COVID-19: Tax implications and relief measures

State and territory tax relief and the tax implications for intragroup arrangements

In light of all the recent changes, there have been numerous implications for tax, as well as various tax relief measures put in place in response to the pandemic. To assist taxpayers through these uncertain times, we summarise below the most recent developments in land tax and payroll tax relief across Australia. 

We are also working closely with clients on the tax implications of COVID-19 for intragroup arrangements. We outline the most pressing transfer pricing and other international taxation considerations concerning large multinational groups.

 

Your key questions answered on state and territory tax relief

Contact: Adrian ChekCraig MilnerTom Tian
Last updated: 23 October 2020

What federal measures are impacting state and territory tax relief?

The National Cabinet has agreed that pandemic relief measures will be operative for six months unless declared otherwise by the responsible minister. It has also released a Mandatory Code of Conduct for commercial leases during COVID-19, which provides a set of leasing principles that eligible businesses are to apply. Relevantly for the purposes of land tax, the Code requires that '[a]ny reduction in statutory charges (eg land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease'.

What relief is available in New South Wales?

The NSW Government has committed to $1.6 billion in tax relief, including $450 million for payroll tax relief and $440 million for land tax relief.

The Government has announced the following measures:

Payroll tax

  • Six-month deferral of payroll tax for businesses with grouped Australian wages of over $10 million for the 2019/2020 financial year.
  • Payroll tax relief for businesses with grouped Australian wages of no more than $10 million, specifically:
    • 25% reduction in annual tax liability when annual reconciliations are lodged; and
    • relief from paying payroll tax for March, April and May 2020 for businesses that lodge and pay monthly.
  • An increased tax-free threshold from $900,000 to $1 million for the 2020/2021 financial year.
  • From 26 October 2020 until 29 November 2020, businesses will be able to setup a Stimulus Payment Arrangement for up to 24 months to repay their deferred 2019/2020 payroll tax payments and any monthly liabilities for July, August and September 2020.

Land tax

  • Land tax reduction of up to a total of 50% for the 2020 land tax year is available over two relief periods: 1 April 2020 and 30 September 2020 (Period 1) and 1 October 2020 and 31 December 2020 (Period 2).
  • The reduction will be the lesser of:
    • the amount of rent reduction provided to an eligible tenant; or
    • 25% of the land tax due on the land leased to that tenant.
  • A landowner will be eligible where:
    • the land is used for business or residential purposes;
    • the land is being leased to a residential tenant, or a business tenant with annual turnover of $50 million or less, who, in either case, can demonstrate financial distress because of COVID-19;
    • the landlord reduces the rent of the affected tenant during a relief period; and
    • the land tax is directly related to the property for which rent has been reduced.
  • Financial distress is:
    • for commercial tenants – a revenue decrease of 30% due to COVID-19; and
    • for residential tenants – a decrease in household income of 25% due to COVID-19.
  • Extended payment deadlines and leniency for late payments of land tax. Payment by instalments is also available; however, no land tax discount will be available to landlords who pay by instalment.
  • Three-month deferral of any outstanding land tax for landlords who claim the land tax concession.

More information is available from Revenue NSW.

What relief is available in Queensland?

The Queensland Government's economic relief package introduced tax relief measures including $740 million dedicated to payroll tax refunds and $400 million in land tax relief.

The Government has announced the following measures:

Payroll tax

  • A two-month payroll tax refund for July and August for businesses with Australian taxable wages up to $6.5 million. Applications close 30 October 2020.
  • Deferral of payroll tax payments for the 2020 calendar year. Businesses whose deferral has been approved will have an automatic extension of that payment deferral until January 2021.
  • A payroll tax exemption for wages to the extent that they are subsidised by the JobKeeper scheme.
  • Businesses with taxable wages over $6.5 million affected by COVID-19 are also eligible for a two-month payroll tax refund and deferment of all payroll tax payments for the rest of 2020.

The Queensland Treasury has released a fact-sheet on payroll tax relief available from March 2020.

More information is available here.

Land tax

  • A land tax rebate reducing land tax liabilities by 25% for eligible properties for the 2019/2020 and 2020/2021 assessment years. Applications must be made by 31 October 2020 for 2019/2020 and 26 February 2021 for 2020/2021.
  • A three-month deferral of land tax liabilities for 2020/2021.
  • A waiver of the 2% land tax foreign surcharge for foreign entities for the 2019/2020 assessment year.
  • For landlords to be eligible for the land tax rebate, they must provide rent relief 'at least commensurate with the land tax relief' to tenants whose capacity to pay rent has been affected by COVID-19. The landlords must also comply with Queensland leasing principles.
  • Additionally, landlords who are unable to secure tenants because of the pandemic and require relief to meet financial obligations will be eligible for the rebate.

