Most Australians working offshore, or foreigners working in Australia, will be aware of the complexity of Australia’s tax rules – particularly those that apply to the question whether they remain or become a resident of Australia.  
 
Where are we now?
 
Those rules are based on broad, undefined concepts in the tax legislation: “resides”, “domicile”, permanent place of abode” and “usual place of abode”.  
 
Where a person “resides” is a subjective test which balances various factors, including:
 

• The purpose of their presence here;
• Their family and business/employment ties;
• The maintenance and location of their assets; and 
• Their social and living arrangements.

 
If the person doesn’t “reside” in Australia under this test, they will nevertheless be resident here if their “domicile” is in Australia, unless their “permanent place of abode” is outside Australia.
 
Then, if a person spends more than 183 days here, they will be assumed to be an Australian resident unless the Commissioner is satisfied that their “usual place of abode” is outside Australia and they don’t intend to take up residence here.
 
Finally, there is an additional overlay if a taxpayer is a member of certain Government superannuation funds.
 
This unsatisfactory combination of objective fact, intention, ATO discretion and fluctuating policy has generated uncertainty and risk for individuals under a self-assessment tax system. More fundamentally, the current rules fall a long way short of the needs of a modern, mobile workforce.  
 
What’s coming?
 
In response to industry lobbying, which was led by the Board of Taxation, in the May Budget the Government proposed to introduce a new set of rules.  The intention is to provide much-needed clarity for mobile workers by setting a bright line primary test to determine residency in most cases; and a secondary “factors” test that takes into account the individual’s circumstances.
 
Scant detail has been released by the Government and we may not see draft legislation for a while.  However, the expectation (informed by the Board of Taxation recommendations) is that separate rules will apply to inbound and outbound workers (the policy rationale being that it should be harder for a resident to lose residency than it is for a non-resident to gain it).
 
What has been announced is that there will be: 
 
A primary “bright line” test that sets a clear day count –183 days for inbound and potentially shorter for outbound; and 
 
Secondary factors that depend on measurable, objective criteria. These are a nod in the direction of the existing subjective tests and would be expected to include: 
 

• citizenship or permanent residency status;
• location of family;
• access to Australian accommodation;
• economic ties (such as employment or business interests); and 
• time spent in Australia over the preceding 2-3 years.

 
Where will this land?
 
Since the Budget, there have been rumblings in the press about where the bright line will be set and whether the secondary factors leave too much residual uncertainty. There is a danger that we’ll swap one set of complex rules for another.
 
Bear in mind, the last word may not have been said on this topic. The new rules haven’t been drafted and won’t take effect until after legislation is passed by Parliament. 
 
As is the case with all tax reform, there will be winners and losers from these changes.  Some expats may need to keep a closer tab on their visits to Australia.  However, a move that provides greater clarity for the majority of taxpayers should be welcomed. 

 As well as being a major global health issue, the pandemic has accelerated and amplified collective awareness of issues of concern that have been with us for some time.  In particular, geo-political tensions, breakdown of global systems, economic inequality, racial inequality and climate change, to name but a few.
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In the new normal, the business environment is changing at an unprecedented pace, businesses are responding rapidly and, for those considering making investments, the importance of doing thorough due diligence has never been greater.  

The changes we are seeing in the business environment include:

• more volatility, with higher peaks and lower troughs, over extended timeframes;
• local goods and services being preferred over those from other parts of the world;
• increasing preference for contact free commerce;
• new government regulation, including workplace health and safety, local procurement incentivisation and taxation stimulus; and
• greater levels of scrutiny of corporate purpose and activity.

There is no question that in the new normal, customer behaviours will be different.  Some industries will be compelled to restructure.  Market positions will shift drastically.  Businesses that are taking action now will be those that come out on top.
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Many business leaders have publicly discussed the desire to preserve the perceived benefits arising from the new ways of working established during the pandemic lockdown, including flattening of management structures, flexibility in responding to clients and rapid decision making.  These leaders are already reshaping their businesses to be successful in the new normal:  

• renewing the focus on revenue generation, recognising it is fundamental; 
• building new partner networks to facilitate identification, capture and delivery of business opportunities;
• reviewing operations, including workforce flexibility, supply chain diversification and value chain digitisation and automation; 
• reducing organisational complexity by eliminating the bureaucratic middle and shifting cultures to be learning and innovation rich; 
• driving towards real time information to support rapid decision making, investing in data, internet of things and artificial intelligence; and 
• demanding greater cost transparency to enable stronger cost management, including turning costs previously considered as fixed into variable costs through outsourcing.  

