2020 YEAR-END TAX CONSIDERATIONS

There is no doubt it’s been a challenging end to the 2020 financial year and with many businesses dealing with the past, current and future effects of COVID-19, it would be easy to forget that the tax year is drawing to a close.  In this newsletter, we would like to take the opportunity to bring to your attention some specific year-end tax matters, and whilst the majority of these matters are COVID-19 related, it is always important to consider the general year tax planning opportunities and matters in the lead-up to 30 June.

The key takeaway from this newsletter is that the substantiation of tax claims will be as important as ever.  The Government has rolled out a number of generous stimulus measures, however the ATO has indicated that compliance and integrity are firmly on its radar and it is expected that the ATO will apply considerable resources to policing the integrity of these measures.  It is therefore recommended that contemporaneous records are kept supporting any tax position taken.

COVID-19 STIMULUS MEASURES

JobKeeper eligibility?  Continue to assess

Many businesses will have already assessed whether they meet the necessary decline in turnover test to access the JobKeeper payment scheme, however, it is important to note that businesses can continue to assess their eligibility for the scheme until September 2020.  This may become relevant where a continued market downturn causes business turnover to fall by the necessary percentage relative to the comparable period. 

As detailed in our recent JobKeeper newsletters, there are a number of ways in which a business may demonstrate a decline in turnover, and these may depend on the particular circumstances of a business.  We also remind you that payment and reporting requirements must be maintained to ensure continued eligibility, and it is especially important that any positions taken in regard to the scheme are well documented and evidenced.

Instant asset write-off significantly increased

Assets purchased and ready for use between 12 March 2020 – 31 December 2020

The instant asset write-off has been increased from $30,000 to $150,000 in response to COVID-19, with eligibility also expanded to businesses with an aggregated turnover of less than $500 million (up from $50 million).  The measure, which applies to both new and second-hand depreciating assets, was also recently extended such that qualifying assets that are purchased and are installed ready for use between 12 March 2020 and 31 December 2020 will now qualify for the write off.  The limit for cars remains set at $57,581. If you are aiming to obtain a tax deduction by 30 June 2020, it is important the asset is delivered and ready for use by 30 June 2020. Otherwise the deduction will be available in the next financial year.

Where the entity is registered for GST, the threshold for the immediate asset write-off is calculated on a GST exclusive basis, as the entity will claim an input tax credit to the extent it is a creditable acquisition for GST purposes.

Accelerated depreciation new assets by 30 June 2021

For taxpayers not able to access the instant asset write off by 31 December 2020, an extended timeframe has been provided in which qualifying businesses are able to accelerate their depreciation deductions on the purchase (and install) of new (but not second-hand) depreciating assets up to 30 June 2021.  The measure allows for an immediate 50% upfront deduction with the remaining 50% being depreciated at existing rates.  Unlike the instant asset write-off, there is no cap on the expenditure eligible for this measure. 

How to treat your stimulus payments
  • JobKeeper payments are treated as assessable income for tax purposes with a deduction available for salary and wages payments, subject to the general requirements for deductibility.
  • Wages that are subsidised by the Federal government’s JobKeeper payment are exempt from payroll tax.
  • Whilst employers may be entitled to a deduction for the PAYG withholding paid, the cashflow boosts are specifically exempt from income tax and GST. 
  • Amounts received under the Government’s early release of super will not be subject to tax.
  • The receipt of Government grants, for example the WA payroll grant (i.e. the once-off COVID grant of $17,500 given to those WA employers, whose annual Australian taxable wages are between 1-4 million) will likely be assessable.   These payments should be taken into consideration when planning your tax instalments for the rest of the year (see below) and your overall FY20 tax liability position.
WA home buyers to receive significant assistance

The introduction of federal and state housing incentives means that some West Australian first homebuyers will receive close to $70,000 in grants.

As part of the Federal Government’s HomeBuilder scheme, a grant of $25,000 will be provided to eligible applicants to build a new home or substantially renovate an existing home.

Under the WA State Government’s Building Bonus package, a further grant of $20,000 is available for eligible applicants who either:

  • enter into a contract to build a new home on vacant land; or
  • enter into an off-the-plan contract to purchase a new home as part of a single-tier strata scheme.

For both WA grants, the contract must be entered into between 4 June 2020 and 31 December 2020 and construction must commence within six months of entering into the contract.

In addition, there is no means testing for the WA grant (meaning no taxable income limits) and no limits regarding the construction value.

An extension to the existing WA off-the-plan duty rebate scheme has also been announced. The scheme now extends to contracts entered into between 4 June 2020 and 31 December 2020 for the purchase of a new unit or apartment, in a multi-tiered development, that is already under construction.

Multiple grants can be paid to the same applicant on separate transactions that meet the criteria for each grant.

We encourage you to look out for out next newsletter which will cover the housing incentives in greater detail.

COVID-19 IMPACTS ON YEAR-END TAX ISSUES

Bad debts

Given the economic impact of COVID-19, the level of bad debt is expected to increase in coming months.  Before writing a debt off as bad in the accounts, care should be taken that all necessary steps required to write off a debt are completed prior to year-end.  When considering writing-off debts, it is important to evidence actions taken to recover the debt and written evidence that the debt was written off must be prepared prior to year-end.  It is also noted that to claim a deduction for a bad debt, businesses must be able to demonstrate satisfaction of the continuity of ownership or business continuity test.

Debt forgiveness

The COVID-19 environment may lead to more debts being forgiven or treated as forgiven in the coming months.   Furthermore, there are a number of circumstances in which a debt may be treated as forgiven for tax purposes, including loan restructuring, debt assignment and debt to equity swaps.  Where a forgiveness of debt is being considered, the impact of the commercial debt forgiveness rules (which can reduce a debtor’s tax losses as well as other tax attributes) and Division 7A (which can deem a dividend to have been paid) must be considered and any proposed transactions need to be carefully planned and implemented.

Accrued expenses

Over the past and coming months, many businesses have or will enter into arrangements in which the payment of business expenses is deferred.  Careful consideration of such expenditure is required to ensure that those deferred expenses that have been incurred, are claimed in the FY20.

Non-payment of tax obligations – Directors personally liable

The financial effect of COVID-19 on cash flow coupled with relief measures provided by the ATO (including extension of time to pay) have increased the risk that Directors may fall foul of the Director Penalty Regime and may be personally liable for the unpaid PAYG, GST and superannuation obligations of their businesses.  Directors should be aware of the following key considerations:

  • Understand the company’s financial capacity  to pay ATO debts.
  • Ensure lodgement compliance of all BAS, IAS and SGC documents is undertaken by the due dates.
  • Be aware of the administrative relief that the ATO is currently providing around payment deferrals and extensions utilising these avenues, where needed. 
WFH -a new method for calculating home office expenses

The ATO has provided a new method to calculate home office expenses in response to the change in national work patterns.  The new method will cover the period starting 1 March 2020 until 30 June 2020 and allows taxpayers to claim a rate of 80 cents per hour for all their running expenses, rather than needing to calculate costs for specific running expenses. The requirement to have a dedicated work-from-home area will also be removed, with multiple people in each household allowed to claim the new rate.  Consideration should however be given to the other methods of calculating home office expenses as these may result in a better outcome. 

With COVID-19 forcing many people to work from home, the area of work-related deductions is likely to continue as an area of increased ATO scrutiny and as such we note that when using the actual method, evidence should be collated and maintained to support any claim.

Rental expenses and losses

As with office expenses, property deductions are also expected to attract increased ATO focus, particularly in the COVID-19 environment, with the ATO likely to scrutinise rental expenses and losses claims.  Careful consideration will be required around the circumstances of each rental property and the impact that any rent holidays or reductions have on the landlord’s ability to claim deductions during this period.  Other areas to be considered may include:

  • The treatment of interest expenses on rental property loans, where banks have provided loan repayment deferrals.
  • The treatment of back payment of rent or insurance received for lost rent.

As with all of the matters discussed in this newsletter, substantiating any claims will be a key focus and it is expected that the ATO will be looking for evidence that landlords were genuinely required to reduce, defer or waiver rent.

For those commercial landlords that have been required to offer lease incentives and / or rent reductions or waivers to attract and maintain tenants, careful consideration of the GST and income tax consequences  of such incentives and rent reductions should be considered as part of the negotiation process.

YEAR END PLANNING

Tax instalments

As a result of COVID-19, the ATO is allowing taxpayers to vary the remainder of their FY20 tax instalments to nil, as well as request refunds of FY20 instalments already paid.

While the ATO has committed to not penalising taxpayers who have varied their instalments, cash-flow management will be important to ensure you are able to pay your full FY20 tax liability in due course.

Superannuation amnesty coming to an end

The last day by which a business can apply the Superannuation Guarantee (SG) amnesty and pay the amounts required under the amnesty is 7 September 2020.  Given that no extensions have been flagged, it is recommended that employers consider their historical superannuation guarantee positions to identify any potential exposure.

We note that under this amnesty, employers have a once-off opportunity to disclose, lodge and pay historically unpaid SG amounts for their employees for the period starting 1 July 1992 until 31 March 2018.  Importantly, employers can claim deductions and will not incur administration charges or penalties during this amnesty. 

