The COVID-19 restrictions are slowly easing but the economic impacts are far from over. While businesses struggle to find ways to free up cash, it is likely we will see restructuring of loans and waiving of debts.
Taxpayers and their advisors need to be aware of the taxation implications of restructuring and forgiving loans, including the Commercial Debt Forgiveness (CDF) rules, Division 7A and the CGT rules.
Key takeaway
COVID-19 has had a debilitating effect on many sectors of the economy and unfortunately, the coming 12 months will see more businesses in financial distress and an uptick in business insolvency.
In such an environment, the commercial reality is that many businesses will be owed debts that will not be paid in full or at all. For many businesses, this could spell disaster. For this reason, debtor management is crucial in the present environment.
As we know, the Federal Government has implemented a package of changes to Australian insolvency and bankruptcy laws to provide relief from the economic impacts of COVID-19.
Following the 2011/2012 Federal Budget announcement that directors will be made personally liable for any unpaid superannuation guarantee contributions, Treasury has released the Tax Laws Amendment (2011 Measures No. 7) Bill 2011 (Bill).
The legislation extends the current director penalty regime for unpaid PAYG. Whilst the announcement from Bill Shorten MP on 5 July 2011 highlights the need to prevent companies engaging in phoenix activities, the legislation will have a much broader impact.
The Bankruptcy Act 1966 (Cth) was amended to address the outcome of the High Court's decision in Cook v Benson1. It was held in that case that a trustee in bankruptcy could not recover amounts transferred from a retirement fund to another superannuation fund after the bankruptcy of the member as the amounts rolled over to the fund by or on behalf of the member were made in good faith and for consideration (ie the member had a right to receive benefits on retirement).
On 10 December 2015, a majority of the High Court of Australia ruled inCommissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation)1 that liquidators are not obliged to, and are not personally liable for, failing to retain sufficient funds for the purpose of discharging a tax liability until the Commissioner issues a notice of assessment.
What does this mean for practitioners?
On 8 October 2014 the Full Court of the Federal Court delivered judgment in favour of the liquidators in the much anticipated Australian Building Systems appeal1 (Appeal).
Barring the Commission of Taxation seeking special leave to appeal to the High Court, liquidators (and other trustees, including receivers and managers) can now take comfort that they are not personally liable for failing to hold sufficient funds for any anticipated CGT liability, in the absence of a notice of assessment.
Our Insolvency Update of 3 March 2014 refers to the Federal Court’s decision in Australian Building Systems Pty Ltd (in liq) v Commissioner of Taxation . The court held that liquidators and receivers and managers cannot be held personally liable for any CGT liability subsequently assessed as due (where funds are remitted in the ordinary course and to secured creditors before the Commissioner of Taxation issues the assessment).
On 21 February 2014 the Federal Court handed down its decision in Australian Building Systems Pty Ltd (in liq) v Commissioner of Taxation [2014] FCA 116 with the result that liquidators and receivers and managers cannot be held personally liable for any CGT liability subsequently assessed as due (where funds are remitted in the ordinary course and to secured creditors before the Commissioner of Taxation issues the assessment).