These Taxing Times - COVID-19 tax planning

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