It is noted that in order to be eligible to claim a deduction for any SG payments made under the SG amnesty, the payments must be made before 7 September 2020, as payments made after this date will not be deductible.

Those companies that are experiencing cash flow difficulties as a result of COVID-19 are encouraged to engage early with the ATO to establish a payment plan.  Where payment obligations cannot be met, the ATO is required by law to disqualify the effects of amnesty, however the application of penalties may be negotiated if the circumstances warrant it.

Company tax rates to decrease

From 1 July 2020, those companies with an aggregated turnover below $50 million and whose income is comprised of less than 80% passive income will be subject a tax rate of 26%.  All other companies are subject to the 30% rate. 

Companies wishing to declare and frank dividends should do so prior to 30 June 2020 in order to utilise the higher franking rate of 27.5%.

Division 7A loan agreements and minimum repayments

Where individuals and/or trusts have borrowed money from a private company in the year ended 30 June 2019, the loans must be fully repaid or be documented in a Division 7A-complying loan agreement before the (deferred) due date of the company’s 2019 income tax return. 

Many companies have had the due date of their 2019 income tax returns deferred as a result of COVID-19, thereby potentially providing more time to repay such loans or enter into a Division 7A-complying loan agreement.

For complying loans put in place before the deferred lodgement date, the borrower will likely need to make their first minimum yearly repayment by 30 June 2020.

Unpaid entitlements created in the 2018–19 income year will also need to be placed on sub-trust arrangements by 5 June 2020, or any later lodgement date allowed by the Commissioner.

In relation to Division 7A loans from FY18 and prior years where a minimum payment is required in FY20, it must be made (via cash or dividend) before 30 June 2020.

For those unpaid present entitlements loan arrangements maturing in 2020, for which the principal sum has not been repaid, the Commissioner will accept that the existing arrangement can be converted to a complying 7-year loan if it is done so prior to the company’s lodgement day. This will provide a further period for the amount to be repaid with periodic payments of both principal and interest.  Where such a loan is not put in place, a  deemed dividend will arise at the end of the income year in which the loan matures.

Proposed Division 7A amendments – Still awaiting further guidance

Despite announcing last year that the start date for amendments to Division 7A would be  1 July 2020, the government is yet to provide any further details or guidance.  Given this, uncertainty continues to exist as to if and when changes to Division 7A will be made.

Year-end administration

Company minutes will need to be signed by the chair where that person is physically located. An electronic signature on the minute is acceptable.  Circulating resolutions may be appropriate where all directors cannot meet electronically.  Keep in mind they are effective once the last director has signed.

Trust distribution minutes should be prepared and signed before 30 June.  Distribution planning may be required if you are planning on distributing capital gains and/or franked dividends to different beneficiaries than those who receive distributions of other income.

If you would like to discuss any matters in this newsletter in further detail, please do not hesitate to contact your Cooper Partners Engagement Team.

This newsletter is current as of 23 June 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

Superannuation – Pre 30 June Considerations

15 June 2020

As 30 June 2020 approaches rapidly, it is important to ensure that your superannuation arrangements are addressed, including consideration of any new superannuation rules, particularly in light of the Government’s COVID-19 economic response.

In summary, considerations include:

  1. Maximising tax-deductible superannuation contributions, including ensuring there is sufficient time for any contributions to clear in the Fund’s bank account prior to 30 June;
  2. Maximising superannuation balances by making after tax contributions, including consideration of whether a withdrawal and recontribution strategy is appropriate given asset valuations;
  3. Ensuring minimum pension payments have been made out of the Fund prior to 30 June to maintain the tax exemption on pension assets;
  4. Where eligible for the COVID-19 early access concession, consider the appropriateness of making a claim;
  5. Consider whether any COVID-19 super compliance issues apply to your fund.  

To read more, please click on the links below:

  1. Contributions before 30 June
  2. Minimum Pension Payments
  3. COVID-19 Early Release of Superannuation
  4. Asset Valuations
  5. COVID-19 Rent Relief and Superannuation
  6. COVID-19 and other superannuation compliance considerations.

1. Contributions before 30 June

Concessional Contributions

Concessional contributions include employer contributions, salary sacrifice contributions, and personal deductible contributions:

  • The current limit for concessional contributions for the 2019/2020 financial year is $25,000. This limit remains unchanged for the 2020/2021 financial year;
  • Where the member is aged 64 or younger, an individual can make concessional contributions without satisfying the work test (40 hours gainful employment in 30 consecutive days). Restrictions apply to those aged 65 and above;
  • From 1 July 2020, an individual will be able to make concessional contributions while they are aged 65 and 66 without the requirement to satisfy the work test.
Carry Forward Unused Concessional Cap

Since the 2018/2019 financial year, an individual can carry forward any unused concessional cap from the previous financial year, for a maximum of five years.  

The individual can contribute these unused amounts to superannuation, provided they have a total superannuation balance (TSB) of less than $500,000 at the commencement of the financial year in which the contribution in made.

For example: John (42) had $440,000 in superannuation at 30 June 2019.  He is self-employed, and made no contributions to superannuation in 2018/2019, and hasn’t contributed anything in 2019/2020.  As part of his tax planning, John’s expected profit in his business will be substantial, and he wants to manage his tax position, as well as build up assets for his retirement.  As John didn’t make any contribution in 2018/2019 and 2019/2020 he is able to contribute $50,000 in the lead up to 30 June under the carry-forward concession. 

Non-Concessional Contributions

Non-concessional contributions include any after-tax voluntary contributions made by individuals:

  • The current limit for the non-concessional contributions for the 2019/2020 financial year is $100,000. This remains unchanged for the 2020/2021 financial year.
  • Where an individual’s total superannuation balance (TSB) is above $1.6 million on 30 June of the previous financial year, they are not eligible to make further non-concessional contributions to superannuation in the current financial year without having excess contributions.
  • Where an individual is aged 64 or younger, they can make non-concessional contributions without satisfying the work test, subject to their TSB. They are also able to bring forward up to two future years’ worth of contributions. This “bring-forward” provision allows an individual to make a one-off non-concessional contribution of up to $300,000 in a financial year.  This is subject to a phased in approach, depending on their TSB, as follows:
New PROPOSED Non-Concessional Contributions Rules – FROM 1 July 2020

If passed, proposed legislation will allow an individual aged 65 and 66 to make non-concessional contributions to superannuation and access the bring forward provisions to make non-concessional contributions of up to $300,000 in a financial year (subject to TSB).  Changes to the work test have already been implemented to facilitate this. 

Where you would like to consider making additional non-concessional contributions in the years leading up to age 65 to 67, please contact us so we can advise you on the most appropriate strategy to maximise your superannuation.  This is particularly the case where asset valuations may have come off due to COVID-19, and there is an opportunity for you to undertake a withdrawal and recontribution strategy to optimise the taxation components within your account for the benefit of your children in the longer-term.

Pre 30 June 2020 considerations:

In order to maximise your contributions to superannuation prior to 30 June 2020, consider the following:

  • Are you able to make concessional contributions up to your cap? This might include the ability to salary sacrifice an amount from your employer, or perhaps make a personal contribution and claim a deduction in your personal tax return (please note, eligibility criteria apply to personal deductible contributions);
  • Do you have the capacity and available funds to make non-concessional contributions into superannuation?
  • Where you intend to make contributions electronically, ensure that you have left sufficient time for the contribution to be cleared into the fund’s bank account. It is the time that the superannuation fund receives the contribution that is the relevant date for the fund, not the time that it leaves your bank account.

2. Ensuring Minimum Pension Payments are Made

Under the government stimulus package in connection to the COVID-19 situation, the default minimum rates for pension payments have been halved for the financial years commencing 1 July 2019 and 1 July 2020. As a result, the minimum pension withdrawal required for the relevant years are decreased. The new rates are as follows;

To satisfy the 2019/2020 annual pension requirements, all pension payments must be withdrawn from the superannuation fund and transferred to your personal bank account by 30 June 2020.

Failing to the meet the minimum pension requirements could lead to the fund losing the tax exemption with respect to the income and realised capital gains generated by the assets supporting the pension, and as a result all of the fund’s income will be subject to tax.

Pre 30 June 2020 considerations:
  • Ensure you have paid the minimum pension amount prior to 30 June 2020.  In this regard, where you intend to pay electronically, ensure that you leave plenty of time to provide instructions to your bank or investment adviser if required, to realise assets in order to pay out the pension in cash;
  • Individuals that have already paid more than the adjusted minimum pension amount (due to halving of the minimum pension rates) may consider stopping making further pension payments for the remaining period until 30 June 2020. This is to ensure that the superannuation fund is maximising its pension tax exemptions;  
  • Individuals that have Transition to Retirement Pensions in place are subject to a 10% maximum drawdown of the pension balance at 30 June 2019 or the date the pension commenced.

3. COVID-19 Early Access to Super

Under the government stimulus package in connection to the COVID-19 situation, eligible individuals may have early access to some of their superannuation benefits. The amount withdrawn is 100% tax-free with no withholding obligations.