More information is available here.

The Government has also introduced a six-month waiver of state land rent, up to a total of $33.5 million, for eligible farmers, businesses, tourism operators, and community and sports clubs. More information is available here.

What relief is available in Victoria?

The Victorian Government declared a State of Emergency on 16 March 2020, which was extended on 12 April 2020. A range of tax measures were introduced as part of a broader economic survival package to support businesses during COVID-19.

The Government has announced the following measures:

Payroll tax

  • For businesses with annual taxable wages of up to $3 million, a full payroll tax waiver for the 2019/2020 financial year; and
  • For businesses with annual taxable wages of up to $10 million, payroll tax deferral for the 2020/2021 financial year until 2021/2022.

Eligible businesses must continue to lodge returns.  

  • For businesses that make additional payments to employees as part of the JobKeeper program:
    • for employees who have come to an agreement with their employer to be stood down and not perform any work, the full $1500 per fortnight paid to them is exempt from payroll tax; and
    • for employees who are paid less than $1500 per fortnight and have not been stood down, the payroll tax exemption applies to the difference between $1500 and their fortnightly wage.
  • Unlike other jurisdictions, Victoria has only offered limited payroll tax relief for the JobKeeper scheme. The payroll tax relief only extends to any additional payments made by employers to their employees in order to qualify for the JobKeeper program.

Land tax

  • A land tax reduction of up to 50% and deferral of remaining 2020 land tax to 31 March 2021 for commercial landlords who provide rent relief to tenants who have been financially affected by the pandemic. This will also apply to landlords who cannot secure a tenant during this period, and will be available from 1 May 2020.
  • A 25% land tax waiver for 2021 land tax is available for eligible residential landlords who provide rent relief to tenants who have been financially affected by the pandemic. They will also be able to defer any remaining tax until 30 November 2021, including any deferred land tax from 2020.
  • Deferral of 2020 land tax until March 2021 for eligible landowners with total taxable landholdings below $1 million and who own at least one non-residential property.  
  • A 25% reduction in 2020 land tax for certain eligible owner-occupiers of commercial properties whose businesses have been affected by the pandemic, with a deferral of the balance of the 2020 land tax to 31 March 2021.
  • Waiver of the Vacant Residential Land Tax for 2021 for inner and middle Melbourne properties that were vacant in 2020 for more than six months.

For commercial landlords to be eligible for these land tax relief measures, their tenant must be eligible for the Jobkeeper Payment and have an annual turnover of $50 million or less.

More information is available here.

What relief is available in Western Australia?

The WA Government has introduced a $607 million stimulus package, including tax relief to support businesses that have been impacted by COVID-19.

The Government has announced the following measures:

Payroll tax

  • An increase of the initial payroll tax threshold on 1 January 2020 to $950,000. A further increase of the payroll tax threshold to $1 million from 1 July 2020. 
  • A waiver of payroll tax from March 2020 to June 2020 for employers whose taxable wages are less than $7.5 million at 30 June 2020.
  • A payroll tax exemption for wages to the extent that they are subsidised by the JobKeeper scheme.
  • A one-time grant of $17,500 for employers whose taxable wages for 2018/2019 were more than $1 million but less than $4 million.

These measures have retrospective application from 1 March 2020.

More information is available here.

Land tax

  • Land tax relief grants of about 25% of the applicant's land tax are available for commercial landlords. To be eligible, landlords must provide rent relief to tenants who have been financially affected by the pandemic, equivalent to a minimum three months' rent and freeze outgoings to small businesses.
What relief is available in South Australia?

The SA Government has committed to a large relief package, including $50 million in dedicated land tax relief. Changes to payroll tax have also been made under the COVID-19 Emergency Response Act 2020 (SA), in force from 9 April 2020.

The Government has announced the following measures:

Payroll tax

  • A payroll tax waiver until January 2021 for business with Australian grouped wages up to $4 million for 2018/2019. Revenue SA will notify eligible businesses directly.
  • A payroll tax deferral until January 2021 for businesses with Australian grouped wages over $4 million for 2018/2019.
  • A payroll tax exemption for wages to the extent that they are subsidised by the JobKeeper scheme.

