needed changes to the Draft by 1 December, then we suggest that consideration
be given to deferring the public release of the Draft until such work can be
completed.

2. Ongoing consultation and ABA commitment: The ABA requests an on-
going consultative process with you and Treasury in relation to the TOFA reform
process. The TOFA reforms are very important to the ABA’s members.
Accordingly, the ABA and its members w ill commit necessary resources to
working w ith Treasury on the matter, and believe that an ongoing, formal and
structured consultation process will be necessary.

3. ATO views: Finally, the ABA is curious as what views the Australian Taxation
Office (―ATO‖) may have in relation to the Draft, given that it will be the agency
which will be charged w ith the administration of the new regime.

We recommend that the Minist er seek the full and frank views of the ATO on the
Draft, if this has not already occurred, and that senior ATO representatives be
invited to our next meeting on 23 November.

Thank you again for the opportunity for consultation and we look forward to
meeting again shortly to discuss these critically important reforms.
AUST RALIAN BANKERS’ ASSOCIATION                                               4


Yours sincerely,




______________________________

Tony Burke

Cc:   Mr Philip Lindsay, Senior Taxation Adviser, Office of the Minister for
      Revenue and the Assistant Treasurer




Attachments:

Appendix A: Commentary on the proposed Exposure Draft

Appendix B: Examples of transactions

Appendix C: Summary of the ABA’s preferred TOFA model

Appendix D: The New Zealand experience
AUST RALIAN BANKERS’ ASSOCIATION                                                    5



                                                                   APPENDIX A

Commentary on the proposed Exposure Draft

1. Introduction

The ABA has the following initial comments on the Draft. Given the time available
for our review, these comments should not be seen as comprehensive.

References below to sections (i.e. labelled ―@‖) are references to the provisions in
the Draft.

2. Scope of “financial arrangeme nt”

2.1 Issue

The definition of f inancial arrangement in @20 is far too broad, and goes well
beyond what would ordinarily be regarded as being encompassed by a ―financial
arrangement‖. This is because the def initions refer, in @20(1) to legal or
equitable rights or obligations to receive or provide ―something of economic value
in the f uture‖, rather than being generally limited to debts, debt -like transactions
and derivatives.

The definition in @20(1) appears to be muc h wider than the definition of
―financial instrument‖ in f inancial accounting standard AASB 132 Financial
Instruments: Disclosure and Presentation.

Subsection @20(2) provides that whether a number of rights and/or obligations
are themselves a financial arrangement or whether they are separate financial
arrangements is a ―question of fact and degree that you determine‖ having
regard to a range of specified factors.

Subdivision 230-F contains some limited exceptions, such that the regime will not
apply to specified types of financial arrangements.

It appears to the ABA that if the definition of financial arrangement was enacted
in its current form, then;

      there is likely to be enormous uncertainty and dispute as to what is or is
       not a financial arrangement and even what is intended to be a financial
       arrangement; and

      various unintended consequences will arise.

Based on the New Zealand approach (see Appendix D), which the ABA does not
support, there would seem to be a need for numerous further exceptions.

By way merely of a few examples, consider the application of the Draft as it
stands to the following situations:

Guarantees/warranties: assume that a business taxpayer buys a new car, and
that a five-year warranty is included in the purchase price of the vehicle. It would
appear that the taxpayer has an embedded financial arrangement, given that
AUST RALIAN BANKERS’ ASSOCIATION                                                   6


there is a right to receive something of economic value in the future.
Accordingly, would it be necessary to somehow break up the purchase price into
the cost of the vehicle, and the cost of the warranty, such that the financial
arrangements regime would apply (somehow) to the warranty component?

Leases: assume that instead of buying a car, the taxpayer obtains a vehicle
under a five year lease f rom a financial institution. In this situation, once again
there would appear to be a financial arrangement, given that the taxpayer has a
legal obligation to provide something of economic value in the future, i.e. the
lease payments.

Pre paid serv ices: assume that ACO pays BCO in advance for services to be
performed over the next 3 years. It would seem that each party has a financial
arrangement.

From a policy perspective, the TOFA rules should not apply to the above fact
patterns, as they do not involve f inancial instruments and/or they are
appropriately dealt with under other aspects of tax law. We stress that these are
merely a few examples.

Further, and more importantly and f undamentally, t he ABA strongly believes that
it is wrong in principle to draft something so widely that it is necessary to
specifically carve-out so many types of rights or obligations in relation to
situations    that   would   not   ordinarily be    regarded    as   financial
arrangements/instruments in the first place.

The preferable approach is to start with a narrower de finition, and then add
specific inclusions to deal w ith any perceived gaps. Such an approach will
minimise uncertainty, unintended consequences, disputes and compliance costs.

Existing exceptions

Some of the stated exceptions in @110 are too broad, such that many
transactions that should be caught by the rules may fall outside of the regime.

For example, @110(6) states that ―a right or obligation under legislation is the
subject of an exception‖. As a consequence of this provision, many loans and bills
of exchange may (inappropriately) not be w ithin scope, having regard to the
Banking Act 1959 (Cth), the Bills of Exchange Act 1909 (Cth) and various pieces
of Commonwealth and State/Territory legislation dealing with money lending.

By way of another example, @110(5) provides that ―a right or obligation under a
contract for the employment of a person is the subject of an exception‖.
Accordingly, if under an employee’s contract of employment the employee lends
money to the employer on a long term/deferred interest basis (i.e. a quasi-zero
coupon bond) the employee would be able to (inappropriately) defer tax on the
interest income as compared to the situation that would arise if s/he in f act
bought a zero coupon bond.

In short, considerable ref inement would have to be made to the existing
exceptions in @110 in order for them to be made effective. (We stress that the
AUST RALIAN BANKERS’ ASSOCIATION                                                        7


above are merely two examples of the difficulties with the existing exceptions,
and are not exhaustive comments.)

