2004‑2005‑2006

The Parliament of the
Commonwealth of Australia

HOUSE OF REPRESENTATIVES

EXPOSURE DRAFT LEGISLATION
Released for public comment December 2005	

Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2006

No.      , 2006

(Treasury)

A Bill for an Act to amend the law relating to taxation, and for related purposes

Contents
1	Short title	1
2	Commencement	1
3	Schedule(s)	2
Schedule 1—Main amendments	3
Income Tax Assessment Act 1997	3

A Bill for an Act to amend the law relating to taxation, and for related purposes
The Parliament of Australia enacts:
1  Short title
		This Act may be cited as the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2006.
2  Commencement
	(1)	Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms.

Commencement information	
Column 1	Column 2	Column 3	
Provision(s)	Commencement	Date/Details	
1.  Sections 1 to 3 and anything in this Act not elsewhere covered by this table	The day on which this Act receives the Royal Assent.		
2.  			
Note:	This table relates only to the provisions of this Act as originally passed by the Parliament and assented to. It will not be expanded to deal with provisions inserted in this Act after assent.
	(2)	Column 3 of the table contains additional information that is not part of this Act. Information in this column may be added to or edited in any published version of this Act.
3  Schedule(s)
		Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.

Schedule 1—Main amendments
  
Income Tax Assessment Act 1997
1  Before Division 240
Insert:
Division 230—Taxation of financial arrangements
  