Eligible individuals may have access to a maximum of:

  • $10,000 of their super for the remaining period until 30 June 2020;
  • A second $10,000 of their super for the period 1 July 2020 to 24 September 2020.

For individuals who are citizens or permanent residents of Australia or New Zealand, they must satisfy one of the following eligibility requirements:

  • Unemployed;
  • Eligible for either jobseeker payment, youth allowance for jobseekers, parenting payment, special benefit or farm household allowance; or
  • On or after 1 January 2020, either:
    • Individual is made redundant;
    • Individual’s working hours was reduced by 20% or more;
    • Individual is a sole trader and the business was suspended or there was a reduction in turnover of 20% or more.

https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/COVID-19-early-release-of-super/

Pre 30 June 2020 considerations:
  • If you are eligible and planning to apply for the early release of your superannuation benefits for the 2019/2020 financial year (that is, for the remaining period until 30 June 2020), the application must be made by 30 June 2020. Applications for the 2020/2021 financial year must be made by 24 September 2020.

4. Asset Valuations – Property and Unlisted Assets

Where a superannuation fund has unlisted assets (such as direct property, unlisted shares, and units in unlisted trusts), the Trustee is required to value the fund’s investments at market value as at 30 June each year.

The economic implications of COVID-19, have been significant for 2019/2020. The Trustee should review the specific impact on the fund when considering year end valuations of investments.

30 June 2020 considerations:
  • Consideration should be given to whether a market appraisal/valuation is required to be obtained for the assets and whether the services of an independent valuer is required. In particular, where the superannuation fund holds property which has been subject to a decrease in rental income, resulting from COVID-19;
  • Ensure the required lease payments are made prior to 30 June and that lease payments are based on a market rate. Where the market rate has changed, this may need to be reflected from 1 July 2019 and in accordance with the lease agreement.
  • Review any rent relief as a result of the COVID-19 situation (refer below);
  • As a result of the current economic situation due to COVID-19, Trustees should review the investment strategy of the superannuation fund to ensure it remains current and that investment allocations are updated as required.

5. COVID-19 Rent Relief

As part of the Government’s COVID-19 support packages, landlords are required to provide temporary rent relief to their tenants in the form a rent reduction, waiver or deferral where the tenant has suffered financial hardship due to COVID-19. This applies to superannuation funds that are landlords.

Generally, superannuation funds that provide rent relief to their tenants (particularly related party tenants) would normally give rise to ATO compliance issues (such as non-arm’s length, in-house asset, financial assistance). However, the ATO’s approach for the COVID-19 rent relief is that the ATO will not take any compliance action against the superannuation funds for the 2019/2020 and 2020/2021 financial years.

30 June 2020 considerations:
  • Where rent relief is provided to the tenant, particularly related-party tenants, negotiations between the superannuation fund and the tenant are required to be properly documented. Such documentation would likely include:
  • Letter from the tenant to the Trustee of the superannuation fund requesting for the rent relief;
  • Evidence by the tenant to support the need of rent relief;
  • Where the tenant is a related party, ensure the rent relief provided is consistent with that being provided by landlords/tenants in a similar situation;
  • Trustee resolution; and
  • Acceptance letter from the Trustee of the superannuation fund to the tenant.

6. COVID-19 Superannuation Compliance 

Limited Recourse Borrowing Arrangements

Where a superannuation fund has a limited recourse borrowing arrangement (LRBA) in place, the Trustee should ensure any obligations under the loan terms are complied.

Where, as a result of COVID-19, a superannuation fund is unable to meet all or part of the loan repayments required under the LRBA, the superannuation fund may be able to reduce or defer their loan repayments.

Where the lender is a bank or third-party lender, all such negotiations and outcomes should be documented.

Where the lender is a related party, please contact us where this is an issue for the superannuation fund to ensure such relief is provided in accordance with the ATO’s guidelines and appropriately documented.

In-house Assets

Where a superannuation fund has an investment or loan with a related party that is captured under the in-house asset (IHA) rules, the Trustee needs to ensure the arrangement complies with the relevant provisions.

The COVID-19 situation may cause the value of the assets of the superannuation fund to decrease substantially at 30 June and leading to a possible breach of the IHA allowable limit of 5%.

30 June 2020 considerations:
  • Where an SMSF has IHA that exceeded the allowable limit of 5% at 30 June 2019, the excess over 5% may be required to be disposed of prior to 30 June 2020;
  • Where an SMSF has IHA that exceeded the allowable limit of 5% from 1 July 2019, consideration should be given to reduce the IHA to less than 5% prior to 30 June 2020;
  • Where an SMSF has IHA that exceeded the allowable limit of 5% at 30 June 2020, the SMSF has 12 months to put in place and execute a written plan to dispose of the IHA to ensure that the IHA is within the allowable limit of 5%.
  • In the case of COVID-19, the ATO has indicated that they will not take any compliance action where the rectification plan was unable to be executed because the market had not yet recovered, or that it was unnecessary to implement the plan as the market had recovered. The reasons as to why the rectification plan was not undertaken must be documented.

The Next Steps

If you would like further details or assistance with respect to any of the above strategies, superannuation in general, or wish to have your position reviewed, please contact Jemma Sanderson or your engagement team on 08 6311 6900.

JOBKEEPER UPDATES AND ATO PUBLICATIONS

8 May  2020

The latest figures from Treasury show that  approximately 730,000 businesses have now enrolled for the JobKeeper scheme extending to approximately  4.7 million employees.

Professional, scientific and technical services are currently the largest industry group to register for JobKeeper, accounting for 14.7 per cent of total enrolments.  The construction industry group was next up, making up 14 per cent of all enrolments.

Only 51,000 employers enrolled come from the accommodation and food sectors, arguably one of the most impacted industries from the Coronavirus. We suspect this is an outcome of many of these business operators unable to find surplus funds to make the initial $1,500 fortnightly payments to employees before they are reimbursed by the JobKeeper payments.

This newsletter acts as a timely reminder to those employers who are claiming for the first two JobKeeper fortnights to ensure you not only have paid your employees the first two minimum $1,500 payment per fortnight since 30 March 2020 by today, 8 May 2020 but also have provided an employee nomination notice to each employee if you enrolled prior to 2 May 2020, in line with the latest legislative amendments which clarify the “one in, all in” feature. Failure to provide the notice to employees within 7 days of enrolling leaves employers liable for a penalty of $4,200 per instance.

Furthermore, where eligibility has been a key concern for many businesses, we cover in this newsletter the recent amended rules and ATO rulings that may help businesses better understand their eligibility position. 

AMENDED RULES FOR SPECIAL PURPOSE EMPLOYER ENTITIES 

THE ELIGIBILITY PROBLEM

Within certain business structures, it can be common to have a special purpose entity that provides the services of its employees to other members of the group.  One of the key requirements of the JobKeeper scheme is that the employer entity must be able to demonstrate a significant decline in its turnover.  In structures such as these however the employer entity does not typically have significant dealings outside the group and as such their turnover is unlikely to reflect the overall performance of the group.  As a result, even where there has been a significant decline in the turnover of the entities in the group, the JobKeeper payment may not be available to the employer entity in this scenario.

To address this issue, the Government has now released its latest legislative instrument providing a modified turnover test for these types of special purpose service entities.

Who will the modified test apply to?

The modified test will apply in the following circumstances:

  • The employer entity must be a member of a consolidated group, consolidatable group (corporate groups that are eligible to consolidate but have not done so) or a GST group. 
  • The operating entities of the group carry on the business of deriving revenue from unrelated third parties.
  • The employer entity cannot be an operating entity of the group.
  • The employer entity must only provide the services of its employees to other members of the group. Incidental services to third parties or members outside the group are allowable.
  • The provision of employee labour services (i.e. the performance of work by individuals the employer entity employs) must be the employer entity’s principal activity.
  • The Commissioner has not determined that the modified decline in turnover test does not apply to the employer entity.

Common ownership paramount

In order to apply the modified test, the employer entity must be part of either a wholly owned group (i.e. 100%) or there must be 90% or more common ownership amongst the group members.

Can you form a GST group now?  Caution advised!

The modified test does not contain provisions regarding the timing of when an election to form a GST group is made, however it is expected that the legislation is intended to apply to those GST groups currently in existence. 

Groups that are considering making an election to form a GST group now with the intent of accessing the JobKeeper, are strongly advised to consider the application of anti-avoidance provision (Section 19) of the Coronavirus Economic Response Package (Payments and Benefits) Act 2020.  Where an election is made now, entities should ensure that their reasoning for choosing this option is sound and not for the purposes of accessing the JobKeeper payment only.  Evidence supporting this reasoning should be maintained.

Where does this leave service trusts?

Limiting the measure to grouped entities for the purposes of consolidation and GST, means that many common service trust arrangements, which are typically not structured through wholly owned corporate structures, but rather as unit trusts, often with multiple unitholders, will not have access to these measures.

Given this, we anticipate that many professionals using service trusts arrangements will not be able to use the modified basic test and where they cannot meet the basic test or any of the alternative tests these entities may still not qualify for the JobKeeper payments.

