COVID-19: tax planning ideas for uncertain times

1. Accounts NextGen COVID-19: tax planning ideas for uncertain times Click to open document in a browser

2. Contributed by MuhunthanKanagaratnam, Partner, Mark Goldsmith, Special Counsel and Julian Cheng, Partner, Gilbert + Tobin. While we have seen state and federal governments announcing a variety of stimulus measures to assist business in these uncertain times, there are still numerous conventional tax planning strategies which business should be mindful of as a supplement to the government response. As cash management becomes critical to the survival of many businesses, it is a useful time for all businesses to reconsider possible tax planning ideas that may reduce their tax burden.

3. . Where any of these ideas result in a reduction to the tax payable of a business for a year of income, the benefit of such reduction may be realised through variations to Pay As You Go (PAYG) instalments instead of having to wait until lodgement of the tax return. In this regard, the Australian Taxation Office (ATO) has announced that businesses can vary PAYG instalments for the 2019/20 year without incurring penalties or interest and may also be able to claim a refund of previous instalments paid for that year. The purpose of this brief guide is to firstly, act as a reminder to business of these various strategies which are typically employed as part of ongoing year-end tax planning and secondly, to explore some less conventional ideas which may in particular cases be of interest.

4. Deferring the tax recognition of income There are some unique features associated with our tax system which may allow for the deferral of income which would not otherwise be permissible at least from an accounting and business perspective. In this regard, for service orientated businesses, typically the timing of recognition of services income arises at the time a recoverable debt is created. This is generally when an invoice is issued although the terms of the contract with customers or clients may mean a recoverable debt arises at other times. Therefore, delaying the timing of issue of invoices may delay the recognition of income for tax purposes, for example, if an invoice is to be issued in June, but the expectation is that it will not be paid until July or later, then consideration could be given to delaying the issue of such invoices.

5. Equally, if the view is that there may be a low prospect of payment given the financial position of the service recipient then again thought could be given to delaying the issue of the invoice until after year end. These matters need to be considered having regard to the terms of the relevant contract governing the timing of issue of an invoice, as well as the requirement under the GST law for the party making the taxable supply (assuming it is one) to which the payment relates, to issue a “tax invoice" within 28 days after receipt of such a request. Of course, this tax planning idea needs to be balanced with the commercial realities of the actual timing of the payment of your invoice, the likelihood of payment and the terms of the contract itself. Clearly, if the impact of such a strategy to delay the tax recognition of that income will have an adverse impact on your cash flow, then that is a significant factor that may outweigh the benefits of employment of this particular strategy.

6. Utilisation of trading stock election The Tax Act provides for various methods of recognising the value of trading stock. In most cases, the default position adopted by business is to effectively recognise trading stock for tax generally at cost. However, in circumstances where the value of closing stock (or a particular item of stock) has materially declined such that the market value of the stock is less than the cost, then a taxpayer can adopt the market selling value basis for valuing that closing stock. Alternatively, closing stock can be valued by adopting the replacement value of the closing stock on hand. In both of these cases, the effect of adopting a lower stock valuation method, whether it be market selling value or replacement value is to effectively value your closing stock at an amount less than cost and as the closing stock is treated as assessable income, this will effectively generate a deduction for the difference between the cost and the alternative value adopted.

7. An example of a situation where market selling value may be adopted could be in respect of obsolete stock, on the basis that the market selling value of that stock given its obsolescence is less than the cost of the stock. Typically, from an accounting perspective the impact of this value obsolescence will be reflected through the creation of a provision for obsolescence, which in the ordinary course is not deductible. If this is the case, a deduction can effectively be obtained for that provision by revaluing for tax purposes the obsolete stock using the market selling value. Some businesses may have also modified their return policies in response to COVID-19. For example, returns may have been placed on hold to prevent the spread of the virus or businesses that have been forced to close may have extended the time frame for returns to enable customers to return goods once they reopen. Depending on the terms of the contract, returns may be assessable to the purchaser and deductible to the seller.

8. The EndAccounts NextGen - Tax Accountants MelbourneLevel 19/180 Lonsdale St, Melbourne VIC 3000(03) 9015 8540info@accountsnextgen.com.auTax Return Melbourne | Accountant Melbourne | Tax Accountant Melbourne | Accounting Internship | Accounting Training