Table of Subdivisions
	Guide to Division 230
230‑A	Core rules
230‑B	Fair value election
230‑C	Foreign exchange retranslation election
230‑D	Special rules about hedging financial arrangements
230‑E	Commissioner discretions
230‑F	Exceptions
230‑G	Additional operation of Division
Guide to Division 230
230‑1  What this Division is about
This Division is about the tax treatment of gains and losses from your financial arrangements.
You recognise the gains and losses, as appropriate, over the life of a financial arrangement and generally ignore distinctions between income and capital.
If it is reasonably likely you will make a gain, or it is reasonably likely you will make a loss, you use a compounding accruals basis. Otherwise you use a realisation basis. Instead of either, you can choose to use a fair value or hedging basis. You can also choose to recognise foreign exchange gains and losses on a retranslation basis.
230‑5  Scope of this Division
	(1)	You have a financial arrangement if you have one or more legal or equitable rights and/or obligations to receive or provide something of economic value in the future.
	(2)	This Division does not apply to all financial arrangements. The main exceptions are for the following:
	(a)	short‑term financial arrangements where non‑money amounts are involved;
	(b)	financial arrangements involving individuals, or entities whose annual turnover is less than $20,000,000, where there is no significant deferral;
	(c)	equity interests.
Subdivision 230‑A—Core rules
Table of sections
230‑10	Objects of this Division
230‑15	Tax treatment of gains or losses from your financial arrangements
230‑20	Disregarded gains or losses
230‑25	How to work out gains or losses from your financial arrangements
230‑30	Financial arrangement
230‑35	Consistency in working out gains or losses
230‑10  Objects of this Division
		The objects of this Division are:
	(a)	to minimise the extent to which the tax treatment of gains and losses on your financial arrangements distorts, through the provision of inappropriate impediments and stimulation, your trading, financing and investment decisions and your risk taking and risk management; and
	(b)	to do so by aligning more closely the tax and commercial recognition of gains and losses from your financial arrangements in the following ways:
	(i)	by allocating such gains and losses to income years throughout the life of your financial arrangements on a reasonable basis; and
	(ii)	by generally recognising gains and losses on revenue rather than capital account.
230‑15  Tax treatment of gains or losses from your financial arrangements
Gains
	(1)	Your assessable income includes a gain you make for the income year from a *financial arrangement you have at any time in the income year.
Losses
	(2)	You can deduct a loss you make for the income year from a *financial arrangement you have at any time in the income year, but only to the extent that:
	(a)	you make it in gaining or producing your assessable income; or
	(b)	you necessarily make it in carrying on a *business for the purpose of gaining or producing your assessable income.
	(3)	You can also deduct a loss you make for the income year from a *financial arrangement you have at any time in the income year if:
	(a)	you are an *Australian entity; and
	(b)	you make the loss in deriving income from a foreign source; and
	(c)	the income is *non‑assessable non‑exempt income under section 23AI, 23AJ or 23AK of the Income Tax Assessment Act 1936; and
	(d)	the loss is a cost in relation to a *debt interest issued by you that is covered by paragraph (a) of the definition of debt deduction in subsection 820‑40(1).
Note:	This Division does not apply to gains or losses that are subject to exceptions under Subdivision 230‑F.
Effect on other provisions
	(4)	If a gain or loss is included in your assessable income or allowable as a deduction to you for an income year under this Division:
	(a)	the gain or loss is not included in your assessable income, or allowable as a deduction to you, to any extent under any other provision of this Act for the same or any other income year; and
	(b)	an amount taken into account in working out the gain or loss is not taken into account to any extent in working out an amount included in your assessable income, or allowable as a deduction to you, under any other provision of this Act for the same or any other income year.
230‑20  Disregarded gains or losses
Exempt or non‑assessable non‑exempt income
	(1)	A gain is disregarded to the extent that:
	(a)	you make it in gaining or producing your *exempt income or your *non‑assessable non‑exempt income; or
	(b)	you necessarily make it in carrying on a *business for the purpose of gaining or producing your exempt income or your non‑assessable non‑exempt income.
Private or domestic nature
	(2)	A gain or a loss is disregarded to the extent that it is of a private or domestic nature.
230‑25  How to work out gains or losses from your financial arrangements
	(1)	To work out a gain or loss you make for an income year from a *financial arrangement, use the method or methods that apply under the table.
Table of methods for working out gains or losses
Item	In these circumstances...	Your gain or loss is...	
1	a *fair value election applies to your *financial arrangement.	the gain or loss that the *accounting standards, or the other standards, mentioned in paragraph 230‑45(1)(b), requires you to recognise for the income year on the financial asset or liability mentioned in that paragraph.	