Reduction to management fees by service entities

When considering whether the basic test or the alternative tests apply (i.e. where the modified test will not apply), service entities should be mindful about the reduction of service fees charged to other related parties and the impact this has on their turnover.  This matter has been specifically identified by the ATO as a risk area (see below for further discussion on the ATO’s PCG regarding schemes to access the JobKeeper payments).  

It is noted that the ATO will generally regard a situation where a service entity satisfies the decline in turnover test itself, as a result of reducing its service or management fees as low risk, where the reduction in fees is in response to a relative decline in turnover of the related parties to whom it provides services. This is regardless of whether the service fee reduction is a consequence of a reduction in employee working hours or not. However the key point is that any such reduction in management fees must be solely a result of a reduction in turnover or operations due to external factors that is beyond the group’s control.  If this is the case, there is a low risk of compliance resources being applied.

Modification of the basic test

The basic test is modified by using the combined GST turnovers for each group member using the services of the employer entity.

This ensures that the decline in turnover test is applied to those group members that predominantly carry on business with third parties rather than measuring the decline in intragroup transactions.

The modification to the basic test also allows for circumstances in which the alternative decline in turnover tests may be applied to other members of the group because there is not an appropriate 2019 comparison period.

Commissioner can prevent access to the test

To maintain the integrity of the system and prevent misuse of the modified test, the Commissioner will have the power to prevent access to this test where the Commissioner has material compliance or integrity concerns with an entity’s use of the test.

Principal vs incidental activities

Whilst the supply of employee labour services to the group must be the employer entity’s main or predominant activity, the employer entity may provide other services to the group or to third parties as long as these activities are considered to be incidental.

These terms are not specifically defined in the legislation and it is expected further guidance from the ATO will be required.

It is expected that those service entities that carry out a variety of activities will have greater risk exposure that the Commissioner may disallow access to the modified test.

Employer entities that carry out additional activities (i.e. leasing) should consider this issue carefully when determining if the modified test applies, as well as ensuring that contemporaneous documentation supporting their principal purpose (i.e. service agreements) is gathered and maintained.

ATO RESPONSE

In addition to the release of legislative amendment to the JobKeeper rules, the ATO have also published two major pieces of guidance regarding the administration of the JobKeeper Scheme, being LCR 2020/1 and PCG 2020/4.  The publications are intended to supplement guidance already provided by the ATO on its JobKeeper website.

The guidance has no doubt been released in response to the practical difficulties that have arisen in applying the JobKeeper rules.  The following is a summary of the key points from these ATO publications.

JobKeeper GST Turnover Test

Law Companion Ruling (LCR 2020/1): ‘JobKeeper payment-decline in turnover test’ provides the Commissioner’s view of how the JobKeeper decline in turnover test is applied, as well as providing some practical guidance and alternative options on how to measure GST turnover for the decline in turnover test.

The ruling seeks to provide clarity on three key areas of the decline in turnover basic test, being:

  1. what supplies are relevant when calculating projected GST turnover and current GST turnover;
  2. how supplies are allocated to relevant periods; and
  3. how to determine the value of each supply that has been allocated to a relevant period.

Whilst the LCR does not provide specific guidance on the alternative tests, it is expected that entities can apply the principles considered in the ruling to these tests.

Compliance approach available

In recognition of the difficulty that some entities may have in linking amounts received or invoiced based strictly on the time a supply is made or likely to be made, the ruling sets out the alternative methods that can be used as a proxy for determining the value of supplies were made or likely to be made in a relevant period, particularly as assessing turnover based on the timing of when a supply is made, is not a usual consideration for working out say GST liabilities which are based on either invoicing or cash receipts, or reporting for accounting and tax purposes.  It is also further complicated when a supply may be made over a period of time, such as when services are performed, or in itself could consist of more than one supply. This may therefore impose a significant compliance burden on businesses.

As such, the Commissioner will also accept turnover as assessed under the following alternative methodologies:

  • accrual method of accounting;
  • GST attribution basis; or
  • Income tax accounting (if not registered for GST).

Predicting turnover

Where projected GST turnover is based on the supplies that an entity is likely to make in a turnover test period, the Commissioner requires that reasonable determinations are made and are based on contemporaneous and bona fide business plans, budget or forecasts and / or projected facts and circumstances. This evidence must be in existence at the time you calculate your projected turnover.

Tolerance but ensure contemporaneous evidence is kept

Whilst significant variations in projected turnover and what actually eventuates will most likely be investigated by the ATO, getting predicted turnover wrong won’t necessarily mean that access to the JobKeeper scheme will be lost as long as an entity can evidence that its projected turnover was reasonable at that point in time.  Maintaining records to support your projections will be critical in this regard, including explaining how you undertook the projection calculations.

Evidence to support projections that supplies have or will decline due to COVID-19 could include:

  • Application of government COVID-19 restrictions such as being required to close or pause business.
  • Delays in receiving trading stock.
  • Consequential impacts on the value of products you supply.
  • Cancellation or significant variation to existing contracts for supplies.
  • Heavy reliance on industry significantly impacted by the COVID restrictions and closures.

Margin schemes -disparity between GST reporting and turnover testing

As anticipated, it has been clarified that suppliers of property using the margin scheme approach will need to include the full value of the property not just the margin when calculating turnover for the purposes of the JobKeeper tests.

Work in Progress

Where a supply is made but not yet billed, an assessment of the value can be made based on an objective assessment of normal business practice and experience, for example, assessing the usual recoverability of WIP. However, once the value has been determined, any other events which may happen after the relevant period and change value cannot be considered.

Timing of adjustments – Discounts, refunds, and bad debts

The ATO has acknowledged that the original value of a supply can fluctuate due to later events.  For example, where refunds are given, discounts are provided, debts are settled, or deposits are forfeited.  Given the practical difficulties in valuing these fluctuations, the ATO has provided the following guidance:

  • Adjustment events that change the value of supplies and occur in the relevant period are included in turnover only if they relate to the value of supplies you have already allocated to that period.
  • Those adjustment events that relate to supplies made in another period are not relevant and should be excluded from your turnover calculation.
  • Writing off debt as bad will not affect its value for testing purposes.

Cash or accruals?  Consistency is a must

The JobKeeper rules allow flexibility in the way in which entities can calculate their turnover, however the ATO have made it clear that it is their expectation that an entity will use the GST accounting method that is normally used by them.

An entity may choose to apply an alternative method of calculating its turnover from the manner in which it reports in its BAS, and this will be acceptable where it is consistently applied for across the relevant testing period.  These entities should ensure that their rationale for adopting a different approach is evidenced and well supported, in light of the integrity provisions that will apply.

The LCR clearly states that large taxpayers seeking to utilise a cash approach are forewarned that the ATO will take particular interest in their reasoning for such a choice.  Similarly, taxpayers that choose to apply the attribution method as an alternative approach whilst delaying the issue of invoices or allowing delays in payment will come under particular scrutiny from the ATO.

Whatever method is used for calculating turnover must continue to be applied for all subsequent JobKeeper reporting to the ATO.

INTEGRITY PROVISIONS

Under the original legislation giving effect to the JobKeeper Scheme, the Commissioner was given powers to determine that an entity was never entitled to a payment and to recover the amount if the Commissioner is satisfied that the entity had carried out a contrived scheme for the sole and dominant purpose of obtaining the payment.

With regard to this specific integrity provision, the ATO has now released its Practical Compliance Guideline (PGC 2020/4), which sets out the ATO’s compliance focus regarding schemes devised to access or increase JobKeeper payments.

Of particular concern to the Commissioner will be those entities that access the JobKeeper scheme but have NOT been significantly affected by external environmental factors beyond its control.  Whilst the PCG does not specifically state that COVID-19 needs to be the cause of a business’s decline in turnover, and this consistent with statements made on the ATO website, entities should be aware that the intent of the JobKeeper scheme, as stated in the original legislation is to provide financial support to those entities directly or indirectly affected by the Coronavirus and as such, caution should be exercised by those entities wishing to access the scheme legitimately but where reductions in turnover are not as a result of COVID-19.

The PCG sets out a number of examples of scenarios that will attract the ATO’s attention, including those arrangements that technically satisfy the eligibility requirements, but have been implemented for the sole or dominant purpose of accessing a JobKeeper payment.  The examples include where a company chooses to defer the making of supplies or where a parent entity within a group manipulates the timing or reduces management fees. The examples typically also refer to reductions in turnover that has been affected by COVID-19, albeit that this is not a legislative requirement as such.

Whilst the ATO’s examples are categorised as high and low risk scenarios, entities should not rely on these examples as a safe harbour and should be satisfied that their processes and reasoning for accessing the JobKeeper payments are sound and justifiable.  Entities should also ensure that they have considered their position and how the rules apply to their circumstances as well as considering any potential risk that the ATO may take the alternate position that their eligibility to the scheme does not exist.

JOBKEEPER DISPUTES AND EMPLOYMENT LAW

The JobKeeper scheme and COVID-19 in general has thrown up a number of employment related issues and many employers are experiencing difficulties in understanding their rights and the rights of their employees.  We encourage those entities that are experiencing uncertainty  about workplace entitlements and obligations in relation to the JobKeeper Payment scheme seek employment law advice.

