Australia: Considerations for tax functions, preserving tax attributes (COVID-19)

Australia: Considerations for tax functions

Considerations for tax functions, including the preservation of tax attributes for future use, are warranted given the effects of the coronavirus (COVID-19) pandemic on business.


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Preserving tax attributes for use when business performance “bounces back” can mean that the pain felt was not a “permanent” cost. Some key items in this regard that tax managers need to consider include:

  • Losses—the satisfaction of loss recoupment tests, especially when there have been injections of equity to keep the business afloat (continuity of ownership test), or different activities undertaken (business continuity test)
  • Future dividend payments—whether current year losses need to be “quarantined” from profits (in the accounts) to allow for greater flexibility in declaring franked dividends in the future and in particular whether dividends were to be paid up from subsidiaries to parent companies to avoid “dividend traps” when there are insufficient retained profits
  • Donations—many businesses have made significant donations in respect of the recent bushfires in Australia; certain donations cannot increase a tax loss, however an election can be made to spread the deduction over five years
  • Maybe not permanent costs—but
    • Are debts being actually written off as "bad" or are provisions being raised against receivables?
    • What value is to be used for trading stock, if there are risks to carry forward tax losses?
    • Balancing adjustment for assets no longer in use?

The decline in business performance also calls into question the carrying value of an organisation’s assets. Impairments will have implications for the thin capitalisation position (even more so when there is additional debt funding brought in to keep the business afloat). The preservation of interest deductions thus could be important for many businesses as they recover. Thin capitalisation of additional funding or expected asset values and additional thin capitalisation calculation methods other than the “safe harbor” need to be considered. The Australian Taxation Office (ATO) has stated that for taxpayers that rely on the arm’s length debt test for the relevant year (i.e., the year including February and March 2020), the ATO will not dedicate compliance resources to reviewing the application of the arm’s length debt test if certain requirements are met (other than to verify that the use of the “test” was directly related to a COVID-19 reflex).

For more information, contact a KPMG tax professional in Australia:

Tim Lynch | +61 7 3233 9341 |

Michael Baartz | +61 7 3233 9464 |

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