Land tax

  • A land tax reduction of up to 50% in the 2019/2020 land tax year for eligible landlords who provide rent relief commensurate with the land tax reduction to tenants experiencing financial distress due to COVID-19:
    • landlords will only be eligible for a land tax reduction for commercial tenants with an annual turnover not exceeding $50 million and that have suffered demonstrable financial distress, being a 30% fall in revenue due to COVID-19, and eligibility for the Australian Government's JobKeeper Payment; and
    • relief is also available to landowners who are unable to secure a tenant because of COVID-19 and eligible commercial owner-occupiers.
  • Deferral of the third and fourth instalment of 2019/2020 land tax for landlords that pay quarterly. Payment can be deferred for up to six months from the date of the third instalment.
  • An increase in the 2020/2021 Land Tax Transition Fund relief from 50% to 100%. This is based on the existing relief guidelines.

More information is available here.

What relief is available in Tasmania?

The Tasmanian Government has released a business stimulus package administered by the Commissioner of State Revenue.

The Government has announced the following measures:

Payroll tax

  • A waiver of 2019/2020 payroll tax for employers with Australian wages (and Australian Group wages) of up to $5 million annually. Employers must be able to demonstrate that their operations have been affected by the current pandemic.
  • A waiver of 2019/2020 payroll tax for employers in the Tasmanian hospitality, tourism and seafood industry.
  • A 12-month payroll tax rebate for employers who employ new youth employees (aged 24 years and under) between 1 April and 31 December 2020 in either full-time or part-time positions.
  • A payroll tax exemption for wages to the extent that they are subsidised by the JobKeeper scheme.

Land tax

  • A land tax waiver for commercial properties for the 2020/2021 financial year where business operations have demonstrably been affected by the current pandemic.
  • Financial hardship provisions for landlords struggling to pay land tax. Landlords are advised to contact the State Revenue Office for specific details.

More information is available here.

What relief is available in the ACT?

The ACT Government has committed to a $351 million economic survival package to support the ACT community through the COVID-19 pandemic. Emergency measures have been implemented under the COVID-19 Emergency Response Act 2020 (ACT), which are in force from 8 April 2020 for 12 months.

The Government has announced the following measures:

Payroll tax

  • A six-month waiver of payroll tax for eligible businesses whose operations have been impacted by COVID-19. Eligible businesses are those operating in industries designated as prohibited activities, including food and drink, beauty and personal care services, entertainment venues, leisure and recreation, residential facilities (including hotels, apartments and hostels), outdoor recreation, non-residential institutions (including galleries, and museums and community facilities).
  • Interest-free deferral of 2020/2021 payroll tax until 1 July 2022 for businesses with wages up to $10 million.
  • A payroll tax exemption for wages to the extent that they are subsidised by the JobKeeper scheme.

Land tax

  • A land tax credit for landlords who reduce their rent by at least 25% due to COVID-19. The credit will cover 50% of the rental reduction, up to a limit of $1,300 per quarter, and will be applied as a reduction to the land tax account. Landowners will need to apply via this form. More information can be found via the ACT Revenue Office.

Rates rebate

  • A rates rebate of $150 for all residential properties in the ACT from 1 July 2020, to be automatically applied to the 2020/2021 rates bill.

For more information, visit the ACT Revenue Office and the Economic Survival Package website.

What relief is available in the Northern Territory?

The NT has a number of programs and initiatives set up to support small businesses through the pandemic.

The Government has announced the following measures:

Payroll tax

  • Payroll tax waiver from March 2020 to April 2021 for eligible businesses registered on the DITT Business Hardship Register with total Australian taxable wages for 2019/2020 of under $7.5 million:
    • eligible businesses are those with an annual turnover of up to $50 million and that can demonstrate at least a 30% reduction in turnover compared with the same month or quarter in 2019. The DITT Business Hardship Register has been operational since May 2020 and registration of hardship is a pre-requisite for eligibility.
  • Payroll tax deferral until 21 May 2021 for employers that are registered on the DITT Business Hardship Register, have total Australian wages of over $7.5 million in 2019/2020, and have experienced at least a 50% reduction in turnover compared with the same month or quarter in 2019.
  • JobKeeper payments will not be subject to payroll tax.
  • Flexible payment options on request, including payment by instalments and extension of time, for businesses that do not qualify for payroll tax relief but can demonstrate financial incapacity.

