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Chapter 6: General application of the policy framework for financial assets and liabilities

Current arrangements

The current system for taxing financial arrangements results in uncertainty and incoherence and can impact adversely on before-tax investment choices.

A strategy for reform

To address the problems with the current system by adopting a timing adjustment approach, where it is practical, and an elective mark-to-market approach. The timing adjustment would be applied to returns taking into account the degree of certainty, tax avoidance possibilities and compliance cost burdens

Issues relating to tax timing Issues relating to disposal
Key policy issues What is the benchmark measure of the timing adjustment? When should the taxpayer be allowed to deviate from this measure? Should elective mark-to-market be allowed? Is there a need for hedging rules? How should the gain or loss on disposal be treated? When does disposal occur?
Benchmark attempts to identify income as it accrues. A commercial accounting method
may be used where it is a reasonable approximation of the economic accruals benchmark.
Allow elective mark-to-market subject to entry criteria. Special hedge rules
may be required for anticipated transactions and internal hedges.
Normally gain assessable, or loss deductible, but exception in some circumstances
(e.g. quarantining).
Disposal normally recognised on legal disposal, but exception in some circumstances.