Up Again Australia: Government Relief and Tax

Restructuring

1. Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?

See [link to restructuring answers in separate section].

2. Is there anything else I should look out for?

We haven’t seen the new laws play out in practice yet – these are unchartered waters for businesses, courts and legal professionals.

Tax

3. What is the position with respect to the applicability of emergency tax measures , including

  1. what they are and apply to;
  2. when they are expected to be phased out on or following a return to business; and
  3. whether any transitional periods are likely to apply.

There are federal government tax or cash payment measures designed to assist businesses through COVID-19, but they are temporary, with specific end dates. The key measures and their applicable dates are:

  • The JobKeeper wage subsidy of AUD1,500 per fortnight from 30 March 2020 to 27 September 2020, for eligible employees of eligible employers. To be eligible, the key requirements are that the employer must have:
    • as at 1 March 2020, carried on a business in Australia or was a nonprofit that pursued its objectives principally in Australia; and
    • its GST turnover (monthly or quarterly) declined or projected to decline in 2020 (when compared to 2019) by at least: 30% (if annual aggregated turnover is or is likely to be less than AUD1 billion), if 50% (if annual aggregated turnover is or is likely to be AUD1 billion or more) or 15% (for certain charities).
  • A tax-free cashflow boost of between AUD20,000 to AUD100,000 to eligible businesses and nonprofit organisations, when activity statements for each monthly or quarterly period from June to September 2020 are lodged.
  • Instant asset write-off – for assets costing AUD150,000 or less (up from AUD30,000), for businesses with an aggregated turnover of less than AUD500 million (up from AUD50 million), and for assets first used or installed ready for use from 12 March to 30 June 2020. From 1 July 2020, the instant asset write-off will only be available for small businesses with a turnover under AUD10 million, and the threshold will be AUD1,000.
  • Accelerated tax depreciation deductions – for depreciating assets with a cost over AUD150,000, the asset may be eligible for an immediate deduction of 50% of the cost of the depreciating asset plus the normal amount of depreciation calculated on the remaining 50% of the asset’s value up to 30 June 2021.

Australian state/territory governments and offices of state/territory revenue also have implemented state taxes concessions, including temporary deferral or waiver (e.g. of three months) of land tax and payroll tax liabilities.

4. Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of

  1. payment obligations (and therefore likely pressure on cash flow); and/or
  2. filing of returns?

Businesses are encouraged to monitor publications of the Australian Taxation Office, Offices of State Revenue and other revenue authorities for their latest updates on COVID-19 administrative concessions for tax payment, lodgement and other related obligations.

For example, the Australian Taxation Office (ATO) currently provides the administrative concessions including the following, many of which require taxpayers to contact the ATO:

  • taxpayers may request a deferral of due dates for tax payments due after 23 January 2020;
  • remission of interest and penalties incurred on or after 23 January 2020;
  • lodging tax returns early, to receive a tax refund early;
  • multinationals qualifying for penalty remission for being unable to prepare transfer pricing documentations in time, if they contact the ATO before 15 July 2020;
  • the ATO’s administrative concession to not review or audit a taxpayer’s thin capitalisation debt-gearing position for the current tax year, if certain criteria is met.

These and other administrative concessions are subject to ongoing consideration by revenue authorities, and are expected to be phased out as and businesses recover after the effects of COVID-19.

5. Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?

  • Certain business asset investments are intended to be incentivised by the instant asset write off (ending 30 June 2020) and accelerated depreciation deductions (ending 30 June 2021), mentioned in question 1 above.
  • Many foreign investments, corporate restructures and other inbound transactions are subject to approval by the Foreign Investment Review Board, as a result of the FIRB screening threshold being reduced to AUD nil (effective from 10:30pm (AEDT) on Sunday, 29 March 2020). This is intended to be a temporary measure to ensure transactions are not contrary to national interest during COVID-19 market conditions. This may result in certain transactions being postponed.
  • COVID-19 distancing restrictions may have also postponed or delayed certain real estate transactions and related funding transactions – for example, due to the inability of certified valuers to enter premises to conduct valuation assessment of real estate.

6. Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?

The real estate sector is intended to be assisted by state land tax deferrals and the ATO’s administrative concessions relating to residential rental property.

International businesses investing inbound into Australia are intended to be assisted by the ATO’s administrative concessions on tax risks (e.g. corporate tax residency and taxable presence) otherwise arising from COVID-19 travel restrictions (e.g. directors or employees “trapped” in Australia).

7. Are there any sectors or interest groups that are now putting forward, or may in the near future request, special tax measures?