Alternatively, it is noted that the Fair Work Commission has released guidance on how it can assist affected parties dealing with disputes regarding the application of the JobKeeper Scheme.

WHERE WE CAN ASSIST YOU

  • We can assist in determining which alternative test best applies to your circumstance.
     
  • We can assist with assessing eligibility for the JobKeeper Payment, including cashflow forecasting and preparation of the entire program application.
     
  • We can conduct independent reviews on the first round of reporting and claims to ensure accurate and within the Rules of eligibility.

This newsletter is current as of 8 May 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve. 

Please contact us to discuss. Cooper Partners is committed to providing general advice to our clients at no charge as part of our commitment to assist you through this period.

AN UPDATE – JOBKEEPER PAYMENT SCHEME – Extension of Time to Enrol

28 April 2020

AMENDMENTS TO THE JOBKEEPER SCHEME

It was another busy week of updates to the JobKeeper Scheme with Treasury announcing on Friday a number of changes and the ATO updating its time frame around enrolment and payment for the first JobKeeper payments over the weekend. For everything you need to know about these changes please see below.

EXTENSION OF TIME

The Commissioner has now announced an extension of time for those employers wanting to participate in the first two fortnights of the JobKeeper Scheme.  These fortnights ran from 30 March to 12 April, and 13 April to 26 April, and enrolment and payment were previously required by April 30 in order to receive payments for these fortnights.

The ATO has now provided both an extension of time to enrol and pay, with employers now having until 31 May to enrol however it is critical that employee payments for the first two fortnights are made by 8 May.  Employers have the option of making two fortnightly payments of at least $1,500 per fortnight, or a combined payment of at least $3,000 by this date to be eligible.

The extension of time will not affect those entities that have already enrolled and have paid their eligible employees at least $1,500 per fortnight, with the ATO reimbursing these entities from next week. This extension of time recognises that the ATO are still issuing guidance as to the application of the Rules which impacts employers’ own assessments of their eligibility.

POLICY CHANGES TO THE JOBKEEPER PAYMENT 

The Government has announced further changes to the operation of the JobKeeper rules.  Here’s what we know so far:

Special purpose employment entities

In response to extensive industry lobbying, an additional alternative decline in turnover test will be provided where an employment entity or special purpose service entity is utilised within a group of companies to employ staff, and that employment entity is unable to demonstrate a decline in its own turnover.

The alternative test will be by reference to the combined GST turnovers of the related entities using the services of the employer entity. The related entities must carry on a business deriving revenue from unrelated parties.

This is a very welcome change and it is pleasing to see that Government has responded to industry concerns around what is a common business structure, which otherwise risked being excluded from eligibility to the scheme.

‘One in, all in’ principle to be strengthened

The existing JobKeeper Rules provide that all eligible employees that agree to be nominated by a participating employer must participate in the scheme.  This includes all eligible employees who are undertaking work for the employer or have been stood down.

It is understood that the rules will be amended to strengthen the ‘one in, all in’ principle that an employer cannot choose which eligible employees will participate in the scheme. This likely follows various concerns from unions about the perception that some employers might pick and choose amongst eligible employees, or otherwise use the scheme to pressure employees to change their employment conditions.

Prospective ineligibility for full time students aged 16 and 17 years old

Under the current rules, 16 and 17-year-old students that work as casual employees are eligible for the payment.  The rules will be amended so that full time students who are 17 years old and younger, and who are not financially independent, will not be eligible for JobKeeper payments. 

This clarification will apply prospectively, so that eligible employers that have already met the wage condition of paying such an employee $1,500 for a fortnight could still be entitled to a JobKeeper for that fortnight.

Employers will need to consider how they can satisfy themselves that any 16 and 17 year old employees, being a typical profile for casual employees, are financially dependent or not.

Other policy changes

Charities: Those ACNC registered employing charities in receipt of funding from the government can elect to exclude this funding when applying the 15 per cent turnover test.

International Aid Organisations:  Changes will allow entities that are endorsed under the Overseas Aid Gift Deductibility Scheme or for developed country relief to meet the requirement that not-for-profits pursue their objectives principally in Australia.  As was the case previously, employees must be Australian residents to be eligible under the JobKeeper program.

Universities:  Changes will clarify that the core Commonwealth Government financial assistance provided to universities will be included in the JobKeeper turnover tests. 

Religious practitioners: Changes will allow JobKeeper Payments to be made to religious institutions in respect of religious practitioners (with the exception of those that are students only), recognising that many religious practitioners are not ‘employees’ of their religious institutions.

EXPLORATION COMPANIES still left out

Despite industry lobbying, junior mining and exploration companies and those entities with no form of revenue have not been offered an alternative means of testing a decline in turnover and as such cannot satisfy the turnover test needed to access support under the JobKeeper Scheme. There maybe circumstances where such entities could be eligible but they are likely to be limited given that such companies generally have minimal GST turnover.

BRIDGING FINANCE

Following feedback from businesses that employers were experiencing delays and roadblocks with their financiers in the process of applying for finance to assist in meeting early JobKeeper payments, particularly after Treasury and the ATO had openly encouraged businesses to consider accessing the $250,000 loans being made available to SMEs in order to fund the required payments to employees,  Australia’s Big Four banks and the Government will create a hotline to assist businesses who need finance to bridge the gap until the first JobKeeper payments are made. The banks have also agreed to bring JobKeeper-related applications to the front of the queue and work with the ATO (to confirm an employer’s notification of entitlement for the JobKeeper Payment) to accelerate the finance assessment process.

WHERE WE CAN ASSIST YOU

  • We can assist in determining which alternative test best applies to your circumstance.
     
  • We can assist with assessing eligibility for the JobKeeper Payment, including cashflow forecasting and preparation of the entire program application.
     
  • We can conduct independent reviews on the first round of reporting and claims to ensure accurate and within the Rules of eligibility.

This newsletter is current as of 28 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Please contact us to discuss.

Cooper Partners is committed to providing general advice to our clients at no charge as part of our commitment to assist you through this period.

WEBINAR RECORDING: Unpacking the JobKeeper Program – Alternative Decline in Turnover Tests

Cooper Partners Webinar

Our recent webinar held on Tuesday 28 April 2020 runs through the latest on the JobKeeper Program.

The Government released the eagerly anticipated JobKeeper Alternative Decline in Turnover Tests late last week.  For many employers, the JobKeeper Payment scheme is a vital subsidy and the difference of being able to retain their workforce or not. 

With the release of this new legislative instrument, entire new classes of employers can possibly now qualify for JobKeeper.

In our webinar, we provided an update on this new development with practical examples as to how these new tests will apply.

  • Who can rely on the alternative tests?
  • Are you one of the 7 classes of entities to which the test can now apply?
  • How do the alternative tests work?
  • What are the new comparable periods of testing?
  • Has your industry been heard? We will look specifically at:
    • construction businesses;
    • corporate and business restructures;
    • start-ups;
    • growing businesses;
    • farming; and
    • junior explorers.
  • If your circumstance isn’t covered, is there any ability to ask for the Commissioner’s discretion?

If you are in the Cooper Partners network and would like to watch this webinar, please click here to register.

This webinar is current as of 28 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Please contact us to discuss.

Alternative Turnover Test Rules Released

The eagerly anticipated alternative decline in turnover test rules for the JobKeeper payment scheme was registered yesterday on Thursday 23 April 2020.

As you know, in order to be eligible for the JobKeeper Payment, businesses must have suffered a substantial decline in their turnover. The JobKeeper Rules require a basic test for assessing this decline as well as provision for the Commissioner to provide an alternative test. The Rules and legislative instrument for these alternative tests were released yesterday and have effect from today.

By way of background, the basic test requires an entity to measure its projected GST turnover and compare this to its actual GST turnover in a relevant comparison period in 2019. The Alternative Test Rules provide an alternative avenue for those businesses that are not able to apply the basic test because of their circumstances, or who fail the basic test, due to certain unusual events that impact turnover.

For those entities currently unable to satisfy the decline in turnover test under the basic test, here’s what you need to know.

SPECIFIC APPLICATION

The Rules set out the specific circumstances to which the alternative tests may be applied.

Broadly, the alternative tests will exclusively apply to those businesses in which there was either no relevant comparison period or where the relevant comparison period is not appropriate in light of their business’ circumstances.

WHO WILL THE ALTERNATIVE TESTS APPLY TO?

The class of entities to which the alternative tests may apply are:

  1. Those entities that commenced business after the relevant comparison period from March 2019 onwards or whose business did not exist in the relevant comparison period. This is to cater for start-up businesses where there isn’t a 12-month comparison available.
     
  2. Those entities that carried out business acquisitions and disposals after the relevant comparison period in 2019. This is to compensate distorted turnover due to different businesses being operated between periods.
     
  3. Those entities that carried out business restructuring after the relevant comparison period in 2019.
     
  4. Those entities that experienced significant growth in the periods prior to the applicable turnover test period. This is in recognition to where of a business may have been in a growth phase in the lead up to the impact of COVID-19 disruption and as a consequence the future turnover will be heavily impacted as to where they were tracking.
     