2.2 ABA Re comme ndation

Some alternative approaches (starting with the ABA’s preferred position) to the
definition of financial arrangement are as follows.

Dire ct link to the AASB 132 definition of fina ncia l instrume nt: Under this
approach, the tax definition of financial arrangement would take its meaning
directly from the financial accounting def inition, with such carve-outs/carve-ins as
necessary to achieve tax policy objectives. As/when the financial accounting
definition changes, this would cause the tax definition to alter as well. The ABA
sees this as a benef it and not a disadvantage -- see the discussion in section 5 of
Appendix C.

Base   the    tax   definition    on   the     AASB   132   de finition   of   fina ncial
instrume nt: Under this approach, there would be no direct link to the financial
accounting definition. Rather, the accounting definition would be included in tax
law, once again w ith such carve-outs/carve-ins as necessary to achieve tax policy
objectives. Changes to the financial accounting definition would have no impact
upon the tax definition. That is, if appropriate, it would be necessary to amend
the tax definition from time to time as financial accounting standards change.

Stand-alone     (narrowe r)      de finition   of   financial   a rra ngeme nt:   If   no
reference is to be made to the financial accounting definition, then the existing
definition in the Draft could be replaced with a narrower/more targeted definition,
which could be based upon a combination of the existing def inition of a debt
interest or a financial arrangement, as per the debt/equity rules in Division 974,
together with a definition of derivative, i.e. as per @403(2) in the Draft. Once
again, there may be a need for some carve-outs/carve-ins to achieve tax policy
objectives. For limited purposes only (e.g. in relation to the fair value ele ction) it
would be appropriate to include equity interests in the regime.

Whichever approach is to be adopted, it should be ―road tested‖ against various
financial transactions, including those contained in Appendix B, so as to
determine w hether there is both certainty and appropriateness of outcome in
relation to both the scope of the measures and the resulting tax timing rules.

3. Treatment of tax consolidate d collective investment vehicles

3.1 Issue

As set out in the ABA’s TOFA submission of 28 January 2005, and as noted in
section 6.3 of Appendix C, the current law contains a number of measures that
are designed to maintain parity of tax treatment between various types of
―collective investment vehicles‖ and invest ments made directly by natural persons
or complying superannuation funds.
AUST RALIAN BANKERS’ ASSOCIATION                                                   8


It is essential that such policy be continued in the new TOFA regime, so as to
maintain competitive neutrality, as far as possible, between entities conducting
similar activities, but through different legal and/or regulatory structures.

Accordingly, there will be a need for measures to ensure that, as would be the
case with individuals, specified collective invest ment vehicles (including
segments/divisions of a larger tax consolidation group – such as, for example, the
superannuation (VPST) business of a life insurance company that is a tax
consolidated subsidiary of a bank) are able to use realisation (rather than market
value/retranslation) rules, regardless of the applicable financial accounting rules,
and to achieve c apital rather than revenue treatment where appropriate.

As it stands, the Draft does not appear to address the above issues. That is, the
fair value election (@250) and the foreign exchange rate election (@300), and
the rules which deem transactions to be on revenue rather than capital account,
(@70) do not make allowance for collective invest ment vehicles embedded w ithin
a larger tax consolidated group.

3.2 ABA Re comme ndation

Amendments to the Draft, and in particular at least in relation to the sections
referred to above, are required so as to ensure parity of treat ment between
collective investment vehicles and natural persons.

That is, it should not be necessary for a collective investment vehicle embedded
within a larger tax consolidated group to be required to make elections which
would not ordinarily be made by a natural person.

4. Discretion to rely on financial accounting records

4.1 Issue

The ABA is pleased with the proposed discretion in @500 to allow the
Commissioner to rely on financial accounting records.

As a practical matter, we envisage that there could be considerable compliance
costs and administration issues for both taxpayers and the ATO in actually
implementing the discretion.

It would appear necessary for each relevant taxpayer to approach the ATO to
determine w hether the discretion would be exercised, and particular, whether the
differences between financial accounting results and the rules otherwise applying
under the legislation are ―substantial‖.

It is not clear how the discretion will be exercised and what records will be
required/what investigations w ill need to be taken by the ATO in order for the
cute Commissioner to be duly ―satisfied‖.

4.2 ABA Re comme ndation

We suggest that an alternative approach (to ease compliance and ad ministration
burdens on both taxpayers and the ATO) be adopted whereby the discretion is
reversed. That is, taxpayers (w ho have made all three of the elections mentioned
AUST RALIAN BANKERS’ ASSOCIATION                                                      9


in @500(1)(b)) would rely on their f inancial records unless the Commissioner
exercised a discretion to the contrary.

5. Othe r issues

The follow ing list of ―other issues‖ should not be seen as either comprehensive or
as involving only minor issues. Many of these matters are of ―f irst order‖
significance and in the ABA’s view require conside ration before the legislation is
progressed.

“Characte r” of gains and losses: It is intended that all gains/losses from
financial arrangements will be deemed to be on revenue account: @70. Even for
a bank this is not necessarily an appropriate/reasonable outcome, given that a
revenue/capital distinction is maintained elsewhere in tax law. For example,
where a capital account asset (e.g. shares in a foreign subsidiary) is funded
and/or hedged by one or more AUD or foreign currency denominated financial
arrangements, revenue/capital mismatches may arise under the Draft (and under
the existing law). It is pleasing that the Draft deals with timing issues in relation
to hedging (per Subdivision 230-D). However, as noted in section 6.4 of Appendix
C, and in many earlier ABA submissions, there is a need for f urther consideration
in relation to     ―character‖     matching   of   related   hedging   and/or   funding
transactions.

