Key tax issues for distressed entities in a COVID-19 world

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This article was written by Sylvester Urban and Jack Anderson.

In uncertain economic times, there is particular focus on preventing or managing corporate insolvencies and associated restructuring. 

Since the global financial crisis, there have been significant developments as a result of new tax legislation and cases.  It is therefore important that you receive the benefit of up-to-date specialist advice in this area.

Our Tax Team has deep experience in advising on all tax aspects of corporate insolvency and restructuring and has been closely following the recent administrative and legislative action. 

Below is a brief discussion of key tax issues you should consider when dealing with a distressed company, whether you are a shareholder, director, creditor or other stakeholder involved in the insolvency administration.  

Are you up to date on the stimulus measures?

The Australian governments have announced or enacted a wide and growing array of stimulus measures.  Businesses should seek to take advantage of these measures as applicable to their circumstances to assist with the preservation of cash flows and asset values.

The KWM Tax Team has prepared a cumulative table of the stimulus measures, which we are keeping up to date.

How will tax authorities assist distressed entities?

Besides the stimulus measures themselves, the ATO has said it can help facilitate restructures and administrations through individually tailored solutions (for example, temporarily reducing or deferring payments).  Treasury has indicated that the Commissioner of Taxation may withhold enforcement actions including director penalty notices and wind-ups. 

Specifically in a distressed entity context, the ATO has stated that:

  • businesses are not required to cancel their ABN or GST registration if they temporarily cease some trading activities but intend to restart when they can;
  • businesses can defer the payment of tax amounts through the BAS, income tax assessment, FBT assessment and excise by up to 6 months;
  • any interest and penalties may be waived where incurred on or after 23 January 2020; and
  • businesses can enter into low-interest payment plans for their existing and ongoing tax liabilities.

A further list of Federal and State and Territory measures can be found in the table referred to above.

It is important to note that responses from the ATO may be delayed due to the impact of COVID-19 on the ATO's own workforce.  This should be factored in by businesses seeking the ATO's input for necessary reliefs and authorisations.

What developments have occurred since the GFC?

Your tax advices during the GFC period are out of date.  Since the GFC:

  • cases have been handed down which clarify or alter pre-existing positions: for example, the High Court put a check on the Commissioner of Taxation's power to require agents and trustees to retain tax from the sale of assets during a liquidation (prior to issuing an assessment): Federal Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liq) & Ors (2015) 257 CLR 544;
  • legislation has been amended and in some cases wholesale new tax codes have been introduced, e.g. the taxation of financial arrangements (TOFA) rules, the AMIT regime and the modernised employee share scheme rules to name a few; and
  • tax authorities have updated or published new guidance which signals changes in the way the tax law is administered, e.g. ATO guidance regarding the collection of tax debts and GST treatment for supplies made by an incapacitated entity.

How can I restructure in a tax efficient way?

While every restructure is different, some of the key tax considerations you should be thinking about are:

  • whether a loan restructure could have implications under the commercial debt forgiveness or bad debt deduction rules;
  • whether modifications to your workforce are made in a way which appropriately recognises the correct tax outcomes (e.g. is termination a "genuine redundancy"? Has an accrued leave transfer payment occurred?);
  • whether the divestment of a loss-making company gives rise to a capital gain under the tax consolidation exit rules, or do the special loss rules apply;
  • whether the distressed entity is maintaining majority underlying ownership and/or conducting the same or similar business to maintain access to its significant tax loss balance; and
  • whether the proposed restructure leads to undesirable stamp duty or GST outcomes.

If you wish to discuss these rules in more detail, please contact a member of our Tax Team.

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