Since its announcement in March 2020, the JobKeeper wage subsidy (see question 1 above) has been subject to ongoing refinements, to ensure it applies to employers, as originally intended or as put forward by particular interest groups (such as sole traders, partnerships, labour service entities, businesses affected by recent natural events (such as the bushfires or droughts). Certain foreign-government-owned employers have lobbied their eligibility to the JobKeeper wage subsidy.

8. Which taxes might be increased to address the financial burden caused by the crisis, for example,

  1. are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth)
  2. measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”)

In the past, the Australian government has imposed levies on taxpayers to fund relief packages for certain natural disasters.

However, in April 2020, the Australian Prime Minister was reported to have ruled out a COVID-19 levy, and to have casted doubt on any tax increases to cover the AUD300 billion COVID-19 stimulus packages.

In May 2020, the Australian government was reported to be considering making adjustments to, including early expiry of, the AUD130 billion JobKeeper subsidy stimulus.

9. Are there other actions that ought to be considered by businesses in your country e.g.

  1. revisit past tax filings to claim carry back of losses;
  2. revise or update preliminary tax assessments;
  3. claim bad debt relief for VAT output tax
  • Generally, tax losses can be carried forward indefinitely (but not carried back), subject to satisfying certain loss utilisation tests.
  • See question 2 above regarding tax payments and lodgement obligations.
  • Bad debt adjustments are generally needed to be made by taxpayers who account for goods and services tax (GST) on a non-cash basis.

Finance

10. What do you need to consider in terms of your funding requirements for returning to business and are there any return to business financial assistance packages being made available by government?

If your business has temporarily closed, there may be a delay between the incurring of costs to restart your business and the consequent receipt of income. Consider how you will finance that gap. In particular, if you have any remaining availability under any revolving credit facility, there will likely be a drawstop on new funding if the conditions to drawing are not met (for example, if there is an event of default (or sometimes a potential event of default) continuing.

Australian banks have demonstrated a willingness to support businesses, including large corporates (particularly those existing customers that were well-performing businesses pre-COVID-19). For small and medium business, Australian banks have deferred loan repayments on principal and interest for up to six months, including equipment finance leases and business credit cards. Interest still accrues (and is capitalised) on these deferred payments.

Borrowers should model their expected cashflows based on a range of scenarios and speak with their financiers early to discuss the plan, timing and cost for returning to business and profitability.

JobKeeper

Consider whether there will be a real benefit in opening, rather than remaining closed. Some major considerations are: cost of employees, cost of running the business, and availability of products due to loss of imports and exports.

When businesses reopen, staffing costs are a key issue. This has been, so far, largely subsidised by the Australian government through the JobKeeper wage subsidy, which was intended to keep employees on the books. The subsidy facilitates employers to pay eligible employees AUD1500 per fortnight, rather than making them redundant due to business disruption caused by COVID-19 and the related health measures.

Businesses should consider the impact of fully reopening, given that the JobKeeper subsidy has only been announced to last for six months, starting on 20 March 2020. It is currently unclear whether the government will extend the subsidy, sobusinesses should not rely heavily on it as a means to pay its employees.

NCCP relief regulations

The National Consumer Credit Protection Amendment (Coronavirus Economic Response Package) Regulations 2020 (Regulations) are made under the National Consumer Credit Protection Act 2009 and came into effect on 2 April 2020. The Regulations allow for the exception of certain Australian credit licensees from certain responsible-lending obligations for partly business purposes, with the aim of assisting facilitate credit to small businesses.

This new regulation is a temporary six-month solution to lift the requirement to assess the purpose behind the credit, to speed up the process of lending –meaning that lenders need only be satisfied that the credit is being provided at least partly for business purposes (rather than wholly or predominantly).

This exception applies to new credit or credit increases, where the borrower is a small business and an existing customer of the licensee, and for all type of credit or leased goods that are partly for business purposes.

AFCA amendments

The Australian Securities and Investment Commission (ASIC) issued the ASIC Corporations (AFCA Scheme Regulatory Requirement) Instrument 2020/0433 which amended the AFCA scheme on 25 April 2020.

The amendments:

  • limit AFCA’s complaint jurisdiction if a borrower’s financial status is assessed with a lower regard due to COVID-19. This is in relation to small to medium business loans guaranteed by the federal government under the Guarantee of Lending to Small and Medium Enterprise (Coronavirus Economic Response Package Act 2020;
  • excluding deferred repayments matters from complaints hearings; and
  • limit review of complaints unless for serious contraventions.

Hardship

The Australian Prudential Regulation Authority (APRA) advised that circumstances caused by COVID-19 leading to deferred payments on loans do not have to considered as a period of arrears or restructured loans.

This was intended to allow banks to provide better circumstances for customers (i.e. not “hardship”). the APRA has also increased reporting requirements about COVID-19 deferral statistics.