Calculation of gains/losses: F urther clarity is required on a range of important
issues as to exactly how/when gains/losses are to be calculated and recognised
under the proposed rules, including but not limited to the follow ing matters:

      the distinction between ―flows‖ during the life of a transaction (e.g.
       interest income/expense) and gains/losses upon maturity or other
       disposal;

      treatment of specific provisions for doubtful debts and bad debt write -offs;

      non-accrual loans, i.e. how/when interest income, where otherwise
       accrued, can be put on to a ―cash‖ basis when the debtor is in actual or
       likely default;

      the concept of a ―realised gain or loss‖ in @75 (item 2 in the table) needs
       to be developed somewhat, given the confusion/uncertainty in practice and
       case law (e.g. the pre-Division 775 decisions on forex gains/losses;
       including the High Court’s 1996 decision in FCT v ERA) as to when a gain
       or loss is in fact ―realised‖ in other situations. Having said this, any such
       development needs to be less prescriptive than the approach taken in
       Division 775;

      the ability to include fee income/expense in the gain/loss c alculations for
       tax purposes so as to achieve symmetry with the financial accounting
       approach; and

      circumstances in which it is reasonable and appropriate to use a ―straight
       line‖ rather than a compound accruals methodology.
AUST RALIAN BANKERS’ ASSOCIATION                                                 10


Aggregation and disaggregation of transa ctions: It is evident from @20(2),
and the three examples therein, that in certain cases one transaction will be split
into one/more financial arrangement(s) and possibly non-financial arrangements,
and that in other cases a series of transactions may comprise one ―financial
arrangement‖. Given the continuing uncertainty as to how the ―related schemes‖
rules work in the debt/equity regime (4 years after their introduction),
considerable further thought needs to be given to the aggregation/disaggregation
rules, so as to minimise uncertainty as to when they do or do not apply. At the
very least, further guidance is needed in the legislation and also in the relevant
explanatory memorandum.

Spe cial (tax timing) he dging rules: In the time available, we have not been
able to conduct a full review of the (tax timing) hedging rules in proposed
Subdivision 230-D. These rules w ill be of critical importance not only to banks but
also to many other types of taxpayers.

We would like the time to be able to review these rules in detail. In particular, we
are keen to compare/contrast the proposed tax rules with the financial accounting
rules (and practice) in relation to hedging as per financial accounting standard
AASB 139 Financial Instruments: Recognition and Measurement.

For practical and compliance cost reasons, we are anxious that the tax rules and
financial accounting rules in relation to hedging be as similar as possible.

Transitional and grandfathe ring rules: The rules in relation to how/when the
new system w ill apply, and the circumstances in which (and consequences of) a
taxpayer making an election to include existing transactions within the regime are
of considerable importance. We note that the Draft does not yet include such an
election, which was reco mmended by the Ralph Review of Business Taxation (see
Recommendation 9.11(b).

Obje cts of the Div ision: We suggest that @10, dealing w ith the "Objects of this
Division" should specifically include reference to each of the following:

      coordination and alignment between financial accounting and tax rules to
       the greatest extent possible (i.e. having regard to the Minister for Revenue
       and the Assistant Treasurer's press release of 5 August 2004); and

      minimisation of compliance costs.

In addition, existing @10(a) and @10(b) should each be qualif ied, e.g. by use of
the word ―generally‖. That is, because the realisation method will still apply to
many financial transactions, gains and losses will not always be recognised ―over
the life‖ of a financial arrangement. Further, particularly having regard to the
preceding comments in this submission, not all financial arrangement should be
deemed to be on revenue account

Interaction with othe r provisions: The TOFA rules are to take precedence
over all other assessing provisions, per @70(4). However, the precise interaction
between the TOFA rules and the rest of income tax law is not entirely clear. For
example, given the complexity of the capital gains tax (―CGT‖) rules, it would be
AUST RALIAN BANKERS’ ASSOCIATION                                                 11


preferable that the CGT provisions are made totally non-operative in relation to
financial arrangements, so as to avoid the complexities which currently arise. It is
understood that consideration had been given to replacing the extremely complex
and almost unworkable foreign exchange rules, currently contained in Division
775, w ith the TOFA Stages 3 & 4; it is not clear whether this has been achieved
with the Draft or whether this is in fact intended. There are many other provisions
in tax law which also currently have application to financial transactions, where it
is not clear whether they will, or need to, be retained.

Schedules and Regulations: There are a number of references in the Draft to
Schedules and Regulations. In order to understand the full scope and application
of the proposed regime, it would be ideal for such Schedules and Regulations to
be released at the same time as the exposure draft of the proposed legislation.
Such an approach would avoid the types of problems which have been so evident
in TOFA Stage 1 (the debt equity rules) and TOFA Stage 2 (the foreign exchange
rules), where there is still considerable doubt as to how the rules operate. In
relation to the debt/equity rules, which commenced in July 2001, much-needed
regulations in certain areas have not even been exposed for public comment, let
alone promulgated.

                                       ****
AUST RALIAN BANKERS’ ASSOCIATION                                                    12



                                                                  APPENDIX B

Examples of transactions

1. Introduction

Set out below are some simple examples of financial transactions, with some
initial/indicative view as to whether/how they should be regarded as being w ithin
the scope of a TOFA regime.

The ABA recommends that the proposed TOFA legislation be ―road tested‖,
before finalisation, against a range of f inancial transactions (including but not
limited to those few below) so as to determine from a policy perspective whether
the transaction is/should be captured, and if so, how the rules actually operate.

Such an approach should help to maximise certainty of operation of the rules. The
outcomes suggested below are only indicative or illustrative and should be
compared to the outcomes arising under financial accounting standards , so as to
ensure symmetry as far as possible.

2. Transactions which should come within a TOFA regime

In each of the following cases it is thought reasonable to apply the TOFA regime.

Zero coupon bond/de posit: ACO pays BCO $60 on day 1 and has the right to
receive $100 at the end of year 5. This could be by way of a deposit or the issue
of a bond or other negotiable instrument. (Alternatively, ACO could purchase such
a bond in the secondary market.) As is currently the case with Division 16E, each
party should spread their $40 income or expense o n a compound accruals basis
over the five-year period in question.

