Whilst there has been a significant focus on the Federal Stimulus packages as well as payment and lodgement deferrals, business owners should also be looking ahead and planning for a return to “normal” business (whatever that looks like).

Planning and forecasting is critical as it provides a base line to consider and address alternative outcomes.  As a result of the recent economic conditions businesses should be reviewing financial assumptions and forecasts – a review of tax forecasts should go hand in hand with these reviews.

Tax forecasts can be as simple as 30% of accounting profit and applying the resultant tax liability evenly over the year, however, this does not really give you a true cashflow picture as to the timing of payments as well as other factors which may be important to the business.  When reviewing your tax forecasts, a variety of matters should be reviewed which include but are not limited to:

• The timing of tax payments – calculation of instalment rates and understanding the impact of a lag in tax instalments compared to current performance. This then drives the need to examine the ability to vary and manage instalments within permitted tolerances to assist in cash management.
• Forecasting franking credits – understanding the timing of changes in tax payable and the impact that these changes will have on generating franking credits. Alternatively, has a deferral of tax or variation of instalments created a potential franking deficit position which could result in franking deficit tax arising?
• Thin capitalisation – what impact has the recent economic environment had on asset values and ongoing funding requirements? How do these impact the net asset position of the entity for thin capitalisation purposes or the economic returns from the entity?
• Tax loss usage – to the extent the entity has losses, when are these expected to be recouped and under what test? Is the business expecting to raise capital and will that result in continuity of ownership test issues?  How will changes to conducting the business as a result of the recent uncertainty impact the entities ability to satisfy the same business test?

Analysing factors like those above will assist a business manage its cashflow to ensure that when the right opportunities present themselves, it is more likely that a business is able to capitalise on them.

If you need assistance in forecasting or if you’d like an expert to review the forecasts you or your team have done, please contact your ESV Engagement Partner for assistance.