On 6 October 2020, treasurer Josh Frydenberg and Minister of Finance Mathias Cormann released the Government’s 2020-21 budget strategy. A key feature of the budget is the proposed ability for 99% of Australian businesses to claim their current tax losses against previous year taxable profits (therefore making them eligible for a tax refund). With such a large portion of businesses captured, what impact is this likely to have on the ATO’s ability to collect outstanding tax debts?

 “Companies with turnover up to $5 billion can apply tax losses incurred during the 2019-20, 2020-21 and/or 2021-22 income years to offset tax paid in 2018-19 or later income years. The tax refund will be available for eligible businesses when they lodge their 2020-21 and 2021-22 tax returns. This will help businesses in future years…”¹ The turnover limit means that in reality, some 3.5 million businesses will be eligible, amounting to over 99% of active businesses.¹

At a glance, you could be forgiven for thinking that these measures are an ingenious way to support business and stimulate the economy. In fact, the budget papers suggest that, combined with the temporary full expensing measures, these measures will boost GDP by $2.5 billion over 2020-21 and $10 billion over 2021-22, all while creating 50,000 jobs.¹ Additionally, this is said to only cost the government $7.1 billion in revenue in the long run as some $24.5 billion of the refunds will reduce businesses future deductions against future profits.²

However, will these measures inhibit the ATO’s ability to collect other forms of tax revenue? First, we need to consider if the ATO will have an automatic right to set off the refund due to a company against other debts due to the ATO, e.g. PAYG withholding tax or GST. It is unclear from the budget if this will be the case. If it is the case, the stimulus effect of this policy may be significantly reduced as refunds are withheld, likely decreasing the above quoted GDP boosts. If a setoff is not available, the ATO may have a hard time collecting other debts due to it.

While the ATO currently appears to have a freeze on wind-up applications, we currently think it likely that the freeze will cease come the end of March 2021 when various COVID-19 related economic measures cease to have effect. We anticipate that if the ATO is unable to set off refunds against other tax debts, it will need to pursue such collections through the Courts. We anticipate that this will leave the ATO with the difficult task of proving that a company is indeed insolvent rather than temporarily illiquid. It is foreseeable that companies with taxable losses in a current period will seek to prove to the Court that either the ATO has a net amount payable to the company or that the company is temporarily illiquid and that illiquidity will be quenched by any refund made by the ATO.

Regardless of the technical application of this budget measure, our initial view is that it will result in the ATO initiating far less winding up applications than it would have without the measure. This should allow businesses more space to plan their way through financial downturn as a result of COVID-19. At this time, it is more important than ever for businesses to have a strong business plan to get them through beyond the downturn in the economy. Businesses who are unable to foresee a future profit or a way to go into a holding pattern at this time should consider their options to exit or restructure their business. Woodgate & Co. are able to assist in the development of these plans.

Woodgate & Co. have over 30 years’ experience in restructuring and business advisory. Contact us to set up your consultation.