Forward purchase of an interest-bearing bond or othe r moneta ry
security: ACO pays BCO $60 on day one, w ith BCO being required to deliver
$100 of floating-rate bonds (issued by a government or another third-party) to
ACO at the end of year 5 under a prepaid forward purchase agreement . Arguably
Division 16E does not currently apply to such a fact pattern, however, arguably
the TOFA regime should extend to such an arrangement. Once again, each party
should spread their $40 income or expense on a compound accruals basis over
the five-year period in question. Upon delivery of the securities, the $40 of
income recognised by ACO would be added to the $60 actually paid for the
securities, giving a total cost base of $100. Similarly, the $40 expense recognised
by BCO would be deducted from the cost base of the bonds delivered by BCO to
ACO.

Sale of an income stream: ACO buys a f ive year interest -bearing bond for face
value of $100 and immediately sells the interest coupons for $40, thereby
effectively creating an in-substance zero-coupon bond. In a similar fashion to the
existing Division 16E (but note the confusion caused by existing s.102CA), ACO
should have the same tax outcome as if it had purchased a zero -coupon bond.
That is, $40 income would be spread over the five-year term of the bond of a
compound accruals basis.
AUST RALIAN BANKERS’ ASSOCIATION                                                 13


Sale of the principal component of a bond: Once again ACO buys a f ive year
interest-bearing bond for face value of $100. This time, ACO, on day one, sells
the right to receive the principal of $100, and receives $60 also on day one. ACO
continues to receive all interest on the bond over the next five years. In a similar
fashion to the sale of the income stream, it would appear that ACO should
effectively split the $100 cost of acquisition of the bond into principal ($60) and
interest ($40), such that no gain/loss is recognised on day one. Rather, the $40
cost of the interest coupons would be a mortised (generally on a yield to maturity
basis) against the interest coupons received.

Pre fere nce shares and other debt interests: The above transactions may be
undertaken w ith redee mable preference shares or other instruments that are debt
interests for tax purposes, and similar outcomes should arise.

Acquisition of an income stream: ACO pays $75 to receive a stream of
receivables, e.g. say lease receivables of $20 p.a. for 5 years. The $75 cost of the
receivables should be amortised (generally on a yield to maturity basis) against
the periodical sums received.

Legal de feasance: ACO owes $100 to BCO, on an interest bearing debt, with the
principal due in 5 years. Under a tripartite arrangement, ACO pays $60 to CCO
today, such that CCO will have the full legal obligation to pay $100 to BCO in 5
years, with ACO being full released in relation to the principal. ACO remains
responsible for the interest payments on the debt. It would appear that ACO’s
―gain‖ of $40 should be spread over 5 years, against the future interest
deductions, notwithstanding that the liability has been discharged. That is the
―cost base‖ of the liability should be split into principal ($60) and interest ($40)
components. CCO’s expense of $40 should also be spread over 5 years, in the
same manner as would be required for a zero coupon bond.

In-substance de feasances: If the above transactions are undertaken as in-
substance rather than full legal defeasances, arguably t he same tax outcomes
should arise.

3. Transactions where it is not as clea r as to whether they should come
within a TOFA regime

In the follow ing case(s) it is thought that it is not as clear from a policy
perspective as to whether the TOFA regime should apply. [One transaction is
presented thus far – there are likely to be others.]

Forward purchase of a non-monetary asset: ACO pays BCO $60 on day one,
with BCO being required to deliver an asset (e.g. shares, other equity interests,
land, a business etc) to ACO at the end of year 5 under a prepaid forward
purchase agreement. In this case, the asset is a non- monetary asset and its
value at year 5 is unclear. (Alternatively, ACO could have lent $60 to BCO
repayable on a zero coupon basis for $100 at the end of year 5, and entered into
a forward purchase of the asset for $100, payable on completion at the end of
year 5. In this alternative ACO would accrue interest income of $40 over 5 years,
on a compound basis; ACO would have a cost of $100 for the asset; BCO w ould
AUST RALIAN BANKERS’ ASSOCIATION                                            14


have interest expense of $40 over 5 years and a $100 sale price for the asset.)
Returning to the initial fact pattern, if the financing is embedded in the sale
contract, in what circumstances should it be disaggregated and treated as a
financial arrangement?

                                     ****
AUST RALIAN BANKERS’ ASSOCIATION                                                 15



                                                                   APPENDIX C

Summary of the ABA’s preferred TOFA model

1. Introduction

The ABA considers that, as a country, we are in the fortunate position of having
the impetus and momentum for reform of a major area of tax law at a time when
detailed and up-to-date accounting standards on the very same topic are
available.

Accordingly, the ABA has developed a framework to maximise tax/financial
accounts alignment - in a way which should have no adverse impact on the
Revenue. The ABA’s TOFA model was set out in some detail in the ABA’s
submission of 28 January 2005 to Treasury (―Submission‖). What follows is a
summary of some aspects of the Submission.

On the assumption that banks will still be required to ―add back‖ their provisions
for doubtful debts (an issue the ABA concedes), the ABA’s proposed TOFA regime
should generally result, for most banks in most years, in a bank's taxable income
from financial transactions being higher than its reported accounting profit from
such transactions. This is a very good outcome for the Government.

2. Overvie w of the ABA’s TOFA mode l

The key aspects of the ABA's preferred approach to TOFA reform are:

    initially, an elective regime w ould be established, whereby taxpayers w ho
     maintain independently audited financial accounts meeting agreed criteria,
     would be permitted to use financial accounting rules in relation to the tax
     consequences of financial arrangements – subject to appropriate safeguards
     and a minimal number of exceptions/carve-outs due to tax policy and
     compliance concerns; and

    subsequently, new or revised tax rules in relation to financial arrangements
     affecting taxpayers not within the elective regime could be developed. These
     rules should be able to be much simpler than those in the Draft. For
     example, there should be no need for some of the specific elections ( e.g.
     dealing with fair value and foreign exchange translation), which would all be
     addressed in the single elective regime.