In a well conducted due diligence the historical and prospective performance of a target business are closely assessed and an inside looking out perspective is as important as an outside looking in perspective.  

Business performance in the new normal may differ drastically from past performance.  Understanding past performance remains important.  However, it is much more important to identify what will change in the external environment and understand how the target business needs to respond. 

In every extended industry value chain, ultimately at one end there is a consumer, a person.  Understanding whether and how that consumer’s buying behaviour is changing is vital to developing a view about the size and growth rates of the (possibly intermediate) market that the target business sells to.  

Extended industry value chain analysis can assist with understanding how the business shifts arising from the new normal might manifest.  These are likely to be significant for many industries and for the futures of businesses in those industries.

​Changes in competitive landscapes require more analysis.  Some companies will be acting quickly and have the cash reserves to weather a downturn, or chase new opportunities, or invest in change. Others will be slow to respond or cash strapped or both.  Businesses that were previously dominant in their markets may be usurped by smaller, more nimble players.

Inside target businesses, transformation will be happening.  Evaluating whether the changes are the right ones in the right timeframe, and whether management has the implementation capability required, can only be done after developing a deeply considered view about the external environment.  

Even a thorough evaluation of the likely shifts in the external environment and how the target business is responding will not provide a crystal-clear picture.  Sensitivity analysis is useful and should be used.  Scenario analysis is even better, particularly if likelihood assessments can be assigned to base, worst and best case scenarios.  
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Doing a deal well requires a robust due diligence.  As we move into the new normal, this has never been truer.  

In the past couple of weeks most of the tax discussion has been dominated by the raft of stimulus measures that are being released, seemingly daily, by the Federal and State Governments.  

Staying on top of the various stimulus measures and maximising the available benefits for your business and your employees is critical.  The immediate challenges of the COVID-19 business crisis has meant a somewhat reactionary approach is necessary (practically nobody saw this coming) and the stimulus measures have been carefully targeted by the Government to help business:

1. Resolve key workforce management challenges (JobKeeper payment and Supporting apprentices and trainees)
2. Address near term cash-management challenges and business resilience (Cash flow support for small and medium business, Instant asset write-off, Accelerated Depreciation, Deferrals for tax payments and Remission of interest and penalties).

But… you should start “planning ahead” now

Looking beyond the here and now, you need to be planning for a return to normal business, although “normal” may be different for some time or indeed forever.  It is important to reimagine what the next normal will look like:

• Will you be as profitable as you were before and what does this mean for your tax payments and tax attributes?
• What shifts will emerge in your capital and funding structures, the supply change or customer base and what new transactions will emerge as a result?
• What regulatory changes will emerge in the tax landscape to pay for the Federal Government’s debt and deficit?

In all the uncertainty that COVID-19 has brought upon us, the one thing that is certain will be the ongoing shifts in the regulatory and competitive environments during and post COVID-19.  Businesses that can anticipate these changes and plan ahead will thrive.

The key to any planning is tax forecasting

Business forecasting is critical when confronting uncertainty, as it gives you a clear base line to assess alternative outcomes.  Most businesses should be currently reviewing financial assumptions and producing new forecasts.  It is necessarily an ongoing process and your tax forecasts should work in parallel.

A good tax forecast model is more than multiplying accounting profit by 30% and assuming four equal tax instalments.  Perhaps this is a reasonable approximate, but it does not tell you the story that is important to your business.  

A good tax forecast model forecasts the key risks and tax attributes of a business.  It should forecast and assess the following:

• The tax impact of key tax adjustments – known and expected permanent and timing adjustments and their impact on taxable income and tax payments

 

• Likely/potential shocks or transactions – further significant drops in revenue (10%, 20% or more from the base line forecasts), sale and lease backs, asset write downs, factoring of debt receivables  

 

• Tax payments - including calculation of instalment rates, understanding the lag in tax instalments as compared to current performance (thereby showing the potential triggers for varying instalments) 

 

• Franking credits – impact of changes in dividend and capital management policies, at what point will you be able to consistently frank dividends again, and are you likely to be in a franking deficit position because of recently paid franked dividends

 

• Thin capitalisation - impact of new debt, asset write downs, impact ongoing losses will have on the net asset position 

 

• Tax loss usage - at what point will losses be fully utilised, what impact will capital raises have on the continuity of ownership test and what impact will new transactions and changes in your business have on the same business test

​Appropriate forecasting of key tax attributes and risks enables you to understand what drives the numbers and identify what the trigger points are for key decision making.  

Such a strategic approach not only manages tax risk, it ensures that when the right opportunities present themselves it is more likely that you are able to capitalise on them to drive business value through tax outcomes, and be ready for a post COVID-19 world