  5. Those entities affected by drought or natural disasters.
     
  6. Those entities with irregular turnover. This typically applies to the construction industry where turnover is based on the stage of completion of the projects.
     
  7. Sole traders and partners affected by sickness or injury.

For each of the above class of entities, the Rules set out the alternative tests that an entity may apply in order to assess whether a decline in turnover has occurred.

WHAT ENTITIES CAN’T APPLY THE ALTERNATIVE TESTS?

  • Those entities in which a relevant and appropriate comparison period exists.That is to say, the alternative tests do not provide an additional option for assessing eligibility, where say a business fails to meet the requisite decline in turnover using relevant and appropriate comparison period as part of the basic test, and none of the specific business circumstances of the alternative tests apply.
     
  • Those entities that have zero turnover* (ie. junior explorers and miners).
     
  • Those entities that ordinarily make input tax supplies* (i.e. those businesses selling or renting existing residential premises).

* These entities will not be able to access the alternative tests on the basis that the circumstances in which they cannot demonstrate a decline in turnover are not outside the usual business setting for these types of businesses.

We note that certain industries affected by these exclusions continue to lobby the Commissioner and additional guidance may be released.

HOW ARE THE ALTERNATIVE TESTS APPLIED?

If a business satisfies the alternative test, there is no requirement that they make any submission to the ATO to request discretion to apply the alternative test in favour of the basic test.

The instrument does not allow any ability to apply for discretion on an individual entity basis, and the ATO website has been updated to state that the Commissioner cannot make discretionary decisions for individual entities.

It has also been made clear that an entity need only satisfy either the basic test, or any of the alternative tests, in order to demonstrate the relevant decline in turnover and be eligible to qualify for the JobKeeper payment. If an entity has satisfied the basic test, an alternative test would not make them ineligible if it could otherwise have applied to the business and they may have failed that alternative test. If more than one alternative test could apply to a business, they can choose which test to apply.

For each of the circumstances outlined in the Rules, there are accompanying alternative tests that must be applied.

The tests are effectively self-assessed using the methodology outlined under each test.

EXAMPLES
Business commenced after relevant comparison period.

ABC Pty Ltd commenced trading on 1 October 2019. As a result of the COVID-19 shut down laws, sales declined substantially from March 2020.

ABC Pty Ltd would like to assess its eligibility for JobKeeper payments in April 2020 based on a projected GST turnover for April 2020, however as ABC Pty Ltd did not begin to carry on a business until 1 October 2019, there is no corresponding period in 2019 that applies.

Application of the Alternative test

ABC Pty Ltd has the choice of applying two alternative tests:

  • The first test compares ABC Pty Ltd’s projected turnover in April 2020 with its average turnover since 1 October 2019.
  • The second test compares ABC Pty Ltd’s projected turnover in April 2020 with the average turnover of the 3 months immediately before April 2020 (i.e. January, February and March 2020).

ABC Pty Ltd is only required to satisfy one of the above tests.

Business acquisition

As a result of the COVID-9 pandemic, XYZ Pty Ltd would like to consider its eligibility for the JobKeeper payments, however as a result of acquiring a business in November 2019, the company has undergone a substantial change in its usual business operations and as such, the relevant comparison period is not considered to be appropriate when assessing its current decline in turnover.

Application of the Alternative test

The alternative test allows XYZ Pty Ltd to compare its projected turnover for the applicable test period with its turnover for the month after the month in which the acquisition occurred.

Therefore, when assessing its decline in turnover, XYZ Pty Ltd compares its projected turnover in April 2020 to its turnover in in December 2019 (being the month after the business acquisition occurred).

THOSE INDUSTRIES OVERLOOKED

The Commissioner does make mention that he undertook targeted consultation with industry groups and business representatives. Although suggested amendments were taken on board, not all recommendations were adopted, or otherwise addressed.

We anticipate the following entities will still struggle to satisfy eligibility.

  • Centralised employer entities that are separate to operational entities within the same group commonly implemented within large corporates in construction, retail property management services and hospitality service provider industries.
     
  • Input tax supplied businesses such as residential leasing businesses, residential living and retirement care facilities.
     
  • Junior exploration companies that typically do not have taxable GST turnover.

MORE TO COME

We will continue to monitor the ATO and treasury sites for additional guidance and provide you with updates as this information comes to hand.

WHERE WE CAN ASSIST YOU

  • We can assist in determining which alternative test best applies to your circumstance.
  • We can assist with assessing eligibility for the JobKeeper Payment, including cashflow forecasting and preparation of the entire program application.
  • We can conduct independent reviews on the first round of reporting and claims to ensure accurate and within the Rules of eligibility.

This newsletter is current as of 24 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Please contact us to discuss.

Please contact us to discuss. Cooper Partners is committed to providing general advice to our clients at no charge as part of our commitment to assist you through this period.

WEBINAR RECORDING: Don’t forget about FBT – we’ve got your back!

Cooper Partners Webinar

Our recent webinar on Tuesday 21 April 2020 ran through Fringe Benefits Tax for the 2020 year.

You wouldn’t be blamed if the last thing you have on your list at the moment is FBT. We are here to make sure your FBT matters don’t become a business risk.

The lodgement date for the 2020 FBT liability is just over 5 weeks away and the ATO haven’t announced any automatic extension to the normal FBT lodgement and payment timeframes.

The impact of the Coronavirus has spread to different areas when preparing your 2020 FBT return. With many workforces shifting to WFH in March 2020, these changes in working arrangements are likely to impact this year’s FBT return.

In this session we covered what to look out for as a consequence of these new working arrangements, types of potential new benefits due to Covid-19 and other implications as part of preparing your 2020 FBT return in these unprecedented times.

A COVID-19 FBT Update on working from home:

  • Provision of property to employees to enable WFH
  • Expense reimbursements –including internet and phone
  • Exemptions and concessions
  • When subject to FBT by the employer
  • Tips and traps for employers
  • The otherwise deductible rule in light of new ATO shortcut methods on employee home office expenses

A COVID-19 Update on other FBT considerations:

  • Cancelled events and travel
  • Travel expenses to return to place of residence
  • FIFO workers
  • Provision of protective equipment
  • Emergency assistance and health care – when do these exemptions apply
  • Other assistance – provision of face masks, sanitisers etc

A 2020 FBT Update – what you need to know:

  • ATO focus areas for 2020, including what is catching the ATO’s attention and tips regarding common problem areas such as entertainment and exempt motor vehicles
  • Changes to car parking fringe benefits – widening the definition
  • Changes to work-related travel expenses – where are we now
  • Relaxation of the taxi exemption – the state of play

If you are in the Cooper Partners network and would like to watch this webinar, please click here to register.

This webinar is current as of 21 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Please contact us to discuss.

WA State Government Unveils Leasing Codes

We alert you to the long-awaited release as of 16 April 2020 of the Western Australian Codes of leasing currently in front of Parliament waiting to be passed.

Since the National Cabinet announced the Mandatory Code of Conduct on 7 April 2020 for commercial tenancies, each State government has been working on designing their framework for implementation of the guidelines in the Code as it will apply to that State.

We expect that negotiations between WA landlords and tenants will be accelerated now that both parties have more clarification.

It is timely to remind both parties that the aim of the legislation is to help small and medium-sized enterprises that are in financial distress due to the impacts of the
Covid-19 disruption to survive the current restrictions.

The Codes only apply to eligible small and mid-market businesses and investors. The definition of eligibility is businesses that generate up to $50M in revenues and have had at least a 30% reduction in revenue as a result of COVID-19. Refer to our newsletter of 4 April 2020 which outlines the detail of the Mandatory Code of Conduct.  

However, we are witnessing a growing trend of what appears to be non-eligible tenants and large corporation tenants who questionably have not been impacted significantly by the current pandemic requesting non proportionate rent waivers and for some the audacious act of merely not paying any rent at all.

With the changes implemented it is certainly the case that the business risk of the tenant has effectively been passed on to the landlord.

We envisage that application of the new WA leasing Codes will raise a myriad of other issues and coming to a timely resolution will heavily rely on both parties adopting the overarching principle of negotiating in “good faith” as required under the National Code of Conduct.

We provide below a summary of the main factors presented in the new WA Code of Conduct Bills as it relates to commercial tenancies together with some of our practical insights.

Note: the below information is not effective until the legislation has been passed.

COMMERCIAL TENANCIES

The Commercial Tenancies (COVID-19 Response) Bill 2020 will introduce the following measures with effect during the emergency period of 30 March 2020 to 29 September 2020:

  • six month moratorium on evictions due to non-payment of rent
     
  • freeze on rent increases
    • will this be a forfeiture of rent reviews or merely deferrals?
    • if deferral, can rent reviews be applied retrospectively?
    • if rent reviews are applied retrospectively, how will the tenant ever recover?
    • how will existing lease incentives impact waivers and deferrals?
    • any freeze does not apply to rent determined by reference to turnover under a small commercial lease.
       
