The Commonwealth Government's targeted COVID-19 relief measures contain some tax issues that corporate tax directors and chief financial officers need to be mindful of in order to utilise them effectively.
Integrity measures in the Omnibus Bill
The Omnibus Bill contains a number of integrity measures designed to prevent opportunistic access to the grants and other concessions. The integrity measures should be on every tax director's watchlist.
Good corporate governance dictates that at this difficult time, steps must be taken to ensure the benefits to be provided are not abused but are adopted and utilised appropriately.
Thin capitalisation
Given the significant decline in asset prices, clearly the 'safe harbour' ratios will be under pressure. The application of thin capitalisation provisions to existing debt should be considered, including assessing the relevance of the arm's length debt test.
It is not clear, given the significant decline in asset prices generally, what the current ATO approach will be, however we expect guidance on this issue in the short to immediate term.
Absent guidance, corporate taxpayers should start to consider their financial modelling and if necessary consider negotiation with the ATO to reach a sensible administrative position under legislation or if a regulatory position is adopted.
Capital raising and tax losses
Where significant equity raising is proposed, the impact on the ability of an Australian entity to continue to satisfy the tax loss recoupment rules (or to retain pre-CGT status) is a critical issue. Tax losses that are already subject to an available fraction are likely to be significantly diluted.
Where any capital raising financial modelling or forecasting includes an assumption that tax losses are available, relevant tax loss testing should be be carried out to assess the risk that the losses that may be currently incurred during these economically depressed periods are available post raising.
Cross border capital management
Capital management and repatriation strategies may need to switch from the payment of dividends, which may be difficult given the lack of profits or net asset surpluses, to the repayment of capital. This may attract further ATO scrutiny in relation to integrity rules such as section 45B of the Income Tax Assessment Act 1936, as well as result in the 'trapping' of significant franking and conduit foreign income amounts.
Where payment holidays are being negotiated, you should consider the deductibility of interest for businesses where the interest accrues but there is a payment holiday.
Transfer pricing
Multinational taxpayers operating in Australia will need to explain and provide evidence that any lower operating profit margin or loss position has a direct nexus with the adverse economic conditions associated with COVID-19 (or other recent events like the Australian bushfires).
Economic benchmark studies used to set prices or margins in transfer pricing models may need updating or adjustment. This will be particularly relevant where total global value chain profits have significantly declined. It will be important to ensure there is appropriate economic and legal evidence produced to support these changes.
Transfer pricing policies may need to be adjusted to align with changes that are made to global supply chains in response to COVID-19 challenges. It will be important to evidence the commercial decision making of Australian management and economic substance of any business restructure required to re-allocate value added functions, assets and risks outside of Australia.
You may also consider the manner in which any relief from cross border royalty and interest expense liabilities will be granted, to manage potential transfer pricing exposures related to the underpayment of withholding tax.
Cross border funding or market support arrangements introduced to mitigate the short term financial impacts of COVID-19 may have other unintended tax consequences in Australia (e.g. support payments made by Australian taxpayers to offshore affiliates may be treated as capital in nature).
Commercial debt forgiveness
In carrying out any negotiation to alter the terms of existing debt, including shareholder loans, the application of the commercial debt forgiveness and limited recourse debt provisions may have adverse impacts on the future utilisation of tax attributes, including tax losses.
Forex
Given the significant drop in the Australian dollar, you should also consider the tax implications of crystallising FX losses to shelter any significant gains (where appropriate).
R&D Tax Incentives
R&D tax incentives are available for COVID-19 medical research. Take care to ensure in these resource constrained times, that the relevant documentation necessary to support claims are well put in place and tested independently.
Employment related matters
Tax directors also need to consider payments to employees over the coming months as business operations, for example:
- To the extent there are refunded/credited payroll tax amounts, considering the assessability of these amounts under the recoupment provisions;
- Treatment of termination payments (including ex gratia payments) for employees who are terminated during the COVID-19 outbreak and in particular, whether the termination is a genuine redundancy or not for tax purposes; and
- Treatment of payments to employees in lieu of wages, particularly whether such payments are subject to superannuation and payroll tax.
These are challenging times, and the changes and requirements change frequently. Please contact us if you wish to discuss the specific impacts on your business and how we can help manage your response to COVID-19.
