As the global response to COVID-19 continues to develop, organisations are facing significant challenges and need to respond rapidly. Changes in practice can result in varied tax obligations. We explore how this impacts on business and what you can do to prepare.

Previously we discussed the Commonwealth Government's economic response to the COVID-19 pandemic announced 22 March 2020. In addition there are a number of Commonwealth and State tax measures which are primarily designed with two objectives in mind, namely:

• Providing cash flow assistance for businesses
• Supporting business investment.

Several of these measures are now law following the enactment by the Federal Parliament of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth).

Corporate tax measures

Boosting cash flow for employers

The Commonwealth Government's (Government's) announced measures are directed at enabling employers to retain staff and continue business operations. The measures are focussed on small to medium enterprises with aggregated annual turnover under AUD $50 million (based on prior year turnover and where the Commissioner is satisfied on a 'reasonable basis' that the entity is eligible) and deliver tax free payments to employers in two stages.

The first measure says that eligible employers that withhold and remit tax to the Australian Taxation Office (ATO) on their employees’ salary and wages will receive a payment equal to 100% of the amount withheld, up to a maximum payment of $50,000. These are a payment that is subject to withholding obligations under Subdivisions 12-B, 12-C or 12-D of the Taxation Administration Act 1953 (Cth), that is a payment of wages or salary or similar remuneration, whether or not any amount is actually withheld, in the period.

Eligible employers that pay salary and wages will receive a minimum payment of $10,000, even if they are not required to withhold. Practically, the ATO will deliver the payment as a credit to the entity upon lodgement of their upcoming business activity statements, with timing of the payment depending on whether the eligible employer is a monthly or quarterly lodger.

Where this places the entity in a refund position, the ATO will deliver the refund within 14 days. The second 'additional payment' for those entities which remain active is also being introduced in the July–October 2020 period.

Eligible entities will receive an additional payment equal to the total of all of the employers payments received as part of the first measure. On lodgement of business activity statements, the additional payments will be delivered as an automatic credit.

The proposed measures include mechanisms that address any abuse of this concession by an enterprise. This includes:

• An integrity provision which prohibits the measures from applying where the sole or dominant purpose of a scheme entered into by the entity was to be in a position to obtain the payments or to increase the entitlement of the entity.
• An overpayment refund mechanism where the entity will be liable to repay any amount (including general interest charge from the date the overpayment arose) that the entity was not actually entitled to (that is, the entity obtained the payment through entering into a scheme in which the integrity provision applies).

ATO measures

In addition to the Commonwealth Government's targeted measures, the ATO has announced a range of potential options that corporates of all sizes should consider having regard to their expected cash flow needs over the coming months. The measures that the ATO has indicated as being open to negotiation include:

• Deferring by up to six months the payment date of amounts due through the business activity statement (including Pay As You Go (PAYG) instalments), income tax assessments, fringe benefits tax assessments and excise;
• Allowing businesses on a quarterly reporting cycle to opt into monthly GST reporting in order to get quicker access to GST refunds they may be entitled to;
• Allowing businesses to vary PAYG instalment amounts to zero for the March 2020 quarter; businesses that vary their PAYG instalment to zero can also claim a refund for any instalments made for the September 2019 and December 2019 quarters;
• Remitting any interest and penalties, incurred on or after 23 January 2020, that have been applied to tax liabilities;
• Working with affected businesses to help them pay their existing and ongoing tax liabilities by allowing them to enter into low interest payment plans; critically, the ATO has made very clear that it expects employers to continue to meet their ongoing superannuation guarantee obligations for their employees.

Current ATO activity

In addition, the ATO appears to be continuing audit activity as normal, subject to specific requirements which may prevent meetings from being held in person. We await further information as to what the ATO intentions are in connection with existing tax controversy matters. Absent any specific policy announcement by the ATO, we would recommend clients specifically engage with the ATO to discuss the ongoing conduct of any current disputes or audit activity which may be disrupted by COVID-19 related measures.

GST measures

The primary GST concession that has been flagged is to allow quarterly taxpayers to elect to file monthly instalments to speed up the realisation of GST refunds. However, this measure may be of limited utility – it is really only beneficial if the taxpayer is in a refund position and can only be implemented from the start of the quarter (for example,1 April).

The ATO have also suggested that it will be subject to the normal rule that once the taxpayer has converted to monthly returns, these must be filed for at least 12 months before the taxpayer can revert to quarterly, necessitating additional administration for the 12-month period.

Perhaps unsurprisingly, the GST measures are of limited scope because any change that affects the rate or base of GST requires the unanimous agreement of the States and Territories before it can be legislated.

Employment tax measures

Fringe Benefits Tax (FBT) – classification as 'emergency assistance'

Where employers are providing assistance to employees in addition to normal employee entitlements, non-cash employment benefits may be subject to FBT unless an exemption applies. Exemptions from FBT include certain benefits provided to employees in an emergency situation.

The ATO has accepted that in the context of COVID-19, the emergency assistance exemption applies if the assistance is provided to an employee who has been located in a high-risk area and has been relocated or otherwise required to self-isolate.

If employers provide or pay for emergency accommodation, meals, food supplied transport or other assistance (such as face masks, sanitisers) for an employee who is or is at risk of becoming sick with COVID-19, these should be exempt from FBT, if this benefit is provided for the employee's immediate relief.