3. Benefits from the ABA’s TOFA Model

In summary, the ABA believes that the advantages of its proposed framework for,
and prioritisation of, TOFA reforms are as follows:

      shorter, simpler law for all taxpayers, w hich w ill be quicker and easier to
       implement – especially those most affected by TOFA, given the linkage to
       existing financial accounting rules;
AUST RALIAN BANKERS’ ASSOCIATION                                                                16


         the proposal will maximise the ―appropriate coordination and alignment
          between the implementation of the remaining stages of TOF A and the
          impending accounting standard – AASB 139‖ 1 , with the following benef its:

               o   leveraging off an already well-thought out and relevant set of
                   principles and rules, thereby avoiding ―reinvention of the wheel‖;

               o   substantially reduced compliance costs for business, through a
                   major reduction in the potential duplication of lengthy and complex
                   rules in each of tax law and financial accounting standards;

               o   substantially ―self-enforcing‖ due to the system applying to
                   taxpayers otherw ise required to maintain audited financial
                   accounts, e.g. for statutory (non-tax) purposes; and

               o   the regime will have in-built flexibility to deal with developments in
                   financial transactions and related accounting rules;

         starting the reform process with the elective regime should not only make
          it easier for Treasury/ATO to subsequently modify existing rules, or
          develop new rules, for taxpayers outside of the regime, but should ensure
          that, where appropriate, there is a greater coordination of tax and
          accounting rules, due to the experience that Treasury and the ATO will
          have gained in the implementation of the elective regime; and

         significantly reduced demands on Treasury, the ATO and Office of
          Parliamentary Counsel in relation to (i) the initial drafting of the measures,
          (ii) their interpretation and ―unfolding‖, (iii) the on-going effort to up-date
          and amend the law, and (iv) administration/enforcement.

4. Benefits of a phased approach

The ABA sees considerable benefit for the Treasury, ATO and taxpayers f rom this
―phased‖ approach to the implementation of the remaining TOFA reforms. By way
of summary of the comments in t his regard in the Submission:

         giving preference to the establishment of the elective regime w ill ensure
          that appropriate rules are available, as soon as possible, for that group of
          taxpayers that over the last 15 years have been by far the most vocal and
          consistent proponents for TOFA reform – i.e. the banking and finance
          community. Reforms are needed for other taxpayers – but they are not as
          urgent as those facing taxpayers whose businesses fundamentally revolve
          around financial arrangements;

         the detailed understanding that Treasury and the ATO will inevitably
          acquire as regards the new financial accounting standards on financial
          instruments, as a consequence of the development of the elective regime,


1
    Press release No.002/2004, 5 August 2004: Taxation of Financial Arrangements: Easing Compliance
    Costs, issued by the Hon. Mal Brough MP, Minister for Revenue and the Assistant Treasurer.
AUST RALIAN BANKERS’ ASSOCIATION                                                   17


       will be of enormous benefit (to Treasury/ATO and taxpayers) when time
       comes to develop or modify TOFA type rules for taxpayers not subject to
       the elective regime;

      some of the features in the Draft should not be needed in either the
       elective regime or in the rules applying to other taxpayers. In particular, it
       should be possible to dispense w ith the specific elections in relation to fair
       value and retranslation – these would be sub-components of a taxpayer’s
       choice to enter the elective regime;

      the ABA believes that the proposed elective TOFA regime should be
       relatively easier, simpler, and quicker, to draft and implement than the
       possibly more detailed rules that will apply outside of the regime; and

      finally, the elective regime w ill provide a more controlled and limited
       means by which to explore both;

           o   the relatively new ―coherent principles‖ approach; and

           o   the appropriate alignment of tax law with financial accounting rules.

The preferable approach to implementing the elective regime on the timeliest
basis would be for the scope of the measures to follow the financial accounting
rules as closely as possible. If there is still a perceived need for the scope of the
new tax rules to apply in a manner beyond the analogous treat ment in the
financial accounting standards (e.g. in relation to the definition of financia l
asset/liability), this could be addressed in the second phase of the remaining
TOFA measures, w ith the amendments being applicable to all taxpayers including
those within the elective regime.

5. C hanges in financ ial accounting standa rds

A key benefit of the ABA’s proposed f ramework is that it will have in-built
flexibility i.e. tax rules will automatically be updated as and when financial
accounting rules are modified. That is, this is seen as a benefit and not a
detriment of the proposal.

This does not mean that the Australian Government will lose control of its tax
base or become ―hostage‖ to setters of accounting standards, i.e. ―grey beards‖
in London. That is;

      strictly speaking, Australian entities have not adopted international
       accounting standards – they are applying Australian standards, reviewed
       and approved by the Australian Parliament, that are based on international
       standards;

      there is inevitably a very long lead time before changes to financial
       accounting standards are implemented. Australia not only w ill have input
       into any changes at the international level, it will be necessary for the
       AASB (with oversight by Parliament) to consider the changes and make
       the appropriate amendments to our standards. Accordingly, t here will be
       more than suffic ient time for the Treasury and the ATO to assess whether
AUST RALIAN BANKERS’ ASSOCIATION                                                                  18


          the changes to financial accounting rules are acceptable from an Australian
          tax perspective; and

         if the Government determines, after consultation, that a particular
          proposed amendment to financial accounting standards is unacceptable
          from a tax perspective, a suitable exception/carve-out for tax purposes
          could be devised.

That is, even from the inception of the proposed regime, the ABA accepts (see
discussion below) that there will be some differences between financial
accounting and tax rules.

6. Diffe rences between financial accounts a nd tax rules

It is likely that both Government/Treasury and taxpayers will wish to suggest
exceptions to the alignment of tax rules with financial accounts – for a variety of
reasons.

Some of these exceptions will be designed to preserve the policy status quo in
certain areas e.g. item 6.1 below dealing with specific provisions for doubtful
debts, and item 6.3 addressing collective invest ment vehicles.