  • an extension of term
    • tenants will be given an opportunity to extend the terms of the lease by the waiver period and/or by the deferral period.
    • will this extension impact any plans to redevelop by the landlord?
    • with regards to leases with less than 24 months to their current expiry date, will this result in any tenant deferral needing an extended bank guarantee for security beyond the lease expiry date?
    • will any extension of the lease term trigger a requirement to obtain FIRB approval considering the recent changes reducing the thresholds of value to zero?
       
  • passing on of state tax reductions to the tenant
    • many lease agreements effectively cater for this already.
    • landlords will need to be careful to not overcharge outgoing recoveries and exclude such taxes where they have been reduced or waived to the landlord.
    • there has been no mention of land tax relief for WA as of 19 April 2020.
       
  • numerous restrictions on penalties for tenants who do not trade or have reduced their trading hours;
    • landlords are encouraged to waive outgoings for the period a tenant is unable to trade.
    • where outgoings commonly represent around 30% of rent, landlords still have obligations such as maintenance and insurance to cover.
       
  • a prohibition on charging interest on rent arrears;
     
  • the introduction of a dispute resolution process;
    • if the parties cannot agree on the rent relief.
    • fast tracking and free.
       
  • an ability for government to prescribe a code of conduct.
Summary of State relief for commercial tenants
Take away actions:
  • There is an obligation for both parties to negotiate in good faith.
     
  • Tenants to continue to comply with the lease until a negotiated agreement is reached under the Code. If the tenant breaches any material term of the lease as amended, then the tenant will lose the protection of the Code.
     
  • Clearly document any negotiations and new arrangements so you have a clear record that will pass the test of examination and evidence of discussions.
     
  • Both parties to provide each other sufficient and accurate information. Act honestly.
     
  • Each lease negotiation will be conducted on a business case basis. All factors should be considered such as industry profiles, eligibility of a tenant for the JobKeeper payment scheme and whether a tenant is already in arrears.

RESIDENTIAL TENANCIES

The WA Government has also introduced draft legislation to cover residential tenancies to address the financial impacts of the COVID-19 coronavirus.

The proposed Residential Tenancies (COVID-19 Response) Bill 2020 will:

  • give powers to The Commissioner for Consumer Protection to make the conciliation of disputes between landlords and tenants mandatory.
     
  • introduce a moratorium on eviction for six months except in limited circumstances including where:
    • a tenant is causing damage to the property;
    • a tenant is causing injury to the landlord or a person in neighbouring premises;
    • the landlord or tenant is experiencing undue hardship;
    • a tenant is experiencing family violence and the perpetrator needs to be evicted;
    • the tenant abandons the premises; or
    • the tenancy agreement is frustrated.
       
  • prohibit rent increases during the emergency period between 30 March 2020 and 29 September 2020;
    • tenants must continue to pay rent.
    • if a tenant can’t pay their rent they will still have the obligation to pay any rent outstanding later.
    • if any notice has already been given for an increase in rent, for a start date which was to occur in the emergency period, the rent increase is deemed to start from 30 September 2020.
       
  • provide that any fixed term tenancy agreement due to expire during the emergency period will continue as a periodic agreement;
     
  • relieve lessors of the obligation to conduct ordinary repairs if the reason they cannot do so is COVID-19 related financial hardship or a lawful restriction on movement;
     
  • enable a tenant to end a fixed term tenancy prior to its end date without incurring break lease fees (tenants will still be liable for damage and rent arrears).

The proposed changes will apply to:

  • residential tenancies agreements under the Residential Tenancies Act 1987 (WA),
     
  • long-stay agreements under the Residential Parks (Long-stay Tenants) Act 2006 (WA); and boarders and lodgers, and
     
  • all public housing tenancies and government employee housing provided by the Housing Authority.

The WA State Government has outlined in its guidelines that renters are not required to provide their landlord with a proof of their savings or lack thereof, and that a letter from a former employer should be sufficient to prove financial hardship.

WHERE WE CAN ASSIST YOU

During these difficult times, our expert team is ready to assist you:

  • We can introduce you to specialist property lawyers to help you in your negotiations whether as a landlord or tenant.
     
  • We can review financial records submitted by either party to substantiate evidence of financial hardship and impact from COVID-19 disruption.
     
  • Review and advise on eligibility of the JobKeeper Payment Scheme.

This newsletter is current as of 19 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve. Please contact us to discuss.

WEBINAR RECORDING: Unpacking the JobKeeper Payment Program

Cooper Partners Webinar

Our latest webinar, held Tuesday 14th April 2020, had a look at the latest with the JobKeeper Payment Program.

The Government has released further details last week regarding the JobKeeper Payment measures.  For many employers it is a vital subsidy and the difference of being able to retain their workforce.

There has been some significant developments since we first discussed this scheme in our webinar on 31 March 2020 and as expected, you had plenty of new questions for us.

We provided an update on the JobKeeper scheme first, explained with practical insights, including:

  • Who qualifies – turnover and turnover drop year on year?
  • What periods can you use to measure turnover drop? 
  • How do you measure turnover?
  • For which employees can employers claim the subsidy?
  • What and when must employers pay employees?
  • How is the subsidy payable and administered? 
  • Unpaid family members of owner managed businesses – who can participate?
  • Sole traders – how do they qualify?

We also answered your hard-hitting questions and provided our insight on this tricky new area.

If you are in the Cooper Partners network and would like to watch this webinar, please click here to register.

This webinar is current as of 14 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Please contact us to discuss.

Unpacking the JobKeeper Payment Rules

Federal Parliament has now passed laws giving effect to the Morrison Government’s historic $130 billion wage subsidy scheme, which will deliver fortnightly payments of $1,500 to an estimated six million workers affected by the COVID-19 pandemic. 

The package passed both houses of parliament with Labor support, after the Coalition rebuffed calls to expand eligibility to one million short-term casuals and to temporary visa workers.

LATEST DEVELOPMENTS

Late Thursday night, we saw the release of the actual statutory Rules setting out the eligibility criteria and reporting obligations to be administered by the Commissioner of Tax. 

Our initial review of the Rules is that the guidelines as to eligibility generally remain consistent with the details as outlined in our earlier update of 7 April 2020. However, the Rules now introduce the level of detail that an employer must consider in determining their eligibility, and the practical processes that they will need to undertake in order to receive the payments.

The Rules impose arduous obligations and strict timeframes in which to comply, and we anticipate that this will pose an administrative burden onto some employers, who will need to ensure they have robust systems in place, in order to meet the reporting and documentation requirements on a timely basis.

EMPLOYER ACTION POINTS

Given the highly compressed timeframe toward the finalisation of the Rules and the ATO registration process, in order to receive the first JobKeeper payment employers need to:

EMPLOYEE ACTION POINTS

An employee must provide their employer with written notification confirming that they meet the eligibility requirements at 1 March 2020 and that they agree to participate in the scheme.

Eligible casuals must also attest that they are not claiming the JobKeeper payment in respect of any other employer.

Australians returning home or employees seconded to Australia may not qualify

To be eligible, an employee must generally reside in Australia and be an Australian citizen or permanent visa holder, i.e. Australian residents for tax purposes. As such, employees that are non-residents or temporary residents for Australian tax purposes will not be eligible for the payments.

It should be noted however, that certain special protected visa holders (limited) and New Zealanders who are in Australia on a subclass 444 visa, who are Australian tax residents will also be eligible.

Eligibility is also open to those Australian employees temporarily working overseas for an Australian based business if they still permanently reside in Australia and qualify as an Australian tax resident.

Contractor or employee? The distinction continues to be important

The JobKeeper payments will only apply to those individuals considered to be employees, rather than contractors. The distinction between independent contractor and employee will continue to be an important factor in the working relationship. Contractors who are sole traders may be able to claim JobKeeper under the business participation provisions.

FURTHER DEVELOPMENTS IN THE RULES

What will be the administrative load?

Employers will need to notify the Commissioner prior to the end of every fortnight that they wish to receive the JobKeeper payments. It appears that the payroll software service providers are amending their systems to assist in this regard. But it will entail prompt training of your in-house payroll officers so they are abreast of this new law so they can accurately monitor the program correctly.

For those businesses operating in Government forced shut down industries such as retail and hospitality, this onerous obligation combined with the upfront funding of employee wages will likely act as a deterrent to proceed with participation in the scheme. Where such businesses do not anticipate sufficient future cash inflows, due consideration will need to be given to the nature and the extent of future revenue derived by these impacted businesses.

Standalone eligible entities will need to consider and establish the appropriate basis for reporting their projected turnover by:

  • preparing robust cashflow projections;
  • identifying the correct methodology for determining turnover; and
  • thoroughly documenting your position to support your claims.
Turnover test only on entry

It has now been made clear by the Rules that the decline in turnover test will be a single satisfaction test on entry into the scheme.

Businesses will be required to ascertain the appropriate turnover methodology to project their future revenue to substantiate their best guess of forecasted decline in revenue at the point of entry.

For example, is the appropriate methodology for your business based on:

  • sales or services in pre-existing contracts or order?
  • agreed billing timeframes? or
  • work in progress or contracts of service?

Notably you are required to make a reasonable prediction and only need to demonstrate that you will satisfy the decline in turnover once. It won’t necessarily mean that you will lose your entitlement retrospectively if you end up having a lesser turnover decline than originally forecasted. But the onus will be on you to show robust evidence and sound use of assumptions supporting your application at the time.

