Thinking | 4 June 2020

COVID-19 and year-end tax planning

It’s that time of the year where you work through tax year-end planning issues.  Although you’ve heard it time and time again, things are a little different this year.

COVID-19 has changed the way we are all doing business! More than ever, it’s important to not just ‘roll your arm over’ and do things the same way, just because ‘that’s the way we’ve always done it’.

In this series of planning considerations for FY20 year-end tax and cash flow, we’ve focused on the impact of COVID-19 for:

  • Businesses, including bad debts and debt forgiveness transactions
  • Year-end administration
  • Landlords and tenants, and
  • Director penalties.

COVID-19 issues for businesses

Some of these are new, others apply annually.  They all can have an impact on cash flow, either now or into the future.

  • Job Keeper - Whilst many businesses have assessed whether they meet the necessary decline in turnover for April and May, this measure continues to apply in June or July, especially if there is a second wave of downturn that causes, or may cause, business turnover to fall by the necessary percentage relative to the comparable period.
  • Bad debts - We expect that the level of bad debts will increase in FY20. Before a taxpayer can deduct a bad debt, there are specific rules and processes that need to be considered and actioned. This article has further detail.
  • Debt forgiveness - Many taxpayers will look to clean up their intra-group loan and receivable/payable balances as part of year-end planning. This is often done to simplify the balance sheet of group entities and/or to deal with tax and financial exposures, such as outstanding Division 7A loans. Assignments and debt forgiveness transactions need to be carefully planned and implemented. This article has further detail.
  • Superannuation:
    • Superannuation Guarantee amnesty: This might not be at the top of everyone’s list, but the due date is 7 September 2020 - the last day by which a business can apply and pay the amounts required under the amnesty. No extensions have been flagged.  See our article here
    • Contributions for the June 2020 quarter must be paid by 30 June 2020 to obtain a tax deduction this financial year.
  • Capital expenditure – It was recently announced that the instant asset write-off of up to $150,000 for businesses with an aggregated turnover of less than $500 million has been extended until 31 December 2020.  Businesses may now choose to hold onto cash in the short term, and purchase capital equipment later in the year and still be able to access this concession.
  • Trading stock - There may be circumstances where a business has been unable to sell stock (for example, due to closures or a general decline in sales). The stock may be valued at cost, realisable value or market value.  If stock is obsolete, it can be valued at Nil.
  • Losses - As a result of the impact of COVID-19, there is an expectation that more businesses will have losses (or higher than anticipated losses) this year. The recoupment of these losses in future years will be important and, again, the COVID-19 environment could make it more difficult to recoup losses.  The relevant loss recoupment tests depend on the type of entity the business is run through, for example:
    • Companies can meet the continuity of ownership test (COT) or, if failed, the same or similar business test (SBT). If the ownership of a business changes because the COVID-19 environment has caused some shareholders to exit, this may cause a failure to meet the COT at the time of recoupment, resulting in the need to rely on the SBT to recoup losses.

In considering whether the SBT is met, strategic decisions about product mix and modifications to business operations to focus on more profitable activities at the expense of loss making ventures, may put pressure on the ability to meet the SBT.

  • Trusts have special loss testing rules.  Fixed trusts, broadly speaking, use the same tests as for companies (with the same issues noted above for companies). Non-fixed trusts, however, have special loss recoupment tests, such as the pattern of distributions and control tests.  Some of the challenges in passing these tests can be addressed through the making of a family trust election (FTE).  However, the making of a FTE brings its own tax risks as distributions of the non-fixed trust can only be made within the ‘family group’ of the test individual, or otherwise suffer family trust distributions tax.

With lodgement deadlines for 2019 returns extended, now is an ideal time to consider these issues before 30 June.  Preparation is critical.  If you need assistance with preparing any documents or further detail on the topics we have considered here, let us know.

Year-end administration

You prepare trust distribution minutes and dividend statements every year.  Do you recycle them, because there aren’t ‘usually’ any changes to the structure of the document?  And how will COVID-19 impact your procedures for this year?

Company documents

For any corporate secretarial documents you prepare this year, you must:

  • Review the company constitution - see what it says (if anything) about the technology that can be used for holding a meeting, the quorum of directors required, and the requirement to have a chair of the meeting. A minute can accurately record resolutions made.  However, if the directors do not validly meet or sign a document correctly (following the provisions of the constitution), it’s going to be more readily challenged by the ATO.
  • Where directors can’t physically meet, the minutes should state that the meeting was held electronically (and ideally, refer to the clause of the constitution that permits this!)
    • Tip: The location of the meeting is usually the physical location of the chair.
    • Further tip: You can also refer to the meeting being held electronically in accordance with Corporations (Coronavirus Economic Response) Determination No. 1 2020 dated 5 May 2020.
  • Sole director companies should not prepare a minute - a sole director resolution is needed. Again, check the constitution.

Signing documents

Are you signing printed copies of returns, declarations, minutes?  Or will you sign these electronically?

Some things to consider:

  • Company minutes will need to be signed by the chair where that person is physically located. An electronic signature on the minute is acceptable.
  • Circulating resolutions may be appropriate where all directors cannot meet electronically. Keep in mind they are effective once the last director has signed.
  • A sole director resolution can also be signed electronically.
  • Any deeds - rather than agreements - that need to be signed, cannot typically be signed electronically and require an actual ‘wet ink’ signature. Some of these requirements have been eased in some States, including Victoria - albeit temporarily.

For all of these, it will be important to show a ‘paper trail’, especially for 30 June sensitive issues (trust and dividend minutes!)

Landlords and tenants

  • The recent Government announcements and legislation that could result in the deferral or waiver of rent, have tax implications for landlords and tenants that need to be considered. This article has further detail.

Director penalties

  • Directors are potentially liable for the unpaid PAYG, GST and superannuation obligations of their businesses. The impact of COVID-19 has clearly affected the cash flow of many businesses and their ability to meet their debts.  In recent times, the ATO has offered extensions to the payment of PAYG instalments that will need to be paid at some stage.  All of these factors increase the risk that directors are potentially on the hook for more of their business’ liabilities.  This article has further detail.

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