In general, w hilst some exceptions w ill be inevitable, they should be minimised,
as far as possible, so as to avoid loss of the key benefits of tax/accounts
alignment.

Set out below is a brief summary of the ABA’s initial comments in this regard, as
per the Submission. Further consideration needs to be given to the range of
carve-outs, and the form they should take.

Even if the Draft is developed in its existing form (i.e. without inclusion of the
ABA’s model/an elective regime), the ABA considers that the follow ing issue s
need to addressed in relation to the Draft.

6.1 Spe cific provisions for doubtful debts (“impairment losses”)

Under current law, all taxpayers, including banks, are only allowed deductions for
bad debts. That is, no deductions are available for provisions (necessary under
financial accounting standards) for doubtful debts.

The ABA acknowledges (but does not necessarily agree with!) the current ―policy
setting‖ of tax law in this regard.

To the extent to which the Government wishes to continue this policy in the new
TOFA regime, it would be necessary to have a specific tax rule that would require
all taxpayers (not just financial institutions) to ―add back‖ specific provisions for
doubtful debts 2 , i.e. at least in relation to the category of financial asset s known
as ―loans and receivables‖ in AASB 139.




2
    Paragraphs 58 to 70 of AASB 139 deal with ―impairment and uncollectibility of financial assets‖ –
    including the ascertainment and treatment of impairment losses (i.e. what would have been called
AUST RALIAN BANKERS’ ASSOCIATION                                                           19


6.2 Othe r unrealised losses/gains (othe r than assets/liabilities held for
trading)

The discussion in section 6.1 above addresses the question of tax deductions for
unrealised losses on one of the four categories of financial assets in AASB 139,
i.e. loans and receivables.

At the other end of the spectrum, being assets classified for financial accounting
purposes as being ―held for trading‖, it would be appropriate and reasonable to
recognize unrealised gains and losses for tax purposes, subject only to the
possible election discussed in section 7.5 below.

Indeed, this is the ―mark to market‖ approach which the ABA has sought since
1989, and which forms the basis of recommendation 9.1 of the Final Report of the
RBT in July 1999.

For financial assets in the other two categories for financial accounting purposes
(per AASB 139), being ―held-to-maturity invest ments‖ and ―available-for-sale
financial assets‖, further consideration is required as to whether unrealised
gains/losses should be recognized for tax purposes. (The ABA’s initial view is that
the tax law should follow the f inancial accounting rules – i.e. any unrealised
gains/losses booked for accounts should be respected for tax purposes.)

6.3 Colle ctive investment vehicles: pa rity of treatme nt with natural
persons

The current law contains a number of measures that are designed to maintain
parity of tax treatment between various types of ―collective investment vehicles‖
and invest ments made directly by natural persons or complying superannuation
funds.

It would be appropriate that such policy be continued in the new TOFA regime
(whethe r the regime follows the Draft, or the ABA’s model), so as to
maintain competitive neutrality, as far as possible, between entities conducting
similar activities, but through different legal and/or regulatory structures.

Accordingly, there will be a need for measures to ensure that, as would be the
case with individuals, specified collective invest ment vehicles (including
segments/divisions of a larger tax consolidation group – such as, for example, the
superannuation (VPST) business of a life insurance company that is a tax
consolidated subsidiary of a bank) are able to use realisation (rather than market
value/retranslation) rules, regardless of the applicable financial accounting rules,
and to achieve capital rather than revenue treatment where appropriate.




 specific provisions under pre-AASB 139 accounting standards and generally accepted accounting
 principles.
AUST RALIAN BANKERS’ ASSOCIATION                                                       20


6.4 C haracter and timing matching: sub-principle, e.g. re he dging

Financial accounting has only one ―class‖ of income/expense. That is, there is no
requirement to identify or ―characterize‖, and separately             treat,   items   of
income/expense in the manner laid dow n in existing tax law.

Characterization is critical for tax purposes – given the quarantining rules that
prevent or limit the ―mixing‖ of gains/losses of different types.

It is beyond the scope of this submission to address whether the existing
characterization rules in tax law are appropriate/should be retained – this issue
goes well beyond financial transactions.

In other words, it is assumed that existing characterization rules are a ―given‖.
Because of such existing rules, and the lack (under current law) of a proper
hedging regime, unreasonable mismatches can arise between items of different
characters. For example, a gain on a forward foreign exchange hedging contract
may be deemed to be on revenue account, and is unable to be offset against a
corresponding capital loss on the underlying capital asset being hedged.

Accordingly, it is considered critical that there be at least an elective ability in the
new TOFA regime to achieve "character matching" for related transactions in
certain cases – leveraging off the hedging rules and related detailed requirements
in financial accounting standards.

For this purpose, "charact er matching" would include;

     assessable vs exempt vs non assessable non exempt income

     revenue vs capital gains/losses

     Australian vs foreign source income.

The character matching rules would be in addition to the hedge timing rules in the
Draft.

6.5 Possible ele ction to de fer ce rtain types of large net unrea lised gains
and losses

The ABA’s model would expose a greater range of unrealised gains/losses to
taxation than is the case under current law. Members of the ABA are generally
comfortable with such an out come from their own perspectives.

However, the ABA acknowledges that some taxpayers may, from time to time, be
placed in a diff icult position from a cash flow perspective if they were required (on
a mandatory basis) to recognise unrealised gains for tax pu rposes. Accordingly,
and as explained earlier, this is one of the key reasons why it is proposed that
there should be an election to enter a tax/accounts alignment regime.

Nonetheless, if the Government wished to make the elective TOFA regime more
attractive to business taxpayers (other than banks and financial institutions), it
would be appropriate to consider an election (within the elective TOFA regime)
that would allow a taxpayer to defer any ―large‖ net amount of unrealised gains
AUST RALIAN BANKERS’ ASSOCIATION                                                 21


and losses arising from specified (not all) types of financial transactions. In
particular, the objective would be to address unrealised foreign exchange gains
and losses, although the principle may have a wider application. The objective
would be to keep the exception as narrow as possible.

