It has been an extraordinarily busy time since the beginning of 2020 and we’re now able to reflect on both what happened, as well as the impacts of 2020.
In our role as tax consultants (and a big thank you to my colleagues that have assisted in the matters referred to below), we have been asked to review a number of matters through 2020, which at first blush are diverse, but when reviewed together have similar themes. Do any of these sound familiar?
- This is how I have always done it.
- This is how my friends/colleagues did it.
- This is my understanding of the law/that is not my understanding of the law.
- I had to do it in a hurry, cheaply.
- I just had to (get the deal done/ make a commercial decision), now please sort out the tax issues.
- I did not think we would get so big, so quickly.
- What do you mean I cannot use my losses?
- What do you mean I cannot access those concessions?
- It is my money, why cannot I use it like that?
Some of the key issues that have been raised by clients within the tax arena through 2020 have included:
- When the acquisition of new performance rights of a director fails the 10% limit on shareholding and voting power in respect of Division 83A of the Income Tax Assessment Act 1997.
Failing this test will disqualify those performance rights (also options and shares), from accessing the ‘start-up’, ‘real risk of forfeiture’, and ‘Subdivision 83A-C scheme’ concessions. This can be a complex area of the law and often overlooked.
- When the loss of employment/ directorship is a real possibility when receiving an employee share scheme interest under Division 83A.
The loss of employment/ directorship in a company usually causes a deferred taxing point and depending on the terms and conditions of the interest, an individual may not have sufficient funds to meet an unexpected tax liability. Were there other mechanisms that could have been used to compensate when initial discussions were being held?
- Whether an Australian company lending funds overseas to a USA LLC triggers Division 7A of the Income Tax Assessment Act 1936?
To the extent Division 7A has been triggered, how to manage the ‘minimum yearly repayments’, especially when the funds have been used to finance a long-term, illiquid asset.
- Whether a supply of a commercial building was a supply of a going concern Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999?
The initial view taken by many that the supply of a commercial building will be a supply of a going concern, this is not always correct.
- Getting too big too early (to the extent cash flow supports this) is generally seen to be a good thing. However, if the business was not set up in an appropriate structure in the first instance, then unexpected tax issues may ensue. This is not just for start- up businesses. There have been occasions when companies with established businesses create a new business within that company. The difficulty comes from how to deal with incentivising directors/employees that have greater involvement in one business over another. Furthermore, should one of the businesses become attractive to outside buyers, how to complete the deal may be limited or not as attractive as it may have otherwise been should the new business commenced in another entity (from a federal and, possibly, state tax perspective).
- It is not just income tax and capital gains tax that needs to be reviewed. There are few situations that there is relief from, or concessional treatment for, income tax and capital gains tax (when correctly structured), but no such relief may be available from transfer duty, landholder duty, pay-roll tax grouping, goods and services tax etc.
- When restructuring is being considered, a deep dive into the tax issues after an initial review should be deferred until a review of external circumstances is made and discussions had with external parties. There have been several occasions where discussions with financiers, landlords, and insurers have caused a restructure not to go ahead or have been materially altered.
- Another sleeper is the Personal Property Securities Register, especially for those entities that have equipment at external sites. Also, consideration should be had to whether the registrations under the PPSR has been correctly completed when some of the equipment is held in a separate entity away from the entity that is contracted to provide the services.
- Take advice as early as possible in the process. The earlier in the process advice is taken, opportunities may present to restructure the commercial deal (if required) and achieve an improved outcome.
- Remember to revisit the tax advice when the deal that has been struck has changed or there has been a time lag between the advice and the deal. The deal may have changed from the initial tax advice received and it may no longer be materially correct. Furthermore, there may be a change in valuation(s) which may change the tax liability or, worse still, cause the inability to access certain tax concessions (e.g. Division 152 small business CGT concessions of the Income Tax Assessment Act 1997).
- Better still, bring your tax advisor along the journey. People forget many tax advisors have significant commercial experience outside of the tax sphere and can be an asset in the overall process.