11. How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?

Should a business seek to subsidise its business venture through entering into or agreeing to any further debt facilities, current loans might be breached. Unless new debt is expressly permitted under the loan agreements, or the business has written consent from the original lender, the business may be unable to enter into any further debt facilities.

You should carefully review any pre-existing loan documents to ensure you are not in breach of any covenants, and test how existing covenants may be affected by higher debt levels before incurring additional debt.

12. Are there any remedies such as equity cure or margin ratchets that you should be checking on to provide liquidity to prevent a default or improve their financial position?

Equity cures

A waiver, amendment or other financial remedy for a breach of financial covenants might not be available under your credit agreement. It may be prudent to review any equity cures in your credit agreement. Equity injections allow for shareholders to add equity into the business to remedy any breach of financial covenant (i.e. default) in order to “cure” the breach.

Lenders may expect a capital restructure to occur in the business, and so may not agree to waive financial covenants to ensure that sponsors or equity holders are forced to take necessary steps to reset the capital structure. These might include a new equity injection, or a commitment to source one.

Margin rachets

The margin ratchet is a mechanism in the credit agreement allowing for the initial margin to be reduced as and when the business achieves a better financial position.

To assess whether the business achieves a better financial position, key financial ratios are reviewed in accordance with the credit agreement. Should the financial position worsen (as will many, given the current global climate) the margin will return to its original level.

If the margin is subject to a ratchet, it will likely increase as financial condition deteriorates (e.g. as leverage increases). Margin is usually set at the highest level if an event of default is continuing.

Pay close attention to how the margin is calculated in the credit agreement and what triggers might increase the margin.

13. What practicalities do you need to consider in relation to audit requirements?

Consider the deadlines to deliver to your lenders your audited financial statements and the practicalities of your auditors being able to carry out their audit. Will there be sufficient time and access to allow the auditors to gather sufficient, appropriate evidence and finalise their report before the deadline?

Ensure that relevant information is appropriately documented to stay informed of the company’s financial position and be able to relay this information to auditors.

14. What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?

You must consider what proportion of your lenders need to consent to the requested amendment or waiver.

Amendments to financial covenants generally require consent of majority lenders (typically 66.6%) and, on SSRCF/unitranche or FOLO deals, in addition, the consent of majority super senior lenders to the extent the amendment relates to the super senior covenant.

Australia also uses “common terms deed” document structures – and if your facility is documented in this manner, consider the lender voting mechanics and approval thresholds – in our experience, the arrangements can be quite varied under common terms arrangements.

In our experience, lenders tend to be more receptive to requests for amendments and waivers if a borrower presents to them a well-considered and reasoned plan to address issues in the business, supported by appropriate evidence/forecasts.

15. Dealing with creditors, including amendments and waivers – Bonds

a. If I can’t comply with the terms of my bond covenants who do I need to notify?

If a default has occurred or is likely to occur, communication with bondholders will often be required through a combination of:

  • public announcements filed on the exchange where the bonds are listed and the issuer's website; and
  • with simultaneous notice to the trustee or fiscal agent (as determined by the governing document of the bonds).

Most high-yield bonds are “covenant light,” operating with limited material adverse effect defaults or cross-defaults to other indebtedness. Issuances in the investment grade market, and other bonds that are not high-yield bonds, may include material adverse effect, change of control and cross-default provisions, and should be considered more closely.

b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?

Governing documents for bonds will usually have a detailed waiver and amendment procedure. It should be expected that consent from bondholders representing a majority of principal amount outstanding will be required for amendments to non-economic terms (such as ability to incur additional debt), but that economic terms (maturity, interest rate, interest payment dates currency, etc.) will require 90% to 100%, depending on bond documentation. Changes to collateral security arrangements may also require super majority consent. The relevant thresholds for bondholder consent will be contained in the trust deed or the indenture of the bonds.

As a matter of first instance, an issuer should have counsel review the amendments and waivers section of the bond documentation, and seek advice regarding prudent public communications under applicable securities laws and regulations.

c. What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?

Bonds are held in electronic form via the clearing systems and usually through a custodian who holds the beneficial interest for these bonds on behalf of the end investors. The bonds are also freely traded in the OTC market. As such, issuers of listed and cleared securities do not generally know who their holders are. To obtain bondholder consent to an amendment, a consent solicitation process will be required. An issuer will typically enlist the aid of a financial advisor and information agent to run a disciplined written consent process via the trustee or fiscal agent.

Bondholder meetings, if required, will be governed by a combination of the bonds' governing documents, the rules of the relevant clearing systems and local statutory provisions.

16. Is the availability of any return to business funding or relief either (a) conditioned on the use of proceeds for green or social purposes or (b) linked to sustainability-related outcomes? If so, what are the applicable purposes or outcomes?

There are no special terms that affect the availability of funding or relief.