2	for the whole or part of the income year:
(a) it is reasonably likely that you will make an actual net gain from your *financial arrangement; or
(b) it is reasonably likely that you will make an actual net loss from your financial arrangement.
In deciding this, you must:
(c) have regard to the terms and conditions of your financial arrangement; and
(d) assume that you will continue to have your financial arrangement until it ends.
However, this item does not apply if a *fair value election applies to your financial arrangement or you cease to have your financial arrangement in the income year.	worked out on a compounding accruals basis for the whole or the part of the income year, as follows:
(a) take into account the actual net gain or loss you are reasonably likely to make and the concept of compounding interest or returns; and
(b) use a compounding period that does not exceed 12 months; and
(c) assume that you will continue to have the financial arrangement until it ends.
You can instead use a reasonable approximation of the above basis.	
3	a foreign exchange retranslation election applies to your *financial arrangement.	equal to the amount in profit or loss mentioned in paragraph 230‑60(1)(b) for the income year, reduced to the extent that you take the amount into account in working out a gain or loss under item 2.	
4	item 1 does not apply and you realise a gain or loss in the income year because:
(a) you cease to have the whole or part of your *financial arrangement before, during or after the income year; or
(b) in the income year, you receive or provide a thing of economic value under your financial arrangement or the time for you to do so occurs.	your realised gain or loss, minus each amount worked out under item 2 of this table for this or a previous income year (so far as the amount relates to the realised gain or loss).	
Note 1:	If an entity becomes a subsidiary member of a consolidated group, the calculation of the gain or loss will be affected by the tax cost setting amount at the joining time: see section [to be drafted].
Note 2:	Subdivision 230‑D contains special rules about the tax treatment of hedging financial arrangements.
Exception where delivery involved
	(2)	If:
	(a)	any of the things of economic value under a *financial arrangement consists of a right to take delivery of, or an obligation to deliver, a commodity, share or other thing (other than money or a *money equivalent); and
	(b)	you cease to have the whole or part of the financial arrangement because that delivery takes place; and
	(c)	a *fair value election does not apply to the financial arrangement;
item 4 of the table in subsection (1) does not apply to the whole or the part.
230‑30  Financial arrangement
	(1)	You have a financial arrangement if you have any of the following:
	(a)	a legal or equitable right to receive something of economic value in the future;
	(b)	a legal or equitable obligation to provide something of economic value in the future;
	(c)	a combination of one or more such rights and/or one or more such obligations.
Note:	The operative provisions of this Division do not apply to all financial arrangements, and only apply partially to some: see the exceptions in Subdivision 230‑F.
Matters relevant to determining what rights and/or obligations comprise particular financial arrangements
	(2)	Whether a number of rights and/or obligations are themselves a financial arrangement or are 2 or more separate financial arrangements is a question of fact and degree that you determine having regard to the following:
	(a)	the nature of the rights and/or obligations;
	(b)	their terms and conditions, including those relating to any payment or other consideration for them;
	(c)	the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of persons involved);
	(d)	normal commercial understandings and practices in relation to them;
	(e)	the objects of this Division.
Example:	Your rights and obligations under a typical convertible note, including the right to convert the note into a share or shares, would comprise one financial arrangement.
Note 1:	If you raised funds by means of a contract that you would not have entered into without entering into another contact, and neither contract could be assigned to a third party without the other also being assigned, this would tend to indicate that your rights and obligations under the 2 contracts together comprise one financial arrangement.
Note 2:	If the commercial effect of your individual rights and/or obligations in a group or series cannot be understood without reference to the group or series as a whole, this would tend to indicate that all of your rights and/or obligations in the group or series together comprise one financial arrangement.
230‑35  Consistency in working out gains or losses
	(1)	The object of this section is to stop you obtaining an inappropriate tax benefit from not working out gains and losses in a consistent manner.
	(2)	If this Division provides that the gain or loss from one or more *financial arrangements that you have is to be worked out in a particular manner for more than one income year, you must apply that manner consistently to the financial arrangement, or to all of the financial arrangements, for each of those income years.
Subdivision 230‑B—Fair value election
Table of sections
230‑40	Objects
230‑45	Fair value election
230‑50	Splitting financial arrangements into 2 financial arrangements
230‑40  Objects
		The objects of this Subdivision are:
	(a)	to allow you to align the tax treatment of gains and losses from financial arrangements with the accounting treatment that applies where financial assets and liabilities are classified as at fair value through profit and loss;
	(b)	to facilitate efficient price‑making; and
	(c)	to achieve the above objects without allowing you to obtain an inappropriate tax benefit.
230‑45  Fair value election
	(1)	You may make a fair value election that applies to each of your *financial arrangements reported in a set of financial statements where:
	(a)	Chapter 2M of the Corporations Act 2001 applies to the set of financial statements, or if it does not, comparable provisions of a foreign law apply; and
	(b)	you are required (whether or not as a result of a choice you make) by:
	(i)	*accounting standard AASB 139; or
	(ii)	if that standard does not apply—a comparable accounting standard that applies under a foreign law;
		to classify, in the set of financial statements, a financial asset or liability as at fair value through profit and loss; and
	(c)	the financial asset or liability comprises the whole or part of the financial arrangement; and
	(d)	you start to have the financial arrangement in the income year in which you make the election or in a later income year.
	(2)	A *fair value election is irrevocable.
230‑50  Splitting financial arrangements into 2 financial arrangements
		If:
	(a)	a *fair value election applies to a *financial arrangement that you have; and
	(b)	the financial asset or financial liability mentioned in paragraph 230‑45(1)(c) comprises only part (the fair valued part) of your financial arrangement;
the other provisions of this Division apply to your financial arrangement as if it were instead 2 separate financial arrangements that you have, as follows:
	(c)	one consisting of the fair valued part; and
	(d)	the other consisting of the remaining part.
Subdivision 230‑C—Foreign exchange retranslation election
Table of sections
230‑55	Objects
230‑60	Foreign exchange retranslation election
230‑55  Objects
		The objects of this Subdivision are:
	(a)	to allow you to align the tax treatment of gains and losses from foreign exchange rate changes with the accounting treatment of profits and losses from such changes; and
	(b)	to achieve this without allowing you to obtain an inappropriate tax benefit.
230‑60  Foreign exchange retranslation election
	(1)	You may make a foreign exchange retranslation election that applies to each of your *financial arrangements reported in a set of financial statements where:
	(a)	Chapter 2M of the Corporations Act 2001 applies to the set of financial statements, or if it does not, comparable provisions of a foreign law do; and
	(b)	you are required by:
	(i)	*accounting standard AASB 121; or
	(ii)	if that standard does not apply—a comparable accounting standard that applies under a foreign law;
		to recognise, in the set of financial statements, an amount in profit or loss in respect of the financial arrangement; and
	(c)	you start to have the financial arrangement in the income year in which you make the election or in a later income year.
	(2)	A *foreign exchange retranslation election is irrevocable.
Subdivision 230‑D—Special rules about hedging financial arrangements
Table of sections
230‑65	Objects
230‑70	Gains or losses where hedging financial arrangement elections apply
230‑75	Table of events and allocation rules
230‑80	Hedging financial arrangement election
230‑85	Basic concepts: derivative financial arrangement, hedging financial arrangement and hedged item
230‑90	Requirement about recording details of the hedge
230‑95	Requirements about allocation of gains and losses
230‑100	Requirement about the effectiveness of the hedge
230‑105	Where requirements of preceding sections not met
230‑110	Where accounting standard applies hedging treatment on an “actually effective” basis
230‑65  Objects
		The objects of this Subdivision are:
	(a)	to facilitate the efficient management of financial risk by reducing after‑tax timing mismatches where hedging takes place; and
	(b)	to minimise tax deferral, including deferral arising from such practices as tax advantaged selection from among possible hedges.
230‑70  Gains or losses where hedging financial arrangement elections apply
	(1)	If you have a *hedging financial arrangement to which a *hedging financial arrangement election applies, your gain or loss for an income year from the hedging financial arrangement is worked out under this section instead of under section 230‑25.
	(2)	Except where subsection (3) applies, your gain or loss is equal to your actual net gain or loss, and is allocated over income years according to the basis described in the record mentioned in subsection 230‑95(1).
Note:	The allocation is capable of extending to income years after you cease to have the hedging financial arrangement.
	(3)	If an event listed in the table in section 230‑75 occurs:
	(a)	your gain or loss is equal to any gain or loss that you would realise if you disposed of your *hedging financial arrangement for its *market value at the time of the event, and the gain or loss is allocated over income years according to the table; and
	(b)	this Division further applies as if, just after the event, you had acquired the *financial arrangement for its market value at the time of the event.
230‑75  Table of events and allocation rules
		For the purposes of paragraph 230‑70(3)(a), the following table lists events and their consequences:

Table of events and allocation rules
Item	If this event occurs...	Your gain or loss is allocated...	
1	(a) you revoke the hedging designation; or
(b) you redesignate your *hedging financial arrangement; or
(c) you cease to meet the requirement of section 230‑100 in relation to your hedging financial arrangement.	over income years according to the basis described in the record mentioned in subsection 230‑95(1).	
2	(a) you cease to have the *hedged item or all of the hedged items; or
(b) you cease to expect that the hedged item or items will come into existence; or
(c) you have your *hedging financial arrangement when the period of 20 years mentioned in paragraph 230‑95(2)(c), or 5 years mentioned in paragraph 230‑95(2)(d), (about the maximum period for allocating gains or losses) ends.	to the income year in which the event occurs	
230‑80  Hedging financial arrangement election
	(1)	You can make a hedging financial arrangement election if, at or before the time you start to have a *hedging financial arrangement, the requirements in sections 230‑90 to 230‑100 are met.
	(2)	The *hedging financial arrangement election applies to your *hedging financial arrangement for the income year in which you start to have the hedging financial arrangement and all later income years.
	(3)	The *hedging financial arrangement election is irrevocable.
230‑85  Basic concepts: derivative financial arrangement, hedging financial arrangement and hedged item
	(1)	This section defines the basic concepts used in this Subdivision.
Hedging financial arrangement
	(2)	A *derivative financial arrangement that you have is a hedging financial arrangement if:
	(a)	you create, acquire or apply the derivative financial arrangement for the purpose of hedging a risk or risks in relation to an asset, liability or current or future transaction; and
	(b)	at the time you do so, the derivative financial arrangement satisfies the requirements of the *accounting standards (or, if those standards do not apply, of applicable comparable standards of a foreign law) to be a hedging instrument; and
	(c)	your financial accounts for the income year in which the rights and/or obligations are created, acquired or applied record the financial arrangement as a hedging instrument; and
	(d)	those financial accounts are audited in accordance with:
	(i)	Chapter 2M of the Corporations Act 2001; or
	(ii)	if that Chapter does not apply, but comparable provisions of a foreign law apply—those provisions.
Where some requirements not satisfied
	(3)	If a *derivative financial arrangement that you have would not be a hedging financial arrangement only because the requirements of paragraph (2)(b) or (c), or both, are not satisfied, it is nevertheless a hedging financial arrangement if the Commissioner considers this appropriate having regard to:
	(a)	in the case only of paragraph (2)(b)—the respects in which, and extent to which, it does not satisfy the requirements of the *accounting standards or the other standards; and
	(b)	in the case of either paragraph—the reasons for the paragraph not being satisfied and the objects of this Subdivision.
Derivative financial arrangement
	(4)	A derivative financial arrangement is a *financial arrangement that you have where:
	(a)	its value changes in response to changes in a specified variable or variables; and
Note:	A specified variable includes an interest rate, foreign exchange rate, credit rating or index, commodity or financial instrument price.
	(b)	there is no requirement for a net investment, or there is such a requirement but the net investment is smaller than would be required for other types of financial arrangement that would be expected to have a similar response to changes in market factors.
Hedged item
	(5)	Each asset, liability or current or future transaction whose risk is hedged by a *hedging financial arrangement that you have is a hedged item.
230‑90  Requirement about recording details of the hedge
	(1)	The requirement of this section is that you must make a record containing a description of the following:
	(a)	the *hedging financial arrangement;
	(b)	the purpose of the hedging;
	(c)	the nature of the risk being hedged;
	(d)	the *hedged item or items;
	(e)	how you will assess the effectiveness of the hedging of the risk in reducing your exposure to changes in the *market value of the hedged item or items or cash flows attributable to them.
	(2)	The description must be sufficiently precise that the following are clear:
	(a)	that the risk in respect of the particular *hedged item or items was the one hedged by the *hedging financial arrangement;
	(b)	the extent to which the risk was hedged;
	(c)	that the rights and/or obligations comprising the hedging financial arrangement were in fact those created, acquired or applied for the purpose of hedging the risk.
230‑95  Requirements about allocation of gains and losses
	(1)	A requirement of this section is that you must:
	(a)	determine the basis on which your gains and losses from the *hedging financial arrangement are to be allocated over income years for the purposes of this Division; and
	(b)	make a record describing the basis.
	(2)	It is also a requirement of this section that the basis that you determine must:
	(a)	be objective; and
	(b)	fairly and reasonably correspond with the basis on which you allocate your gains and losses from the *hedged item or items; and
	(c)	if there is only one hedged item—not extend over more than 20 years from the time you start to have the *hedging financial arrangement; and
	(d)	if there is more than one hedged item—not extend over more than 5 years from the time you start to have the hedging financial arrangement.
230‑100  Requirement about the effectiveness of the hedge
		The requirement of this section is that:
	(a)	the hedging of the risk must be expected to be highly effective in reducing your exposure to changes in the *market value of the *hedged item or items or cash flows attributable to your hedged risk; and
	(b)	for cash flows in relation to the hedged item or items, the forecast risk must be highly probable and must involve an exposure to variations in cash flows that could ultimately affect your taxable income; and
	(c)	the market value of the hedged item or items or cash flows relating to them and the market value of the *hedging financial arrangement must be able to be reliably measured; and
