COVID-19 tax considerations

COVID-19 tax considerations

• 11 December 2020
• The Tax Faculty

Wearing masks, constantly sanitizing your hands, not walking or sitting too close to others, not being able to see smiles…  Who would have thought on 1 January 2020 that the year would turn out this way?  But, it is what it is...  We’ve tried to accept it and make peace with it as best we can.  Although a vaccine in the (hopefully near) future might address our health-related concerns, the financial and tax impact of Covid-19 might still be part of our lives for some time to come.

Business rescue

The Covid-19 pandemic has emphasized the importance of having an understanding of business rescue, as there has been an enormous increase in the number of businesses in financial distress.  The strategy of the company could include entering into legal and formal business rescue proceedings, restructuring debt, cutting costs, reducing workforce, selling assets, etc.  What can be done to save a business?  When considering all the options available to the business, one of the key aspects to consider is the tax consequences related to the decisions made.  This will enable the business to make informed decisions.  In this webinar, we look at business rescue holistically. Join us for this on-demand webinar Tax and Business Rescue 2020 .

Restructuring

Businesses might also need to restructure their debt.  This makes a lot of sense from a business perspective, but might have adverse tax consequences for the debtor receiving the benefit of the restructuring (this benefit can take many forms, the simplest of which is a write-off of debt).  It is, therefore, imperative that the structuring be done in a tax efficient manner. 

The corporate rules play a vital role in providing effective tax planning strategies.  Businesses might want to transfer assets from one group entity where excess capacity exists to another group entity where capacity is needed.  If properly structured, this transfer can be done in a tax neutral manner in terms of a section 45 of the Income Tax Act.  It is important to note here that the parties involved must be part of a “group of companies” as defined in section 41 of the Income Tax Act (i.e. not the section 1 definition).   The definition in section 41 excludes certain entities from being considered part of the group of companies, such as foreign entities, and also excludes certain interest held, such as interests held as trading stock.  The transferor and the transferee are, effectively, deemed to be one and the same entity and the transfer will not lead to a recoupment or taxable capital gain arising.  This provides a huge advantage to entities being able to structure transfers of trading stock or capital assets in this manner.

Businesses might also need to merge with other entities where synergies exist and some might ultimately be liquidated if the business can’t be saved.  The tax consequences of these actions must be considered as unexpected tax consequences might be the final nail in the coffin of a struggling business. 

Join us for the webinar series on Debt Restructuring and Corporate reorganisations Debt restructuring and corporate reorganisations - Full Series.

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