COVID-19 tax planning ideas for uncertain times
                     Accounts 
NextGen
COVID-19: tax planning 
ideas for uncertain 
times
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Contributed by Muhunthan Kanagaratnam, 
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. 
. 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.
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.
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.
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.
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.
The End
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