What is a ―large net‖ unrealised gain/loss balance could be set as a specified
percentage (to be determined) of either the taxpayer’s (gross) assessable income
or (net) taxable income.

Consideration would need to be given as to how any defe rred net amount of
unrealised gains/losses would be treated. In order to maintain parity with the
current law, a realisation basis (for defined types of gains/losses) might apply.
Alternatively, it may be possible, for example, for the net balance to be spread on
a simple 3 or 5 year ―rolling‖ basis.

Once again, whether the election should be revocable (and if so, when/how) or
irrevocable w ill require consideration. The ABA’s initial thinking is that there
should be some ability to revoke the election where a taxpayer’s
circumstances/business activities have changed to a substantial extent.

The ABA envisages that banks and financial institutions would generally not seek
to make the election discussed in this section – i.e. such taxpayers generally
expect, and wish, to be taxed on unrealised gains and losses under the new TOFA
regime.

6.6 W hen to bifurcate/disaggregate fina ncia l transa ctions

Financial accounting standards ―bifurcate‖, i.e. disaggregate, compound financial
transactions in certain situations.

In general, the new TOFA regime should adopt the same approach and rules as
those set out in financial accounting standards.

However, the debt/equity regime in Division 974 w ill probably require a different
approach in relation to debt/equity issues.

As a broad principle, given the ―code-like‖ nature of the relatively recent Division
974, the ABA proposes that in relation to debt/equity matters, there would be no
disaggregation for tax purposes, even where such an approach is required under
financial accounting standards.

However, bifurcation, per the rules in accounting standards, would apply in all
other (non debt-equity) scenarios.

                                        ****
AUST RALIAN BANKERS’ ASSOCIATION                                                   22



                                                                   APPENDIX D

The New Zealand experience

1. Introduction

New Zealand introduced what was orig inally know n as its ―accruals regime‖, to
deal w ith financial arrangements, in 1986, w ith effect from income years
commencing on or after 1 April 1995.

Section 2 below contains extracts from the current NZ rules dealing w ith financial
arrangements.

It can be seen from the New Zealand legislation that there are no fewer than 25
specific carve-outs in ss.EW 4 and EW 5 from the (overly-wide) def inition of
financial arrangement in s.EW 3. Viewed from an Australian perspective, some of
the New Zealand exceptions appear to be drafted in a somew hat (overly)
simplistic manner, such that any comparable ―laundry list‖ approach in Australia
is likely to be much more intricate.

After numerous previous (not entirely successful) efforts to clarify the operation
of the New Zealand system, a Discussion Document on further proposed changes
to the then accruals rules was released in December 1997 by the Deputy Prime
Minister and Treasurer; and the Minister of Finance and Minister of Revenue. That
document noted, at paragraph 2.4, as follows:

          “We agree with the Valabh Committee [which reported in October 1991]
          that the major problem behind most of the criticisms is the lack of clear
          statutory guidance on the boundar ies of the accruals rules and, in
          particular, in the definition of the term "financial arrangement". A clearer
          definition of this term would assist in the application of the rules. In the
          interests of certainty, taxpayers need to know w hether particular
          transactions fall within the rules. It is gene rally acknowledged that
          the present definition is too wide, including within its scope some
          comme rcial transactions that we re not originally anticipated as
          being subje ct to the rules.” (emphasis added)

It is not at all clear that the NZ amendments which were made after the 1997
Discussion Document have suitably narrowed the rules. If the basic rule is too
wide, then there is an almost impossible task to try and appropriately narrow it
through a ―laundry list‖ approach. Almost inevitably, items will be missed and
unintended consequences and uncertainty will remain.

2. Extracts from Subpart EW (F ina ncial a rra ngements rules) of the New
Zealand Income Tax Act 2004

EW 3 What is a financial arrangeme nt?

Meaning

(1) Financial arrangement          means   an arrangement described in any of
subsections (2) to (4).
AUST RALIAN BANKERS’ ASSOCIATION                                                             23


Money received for money provided

(2) A financial arrangement is an arrangement under which a person receives
money in consideration for that person, or another person, providing money to
any person—

         (a) at a future time; or

         (b) on the occurrence or non-occurrence of a future event, whether or
         not the event occurs because notice is given or not given.

Exam ples of money received for money provided

(3) Without limit ing subsection (2), each of the following is                    a financial
arrangement:

         (a) a debt, including a debt that arises by law:

         (b) a debt instrument:

         (c) the deferral of the payment of some or all of the consideration for an
         absolute assignment of some or all of a person's rights under another
         financial arrangeme nt or under an excepted financial arrangement :

         (d) the deferral of the payment of some or all of the consideration for a
         legal defeasance releasing a person from some or all of their obligations
         under another financial arrangement or under an excepted financial
         arrangement.

Excepted financial arrangement ceasing to be excepted

(4) For sections EW 7 and EW 8, —

         (a) an excepted financial arrangement that ceases to be an excepted
         financial arrangement through the operation of section EW 7 is a financia l
         arrangement:

         (b) an excepted financial arrangement that ceases to be an excepted
         financial arrangement for a party through the operation of section EW 8
         is a financial arrangement for the party.

Defined in this Act: consideration, excepted financial arrangement, financial arrangement, legal
defeasance, money

EW 4 What is not a financial a rra ngement?

Absolute assignment

(1) An absolute assignment of some or all of a person's rights under another
financial arrangement or under an excepted financial arrangement is not a
financial arrangement, except to the extent described in section EW 3(3)(c).

Legal defeasance
AUST RALIAN BANKERS’ ASSOCIATION                                                               24


(2) A legal defeasance releasing a person from some or all of their obligations
under another financial arrangement or under an excepted financial arrangement
is not a f inancial arrangement, except to the extent described in section EW
3(3)(d).