Businesses can apply from 1 May 2020. More information is available from the Territory Revenue Office.

Land tax

There is no land tax in the NT.

Commercial tenancies

The NT Government is providing financial support to commercial tenants with turnover of less than $50 million that are experiencing economic hardship: ie a reduction in turnover of more than 30%. Where there is demonstrated economic hardship, commercial tenants can request rent relief from their landlord. Landlords will be expected to negotiate relief in line with the national Code of Conduct for commercial tenancies. Landlords who provide rent relief will be eligible for payroll tax and utilities relief. From 1 May, utility bills for commercial properties have been halved for the next six months for businesses suffering COVID-19-related economic hardship. The property activation levy introduced in July 2019 will also be waived for relevant landlords whose property becomes vacant due to the COVID-19.

 

Your key questions answered on tax impact of COVID-19 on intragroup arrangements

Contacts: Toby KnightThomas Ickeringill
Last updated: 17 April 2020

How does COVID-19 affect your advance pricing arrangements ('APAs')?

An APA is an agreement reached between a taxpayer and one or more tax administrations on the pricing of intercompany transactions over an agreed period. All APAs contain so-called 'critical assumptions'. These are assumptions that are so significant that neither party to an arm's length situation would continue to be bound by the terms of the APA if any of the assumptions changed. The types of critical assumptions that may be particularly strained, or even breached, in the current environment, include the following:

  • no force majeure event;
  • no significant change in industry circumstances or wider economic conditions;
  • no significant change in functions performed, risks borne or assets used by the relevant taxpayer(s); and
  • no significant fluctuation in the supply of, or demand for, the underlying good or service that is subject to the APA. This critical assumption may involve a quantitative test.

It is therefore vital to review the critical assumptions in all existing APAs to assess whether any of them have been breached. If so, it may need to be renegotiated, suspended or cancelled. In these circumstances, it is important to develop an APA strategy, including determining:

  • whether the arrangements continue to represent arm's length behaviour;
  • how (if at all) you intend to engage with the tax administration(s);
  • whether the business intends to be bound by the terms of the APA, both in the short-term and long-term; and
  • if so, whether a continuation, modification or temporary suspension of the existing APA terms is desirable.
Are there tax implications of your directors or employees working in a jurisdiction other than their ordinary jurisdiction of residence?

We note that COVID-19 might give rise to circumstances in which a company's directors and/or employees opt to work from a jurisdiction other than their main jurisdiction of residence. Where these arrangements are likely to persist, it is important to consider, amongst other things, whether:

  • this affects the tax residence of a group company by virtue of changes in its 'central management and control' or 'place of effective management';
  • they create a new taxable presence (known as a 'permanent establishment'), such as by directors or senior employees concluding major contracts in the name of the business or having a new fixed place of business; and
  • it materially affects the perceived economic substance of group companies.

The OECD Secretariat has recently issued guidance on the above, expressing the view that it is unlikely that the temporary dislocation of individuals brought about by COVID-19 will give rise to inadvertent changes in corporate tax residence or permanent establishments. Consistent with this, the ATO has helpfully provided partial comfort on some of these issues from an Australian tax perspective, including:

  • not applying compliance resources to determine if central management and control is in Australia if COVID-19 is the only reason for holding board meetings in Australia or directors attending board meetings from Australia; and
  • not recognising an Australian permanent establishment if a foreign company did not previously have a permanent establishment in Australia, provided there are no other changes in the company's circumstances and the unplanned presence of employees in Australia is the short-term result of being temporarily relocated or restricted.

Whilst this comfort is welcome, it does not cover the full range of possibilities taxpayers could be facing in the current environment. These may include, but are not limited to, the following:

  • group companies whose functional profiles have inadvertently changed as a result of employee relocations and whether the group transfer pricing policies remain valid;
  • foreign companies whose small number of directors and employees change their usual residence (eg captive insurance providers, IP holding companies, financing entities) and whether they have maintained the requisite level of economic substance to support group transfer pricing policies;
  • directors and senior employees voluntarily working remotely from a foreign jurisdiction for personal reasons (eg working from a 'holiday house', working from a foreign family member's house) even where there are realistic opportunities to travel to their usual place of residence; and
  • Australian companies whose directors and/or employees change their usual residence and the other jurisdiction is not offering the same degree of leniency as the ATO.