FBT: providing employees with other benefits in addition to their salary

With the increase of employees working from home, employers may provide employees with a laptop, printer or other portable electronic devices to enable them to work from home. These should be exempt from FBT if they are used primarily for the employee's employment. The minor benefits exemption may apply for minor, infrequent and irregular benefits less than $300. Employers should consider offering employees the ability to salary package these types of benefits, if they don't already do so.

Supporting business investment in uncertain times

The Government announced two significant measures which will enhance business investment decision making in the next 15 months.

Instant Asset Write-Off regime

The Instant Asset Write-Off regime has been expanded to allow an immediate deduction for purchases made from 12 March until 30 June 2020 of new and used depreciating assets. To be eligible:

• The asset must cost less than $150,000 (the current cost limit is less than $30,000)
• The business must have a turnover up to $500 million per annum (the current turnover limit is $50m per annum).

The expansion to businesses with a turnover of up to $500 million represents a significant expansion of the measure to many medium sized business. Indeed it will only be the largest of ASX public companies which are likely to be ineligible for this measure.

We anticipate further details will become available for the enactment of this measure in the next day or so.

Backing Business Investment (BBI)

The BBI measure package is a separate concession for purchases of new and used depreciable items:

• A taxpayer will be able to deduct 50% of the cost of a new depreciating asset purchased between 12 March 2020 and 30 June 2021 (existing second-hand assets are not included nor Division 43 assets);
• The deduction is made available ‘on installation’ which must occur before 30 June 2021;
• The remaining 50% of cost will be recovered over the life of the asset through the usual depreciation rules;
• The measure only applies to taxpayers with aggregated turnover under $500 million.

This measure is meant to apply to purchases of all kinds of new depreciating assets, including those which exceed the $150,000 limit applicable for the Instant Asset Write Off. The main restriction appears to be that the measure is confined to new depreciating assets under Division 40 of the Income Tax Assessment Act 1997, so that the deduction is only available if the asset has been installed for use. Further details on the nature of the $500 million turnover cap (and in which year) also need to be considered.

ATO positions to provide clarity on tax positions adopted that are disrupted by COVID-19 measures

Corporate tax residency - what is the potential risk?

Given the recent COVID-19 developments in Australia and abroad, many governments have put in place travel restrictions, as a result of which Australian based directors of any foreign incorporated companies may not be able to attend board meetings in those respective foreign jurisdictions.

Where the Australian resident directors collectively influence the decisions of a foreign company, the fact that these directors are located in Australia when the decisions are made could result in the company's place of effective management being located in Australia.

In such a case, the foreign company could be treated as an Australian tax resident for Australian tax purposes despite being incorporated in the foreign jurisdiction (and continuing to be tax resident in that jurisdiction under its domestic laws).

The ATO has provided guidance to address the uncertainty regarding tax residency arising from the travel restrictions.

The ATO has made a statement on their website that if the only reason for holding board meetings in Australia or directors attending board meetings from Australia is because of impacts of COVID-19 for a company, then the ATO should not consider the tax residency of that company to be altered as a result (assuming that no other changes to the circumstances of that company).

We have contacted the ATO and they have echoed this statement made on their website. Furthermore, the ATO recommends that the board minutes include the fact the directors were attending board meetings from Australia as a result of the travel restrictions.

We will continue to monitor any further announcements made by the ATO on this issue.

Permanent establishment risks created by travel bans - what is the risk?

Where foreign based employers inadvertently have employees working in Australia as a result of COVID-19 travel bans, this may lead to the existence of a permanent establishment or branch which would be subject to Australian tax and compliance requirements.

The ATO have recognised that COVID-19 has resulted in overseas travel restrictions and a high degree of uncertainty around international travel. On this basis the impacts of COVID-19 should not result in a company having an Australian permanent establishment if it meets all the following:

• The foreign incorporated company did not have a permanent establishment in Australia before the impacts of COVID-19
• There are no other changes in the company’s circumstances
• The unplanned presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel as a consequence of COVID-19.

The ATO guidance does not clarify what dates will be considered to be the relevant dates for the 'impacts of COVID-19', and we assume that the dates for the Australian Government travel restrictions will apply.

Hopefully this will also mean that foreign employers which have foreign employees in Australia, and meet the above criteria, will also not have Australian employment tax obligations with respect to those employees, although the each employee's position and the length of time they are present in Australia will need to be closely monitored.

Foreign permanent establishment risk for Australian companies with employees offshore

For Australian companies with employees who may be stranded but are working in foreign jurisdictions, there is a risk of a permanent establishment being created offshore in a foreign jurisdiction. At present, this does not appear a matter which has received any degree of global attention.

In addition, there is presently no guidance from the ATO to suggest that they would treat the profits as non-assessable in Australia.

Businesses and employers are doing what it takes to ensure they are agile in unprecedented times, with key decisions being made in respect of cash flow and resourcing. Consequently, corporate tax issues will continue to eventuate as businesses evolve.

We expect further tax measures to emerge in the coming weeks as the full economic effects of the COVID-19 pandemic become known (or at least understood).

We will continue to update our clients on a regular basis as new announcements are made and provide client insights into developments as they emerge.

Please contact us if you wish to discuss the impacts on your business and how we can help manage your response to COVID-19.