Excepted financial arrangement

(3) An excepted financial arrangement is not a financial arrangement. The
relationship between financial arrangements and excepted financial arrangements
is dealt with in section EW 6.

Defined in this Act: excepted financial arrangement, financial arrangement, legal defeasance

EW 5 What is an excepted fina ncia l a rra ngement?

Meaning

(1) Excepted financ ial arrangeme nt means an arrangement described in any
of subsections (2) to (23). However,—

          (a) an arrangement described in any of subsections (16) to (18) may
          cease to be an excepted financial arrangement through the operation of
          section EW 7:

          (b) an arrangement described in any of subsections (19) to (23) may
          cease to be an excepted financial arrangement for a party who makes an
          election under section EW 8.

Annuity

(2) Each of the following is an excepted financial arrangement:

          (a) an annuity for a term contingent on human life:

          (b) an annuity for a term not contingent on human life to which section
          EY 8(2)(c) (Meaning of life insurance) applies.

Bet

(3) A bet on any of the following is an excepted financial arrangement:

          (a) a race, as defined in section 5 of the Racing Act 2003:

          (b) a sporting event under a sports betting system administered under
          Part 6 of the Racing Act 2003:

          (c) gambling, including a New Zealand lottery, as those terms are defined
          in section 4(1) of the Gambling Act 2003.

Employment contract

(4) An employment contract is an excepted financial arrangement.

Farm-out arrangement

(5) A farm-out arrangement is an excepted financial arrangement.
AUST RALIAN BANKERS’ ASSOCIATION                                                25


Group investment fund

(6) An interest in a group invest ment fund is an excepted financial arrangement.

Hire purchase: livestock or bloodstock

(7) A hire purchase agreement for livestock or bloodstock is an excepted financial
arrangement.

Insurance contract

(8) An insurance contract is an excepted financial arrangement .

Lease not finance lease

(9) A lease that is not a finance lease is an excepted financial arrangement.

Loan in New Zealand currency

(10) A loan to which all the follow ing apply is an excepted financial arrangement
for the lender:

        (a) the loan is in New Zealand currency; and

        (b) the loan is interest-free; and

        (c) the loan is repayable on demand.

Partnership or joint venture

(11) An interest in a partnership or a joint venture is an excepted financial
arrangement.

Share or option

(12) A share, or an option to acquire or to dispose of shares, is an excepted
financial arrangement, if the share is acquired, or the person becomes a party to
the option, on or after 20 May 1999. This subsection does not apply to a
withdrawable share or to an option to acquire or to dispose of w ithdrawable
shares.

Specified preference share

(13) A specified preference share to which section FZ 1 (Deduction for dividends
paid on certain preference shares) applies is an excepted financial arrangement.

Superannuation

(14) A membership of a superannuation scheme is an excepted financial
arrangement.

Warranty

(15) A warranty for goods or services is an excepted financial arrangement.

Loan in foreign currency: private or domestic purpose
AUST RALIAN BANKERS’ ASSOCIATION                                                      26


(16) A loan to which all the follow ing apply is an excepted financial arrangement
for the borrower:

        (a) the loan is in foreign currency; and

        (b) the borrower is a cash basis person; and

        (c) the borrower uses the loan for a private or a domestic purpose.

Option: pr ivate or domestic purpose

(17) An option to acquire or dispose of property, other than an interest in a
financial arrangement, is an excepted financial arrangement for a person who
becomes a party to the option for a private or a domestic purpose.

Private or domestic agreement for the sale and purchase of property or services

(18) An agreement for the sale and purchase of property or services entered into
by a person, or a specified option granted to or by a person, is an excepted
financial arrangeme nt for the person if,—

        (a) first,—

                 (i) the agreement is entered into by the person for a private or a
                 domestic purpose; or

                 (ii) the option is granted to or by the person for a private or a
                 domestic purpose; and

        (b) second, the subject matter of the agreement or option is —

                 (i) real property whose purchase price is less than $1,000,000;
                 or

                 (ii) any other property whose purchase price is less than
                 $400,000; or

                 (iii) services whose purchase price is less than $400,000; and

        (c) third,—

                 (i) the agreement requires settlement of the property, or
                 performance of the services, to take place on or before the 365th
                 day after the date on which the agreement is entered into; or

                 (ii)   the   option   requires   settlement   of   the   property,   or
                 performance of the services, if an agreement is entered into as a
                 result of the exercise of the option, to take place on or before
                 the 365th day after the date on which the option is granted.

Agreement for the sale and purchase of property or services

(19) An agreement for the sale and purchase of property or services is an
excepted financial arrangement, except for a party who makes an election under
section EW 8, if—
AUST RALIAN BANKERS’ ASSOCIATION                                                                27


          (a) all a party's sales or purchases under the agreement are prepaid; and

          (b) for all the party's agree ments under which all sales and purchases are
          prepaid, the total value of prepayments, on every day in an income year,
          is $50,000 or less.

Short-term agreement for the sale and purchase of property or services

(20) A short-term agreement for the sale and purchase of property or services is
an excepted financial arrangement, except for a party who makes an election
under section EW 8.

Short-term option

(21) A short-term option is an excepted financial arrangement, except for a party
who makes an elec tion under section EW 8.

Travellers' cheques

(22) Travellers' cheques are excepted financial arrangements, except for a party
who makes an election under section EW 8.

Variable pr incipal debt instrument

(23) A variable principal debt instrument is an excepted financial arrangement,
except for a party who makes an election under section EW 8, if the total value
on every day in an income year of all variable principal debt instruments to which
a person is a party is $50,000 or less.

Defined in this Act: agreement for the sale and purchase of property or services, arrangement,
bloodstock, cash basis person, excepted financial arrangement, farm out arrangement, finance lease,
group investment fund, hire purchase agreement, income year, insurance contract, lease, New
Zealand, property, share, short-term agreement for the sale and purchase of property or services,
short-term option, specified preference shares, superannuation scheme, variable principal debt
instrument, withdrawable share

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