	(d)	you must assess the hedging of the risk by the hedging financial arrangement on an ongoing basis and your assessment must be that it is highly effective in reducing your exposure to changes in the market value of the hedged item or items or cash flows attributable to the hedged risk throughout the period that it has been in operation.
230‑105  Where requirements of preceding sections not met
		If a *hedging financial arrangement that you have would not meet the requirements of sections 230‑90 to 230‑100, it nevertheless meets the requirements if the Commissioner considers this appropriate having regard to:
	(a)	the respects in which it would not do so; and
	(b)	the extent to which it would not do so; and
	(c)	the reasons why it would not do so; and
	(d)	the objects of this Subdivision.
230‑110  Where accounting standard applies hedging treatment on an “actually effective” basis
	(1)	If this section applies to a *hedging financial arrangement that you have, for the purposes of applying this Division (other than section 230‑135), the hedging financial arrangement is treated as 2 separate *financial arrangements, as follows:
	(a)	a hedging financial arrangement that consists of that part in respect of which the gain or loss is actually effective in hedging the risk; and
	(b)	another financial arrangement consisting of the remaining part.
	(2)	This section applies to a *hedging financial arrangement that you have if:
	(a)	you make a *hedging financial arrangement election that applies to the hedging financial arrangement; and
	(b)	according to the *accounting standards, only that part of a gain or loss on the financial assets or financial liabilities that comprise the financial arrangement that is actually effective in hedging a risk is to be treated as a hedge.
Subdivision 230‑E—Commissioner discretions
Table of sections
230‑115	Commissioner discretion to rely on financial records
230‑120	Commissioner discretion to apply Division on an arm’s length basis
230‑115  Commissioner discretion to rely on financial records
	(1)	If the auditing and election requirements in subsection (2) are satisfied for an income year in relation to a *financial arrangement that you have and:
	(a)	in one or more respects the way in which you have worked out a gain or loss from the financial arrangement for the income year in your financial records differs from the way the gain or loss is worked out in accordance with this Division (disregarding section 230‑120); and
	(b)	the Commissioner is satisfied that the difference is not substantial and that, if the gain or loss were worked out for the purposes of this Division in the way you have done, this would be in accordance with the objects of this Division; and
	(c)	having regard to:
	(i)	the cost of your complying with this Division; and
	(ii)	the cost of administering this Division; and
	(iii)	any other matter that the Commissioner considers relevant;
		the Commissioner considers it appropriate that the way in which you worked out the gain or loss should also apply for the purposes of this Division;
then, subject to section 230‑120, the gain or loss is so worked out for the purposes of this Division.
	(2)	The auditing and election requirements for the income year in relation to a *financial arrangement that you have (the subject arrangement) are as follows:
	(a)	your financial records for the income year must be audited in accordance with Chapter 2M of the Corporations Act 2001 or, if that Chapter does not apply to you, in accordance with the applicable comparable auditing requirements of a foreign law; and
	(b)	a *fair value election and a *foreign currency retranslation election must apply in relation to the set of financial statements in which the subject arrangement is reported; and
	(c)	a *hedging financial arrangement election must apply to:
	(i)	if the subject arrangement is a *hedging financial arrangement—the subject arrangement; and
	(ii)	each other hedging financial arrangement you have that you started to have in the same income year as, or a later income year than, the subject arrangement and that is reported in the set of financial statements in which the subject arrangement is reported.
230‑120  Commissioner discretion to apply Division on an arm’s length basis
		If the Commissioner is satisfied, having regard to any connection between you and another entity, that:
	(a)	you and the other entity were not dealing with each other at arm’s length in relation to any of the rights and/or obligations comprising a *financial arrangement that you have; and
	(b)	as a result, this Division has a different operation in relation to the financial arrangement than it would have had if you and the other entity had been dealing with each other at arm’s length in relation to the rights and/or obligations;
this Division has the operation that the Commissioner considers it would have had in relation to the financial arrangement if you and the other entity had been dealing with each other at arm’s length in relation to the rights and/or obligations.
Subdivision 230‑F—Exceptions
Table of sections
230‑125	Exception for short‑term arrangements where non‑money amount involved
230‑130	Exception for individual or small business where no significant deferral
230‑135	Exceptions for various rights and/or obligations
230‑140	Deliverable derivatives disposed of prior to maturity
230‑145	Disposal or redemption of traditional securities
230‑150	Forgiveness of commercial debts
230‑125  Exception for short‑term arrangements where non‑money amount involved
		This Division does not apply in relation to your gains and losses from a *financial arrangement, other than a *derivative financial arrangement, for any income year if:
	(a)	either the thing or things of economic value or the consideration for them, or both, are not money or a *money equivalent; and
	(b)	the period between the time the consideration (or a substantial proportion of it) is to be received or given and the time the thing or things of economic value (or a substantial proportion of them) are to be received or provided is not more than 12 months; and
	(c)	a *fair value election does not apply to the financial arrangement.
230‑130  Exception for individual or small business where no significant deferral
	(1)	This Division does not apply to your gains or losses from a *financial arrangement for any income year if:
	(a)	you are:
	(i)	an individual; or
	(ii)	an entity whose turnover for the income year (worked out at the end of the income year) in which you start to have the financial arrangement is less than $20,000,000; and
	(b)	either:
	(i)	the financial arrangement is to end not more than 12 months after you start to have it; or
	(ii)	the implicit annual interest rate of your return from the financial arrangement, worked out over the period from when you start to have it until it is to end, does not differ by more than 1.5 percentage points from the interest rate of the return worked out in respect of your actual receipts and payments for any single income year.
	(2)	For the purposes of subparagraph (1)(a)(ii), the question whether your turnover for the income year mentioned in that subparagraph (worked out at the end of the income year) is less than $20,000,000 is to be determined by applying subsection 188‑10(2) of the *GST Act as if the amount of $20,000,000 were a turnover threshold for the purposes of that subsection.
230‑135  Exceptions for various rights and/or obligations
	(1)	This Division does not apply to your gains and losses from a *financial arrangement for any income year to the extent that your rights and/or obligations are the subject of an exception under any of the following subsections.
Equity interest
	(2)	A right carried by an *equity interest, or an obligation that corresponds to such a right, is the subject of an exception, unless a *fair value election applies to the *financial arrangement and the right or obligation is not that of the issuer of the equity interest.
Interest in partnership or trust
	(3)	A right carried by an interest in a partnership or a trust, or an obligation that corresponds to such a right, is the subject of an exception if:
	(a)	there is only one class of interest in the partnership or trust; or
	(b)	the interest would be an *equity interest if the partnership or trust were a company and the holder of the interest were a member.
Life insurance policy
	(4)	A right or obligation under a life insurance policy within the meaning of the Life Insurance Act 1995 is the subject of an exception.
Personal services
	(5)	A right to receive, or an obligation to provide:
	(a)	personal services; or
	(b)	consideration for the provision of personal services;
is the subject of an exception.
Restrictive covenant
	(6)	A right to the benefit of a restrictive covenant, or an obligation to be bound by a restrictive covenant, is the subject of an exception.
Personal injuries
	(7)	A right or obligation arising from a personal injury is the subject of an exception.
Leasing or property arrangement
	(8)	A right or obligation arising under:
	(a)	an arrangement to which Division 42A (Leases of luxury cars) of Schedule 2E to the Income Tax Assessment Act 1936 applies; or
	(b)	an arrangement to which Division 240 (Arrangements treated as a sale and loan) of this Act applies.
230‑140  Deliverable derivatives disposed of prior to maturity
		If:
	(a)	you have a *derivative financial arrangement where all of the things of economic value consist of a right to take delivery of, or an obligation to deliver, a commodity, share or other thing; and
	(b)	a gain or loss that you make arises from ceasing to have the derivative financial arrangement (other than by delivery of the commodity, share or other thing); and
	(c)	ignoring this Division, a gain or loss from delivery of the commodity, share or other thing would not have been included in your assessable income (other than under Part 3‑1 or 3‑3—about capital gains and capital losses) or allowable as a deduction to you; and
	(d)	a *fair value election does not apply to the derivative financial arrangement;
this Division does not apply to the gain or loss.
Note 1:	The loss is however a capital loss: see CGT event [to be drafted].
Note 2:	Subsection 230‑25(2) contains a rule about deliverable derivatives that are settled by delivery.
230‑145  Disposal or redemption of traditional securities
		To the extent that, ignoring this Division, subsection 70B(4) (about disposal or redemption of traditional securities that are not deductible) of the Income Tax Assessment Act 1936 prevents you from deducting a loss that you make from a *financial arrangement, this Division does not apply to the loss.
Note:	The loss is however a capital loss: see CGT event [to be drafted].
230‑150  Forgiveness of commercial debts
		If a gain that you make from a *financial arrangement arises from the forgiveness of a debt (as defined in Subdivision 245‑B of Schedule 2C to the Income Tax Assessment Act 1936), the gain is reduced by:
	(a)	if section 245‑90 (about agreements to forgo capital losses or revenue reductions) of that Schedule does not apply—the debt’s net forgiven amount as defined in paragraph 245‑85(2)(a) of that Schedule; or
	(b)	if that section does apply—the debt’s provisional net forgiven amount as defined in paragraph 245‑85(2)(b) of that Schedule.
Note:	Section 51AAA (about a net capital gains limit) of the Income Tax Assessment Act 1936 also has the effect of preventing you from deducting losses.
Subdivision 230‑G—Additional operation of Division
Table of sections
230‑155	Additional operation of Division in relation to foreign currency
230‑155  Additional operation of Division in relation to foreign currency
		This Division also applies to foreign currency as if it were the right that comprised a *financial arrangement.
2  Subsection 995‑1(1)
Insert:
derivative financial arrangement has the meaning given by subsection 230‑85(4).
fair value election has the meaning given by subsection 230‑45(1).
financial arrangement has the meaning given by section 230‑30.
foreign exchange retranslation election has the meaning given by subsection 230‑60(1).
hedged item has the meaning given by subsection 230‑85(5).
hedging financial arrangement has the meaning given by subsections 230‑85(2) and (3).
hedging financial arrangement election has the meaning given by section 230‑80.
money equivalent means:
	(a)	a right to receive money or something that is a money equivalent under this definition; or
	(b)	something whose value is, or is limited by, a specified amount of money or an amount of money that is worked out in a specified way; or
	(c)	something that can be settled in money or in something that is a money equivalent under this definition.