If you consider that your business operations may fall within one or more of the above circumstances, it will be important to scrutinise your international tax affairs, particularly if there is a possibility that the current (interim) arrangements may continue for a period after COVID-19 restrictions are lifted.

Has COVID-19 given rise to a material change in your business operations?

It is well recognised that COVID-19 has given rise to significant changes to business operations. These changes include supply chain disruptions, temporary suspension of key functions, digitalisation of manual functions, widespread virtual working, relocation of personnel, asset sell-offs and employee redundancies. Where there have been such changes, important considerations include whether:

  • your intercompany legal agreements and intragroup transfer pricing policies remain fit-for-purpose (see below); and
  • there has been a 'business restructuring', thereby requiring a change in transfer pricing policy and potentially giving rise to a CGT event (commonly referred to as an 'exit charge'). Where there has been a business restructuring event, contemporaneous documentation describing the decision-making process and articulating the arm's length nature of the restructuring is strongly encouraged.
Have you reviewed your intercompany legal agreements and intragroup transfer pricing policy in light of COVID-19?

The day-to-day operations of many businesses have drastically changed in response to the challenges posed by COVID-19. This has led to many real-life examples not only of contractual renegotiations, but also the unilateral waiver of contractual rights. In an intragroup context, it is necessary to consider whether related parties, at arm's length, would renegotiate the pricing of their arrangements in the current environment.

In doing so, it is necessary to review your group's intercompany legal agreements. If there are express contractual terms permitting a renegotiation or change in pricing in extenuating circumstances (eg material adverse change or force majeure), you will need to consider whether, in the context of your business, they come into effect. Even if they do not, or the agreements are silent on the question of renegotiation, it may be legitimate to ask whether, at arm's length, a renegotiation (or even unilateral waiver) may be expected.

This analysis is particularly important for entities with 'limited risk' or 'routine' pricing arrangements (eg fixed mark-up on cost, guaranteed return on sales). COVID-19 is likely to strain many limited risk structures, particularly where fixed or guaranteed remuneration will result in substantial residual losses being recognised elsewhere. Therefore, notwithstanding the transfer pricing policy in place, it will need to be determined whether groupwide extraordinary losses can be shared amongst the 'limited risk' or 'routine' entities and, if so, to what extent they can at arm's length. Similarly, for those groups with extraordinary profits, it may be necessary to determine whether those profits ought to be shared with the 'limited risk' or 'routine' entities. The degree of flexibility in your intercompany legal agreements and transfer pricing policy will come down to the specific facts and circumstances of your business, with industry-wide factors especially important.

Has COVID-19 had a significant impact on your balance sheet and/or your intragroup financing arrangements?

When there is an economic shock, a multinational group's treasury function often needs to respond rapidly to meet the needs of its core operations. This may include equity injections, short-term intragroup loans, interest holidays, negative cash pools, the relaxation of repayment terms, the waiver of debt covenants and the provision or extension of credit facilities. This gives rise to a range of tax considerations, including:

  • the characterisation of capital transactions as debt or equity (and the transfer pricing consequences);
  • the characterisation of payments as interest or dividends (and the withholding tax consequences);
  • the appropriateness of existing guarantee fee arrangements (if in place) and/or whether guarantee fees need to be implemented (if not in place);
  • whether the intragroup financing transfer pricing policies need to be adjusted given changes to money markets, capital markets and the group's external financing arrangements; and
  • whether thin capitalisation rules are breached. We welcome the ATO's recent announcement that it will not apply compliance resources to taxpayers that would have satisfied the safe harbour test but for COVID-19 and use their best endeavours to apply all criteria of the arm's length debt test ('ALDT'). It is important to keep in mind, however, that the determination of the ALDT must be made on the basis of a standalone Australian taxpayer, ie an assumption that no guarantee, security or other form of credit support has been provided to the entity by associates.

Where COVID-19 has had a material impact on your balance sheet and/or your intragroup financing arrangements, it is especially important to review both the immediate tax implications and the longer term suitability of your existing tax policies associated with your intragroup financing arrangements.

More questions on this topic?

Your privacy: Allens collects your personal information so we can provide and market services to you. Your information may be shared with other members of the Allens Group both in Australia and overseas. You have a right to access certain personal information that we collect and hold about you. You may contact us at PrivacyCompliance@allens.com.au. Further information is available on this page.

COVID-19

Answering your key questions on a range of topics