The Commissioner will expect that consideration has been given to the facts and circumstances of each business. It may well be that your business will have a delayed impact and comparing predicted April 2020 to actual April 2019 won’t suggest a decline in turnover.  Instead, you can consider your projected June 2020 quarter turnover to the actual turnover from the June 2019 quarter.

Ongoing turnover disclosures

Employers will then need to provide actual and projected GST turnover information to the Commissioner each month. Without suitable revenue reporting systems and timely processes in place, this requirement may prove onerous and likely result in some businesses opting out of the scheme.

It is worth noting ongoing reporting obligations will not be used to test eligibility or verify projections (as this is tested only once), and nor is it intended to verify the accuracy of projections made by entities. It is instead an information gathering exercise that will allow the government to assess the economic impact of the Coronavirus on a monthly basis across Australia.

Decline in turnover test a once only test but retesting available!

The Rules provide that the requisite decline in turnover is assessed and met for eligibility entering the scheme. However, those employers whose turnover has not yet been sufficiently affected, can test in later months to determine their eligibility.

Relief for commercial tenants is linked to the scheme

Whilst the above points highlight why some employers may choose to opt out of the scheme, those employers wishing to take advantage of the Government’s commercial rent relief measures need to be aware that the mandatory code of conduct for commercial tenancies applies to those tenants that are eligible for the JobKeeper Payment scheme and it is expected that these entities will need to demonstrate their eligibility to access the rent relief.

One in all in

The JobKeeper scheme requires an employer to actively seek to participate in the scheme, however an employer cannot pick and choose which eligible employees will participate in the scheme and all eligible employees that agree to nominate for the scheme, are in.

Employer opt out rights

Given the administrative burden and the likely initial cash flow implications, employers may be reluctant or simply not able to participate in the scheme.  Each employer will need to weigh up the financial and commercial factors at play when making this decision.

The JobKeeper scheme is not mandatory and employers are required to opt-in to the scheme. Currently, no obligation appears to exist under the JobKeeper Rules in which employers are required to inform current or recently stood down employees that they will not be participating in the scheme. 

Although an employer does not need to consult with or obtain the consent from its eligible employees under the scheme, if it chooses to not participate we strongly recommend that you obtain legal employment advice as to the implications under your relevant employment agreements and awards, particularly where you have stood employees down or modified their working arrangements under the new JobKeeper stand down provisions under the Fair Work Act.

Restructure relief is currently limited to employees

It appears the concession afforded to employees under which they will be deemed to have continuity of employment where the entity operating the business has changed recently, has not been extended to the turnover test.  In the absence of any further concession, those businesses that have recently undergone restructuring will not have the necessary comparative data to demonstrate satisfaction of the turnover test.  

We suspect this is an anomaly that we hope will be addressed. Perhaps these impacted entities can use the ‘alternative decline in turnover test’ where they have access to the previous owner’s financial records to satisfy this obligation.

Commissioner’s discretion may be limited

It is expected that there will be a range of entities that do not satisfy the turnover test and while the Rules provide for this by introducing an ‘alternative decline in turnover test’, this test will apply to classes of entities and not on a case by case basis.  Based on this, the Commissioner’s discretion in granting relief does not appear to extend to an entity’s particular facts and as such, be considerably narrower than previously set out by Treasury. 

The alternative tests are to be legislated and as such there is currently limited guidance on whether these measures will apply to businesses such as junior mining or exploration companies that do not yet have any business turnover, but that may still be affected by the economic fallout from COVID-19. The Explanatory Statement to the Rules provides some examples to which this alternative test could be applied, but it is currently a case of watch this space until this legislative guidance is released.

Do you need to revisit your centralised payroll functions?

The scheme proceeds on the basis that it is a particular entity, and not a group, which is entitled to a JobKeeper payment, and further, an entity can only be entitled to the JobKeeper payment if it is the employer of the particular individual. 

It is therefore anticipated that those groups that use a centralised employment entity to employ and pay staff on behalf of the other group entities may not meet the required decline in turnover test.

Flexibility in payment type but how will it be treated for tax?

Employers must assess fortnightly whether they have paid the requisite amount i.e. $1,500 pre-tax to each eligible employee. Amounts paid are not limited to salary and wages and may include commissions, bonus or allowances, amounts withheld by the employer for PAYG withholding purposes and amounts made under a salary sacrifice arrangement.  Where an employer’s regular pay cycle is monthly, the payments in that pay cycle must be allocated on a reasonable basis when applying this test.

Payments will be taxable income for the employee and as such the employer must withhold PAYG income tax.  At this stage, the WA State Government has not finalised its position on whether the payment will be subject to payroll tax and workers’ compensation insurance purposes.

Business participation

Further to our comments in Tuesday’s Update  7 April 2020 regarding unpaid owner managed and family employees, the Rules confirm that the JobKeeper payments will apply to such entities under the business participant provisions, but further clarifies that the following entities will not be eligible to receive the JobKeeper payments:

  • Unit trusts with non-individual unitholders such as family trusts; and
  • Companies with non-individual shareholders again such as family trusts.

In the latter case, these companies may be able to rely on the director provisions that allow for one director to receive the payment.

Such businesses are only entitled to receive the JobKeeper payment in relation to one nominated eligible participant.  Similarly, an individual can only create an entitlement for one entity and must not have been nominated by another employer. 

It is worth noting Treasury has inserted an integrity rule for business participants in the scheme that restricts the payments to participants of active businesses only.  We will be interested to watch out for further clarification by the Commissioner as to whether this will extend to all Landlord businesses. We will provide more details regarding this new measure in our updates to follow.

Overpayments and entitlement

The new law provides rules for overpayments, including the application of interest and the requirement to repay amounts, with joint and several liability rules also introduced, where for example an employee may have made a false or misleading statement to an employer.

Furthermore, the Rules make it clear that just because the Commissioner pays an entity a payment does not mean the entity is entitled to it, therefore ensuring the door to recovery is kept well open. It is expected that ATO audit activity will be increased over the coming periods to ensure compliance with the Rules.

No records – No payment

Employers are warned that pre-payment and post-payment record keeping requirements exist and must be met.  Where an employer does not keep the correct records for the required amount of time (5 years), they may be taken to be ineligible to receive the payments and will likely be required repay the amount plus interest.

Serious penalties for contrived schemes

The legislation also makes clear that anyone who enters or carries out a scheme for the sole or dominant purpose of obtaining a COVID-19 payment will face a wide range of administrative and criminal sanctions, including up to 10 years’ imprisonment.

CHANGES TO FAIR WORK ACT

To facilitate the introduction of the JobKeeper Payment program combined with the immediate need for many employers to manage their workforce obligations in these unprecedented times, changes have also been made to the Fair Work Act. These changes aim to provide employers with a level of flexibility over the coming 6 month period with a view to retaining their workforce for a longer term.

For those employers that are eligible and participate in the JobKeeper Payment program, they will be afforded protection within the Fair Work Act to modify the working arrangements of their employees over the 6 month period to which the JobKeeper program will operate, by enabling them to make Jobkeeper Stand Down Directions to their employees who are in receipt of JobKeeper payments.

In brief, an employer will have the ability to:

  • Modify the usual workdays of an employee to be less than normal.
  • Reduce the usual work hours of an employee.
  • Make temporary or partial stand down orders to an employee (no work at all).
  • Direct the employee to perform other duties or at a different location, where safe to do so.
  • Request an employee to take paid annual leave, so long as it does not reduce an employee’s accrued entitlements to less than 2 weeks.
  • Request an employee to take twice as much annual leave at half pay.

The employer must ensure that it is necessary to make the direction, in order to continue the employment of the employee(s) and must be reasonable in the circumstances.

The amendments require an employer to undertake a consultation process with the employee, and generally must provide notice in writing of at least 3 days to the employee and must maintain written record of such consultation.

In addition, the employer must ensure that wage conditions such as maintaining the same hourly base rate of pay applies, as if the direction had not been made.

An employee that is subject to a JobKeeper stand down direction, will still be entitled to accrue normal leave entitlements as if the direction had not been given, and any period under which a direction applies (including a formal stand down) continues to be counted as service.  It is noted that this may prove to be an added disincentive for certain impacted employers to take up the JobKeeper Scheme.

An employee subject to a direction, may request the employer the ability to engage in reasonable secondary employment, training or development, which the employer must similarly consider and not unreasonably refuse.

More information with regard to these changes is available at the Fair Work Ombudsman site.

WHERE WE CAN ASSIST YOU

  • We can assist with assessing eligibility for the JobKeeper Payment, including cashflow forecasting and preparation of the program application.
  • We can conduct independent reviews on the first round of reporting and claims to ensure accurate and within the Rules of eligibility.
  • We can prepare submissions to the Tax Commissioner to apply discretion regarding eligibility.

This newsletter is current as of 10 April 2020, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Please contact us to discuss.

Please contact us to discuss. Cooper Partners is committed to providing general advice to our clients at no charge as part of our commitment to assist you through this period.