Thinking | 23 April 2020
JobKeeper Scheme pitfalls
This article was updated on 4 May 2020.
The JobKeeper Scheme is now here to help eligible Australian businesses, their employees and the self-employed. Scott Morrison came down hard on hoarders calling them ‘un-Australian’, and the same label may well be applied to those contriving arrangements or schemes in order to receive JobKeeper Payments.
Of course many want to participate, if they are eligible, but some entities and individuals won’t make the cut. Business owners will, no doubt, be looking to explore ways in which they can qualify for the newly implemented rules, which are untested and raise many questions. Those who change their business structure or undertake unusual or contrived commercial arrangements to come within the rules need to exercise caution in order to avoid unwanted attention from the ATO. And their advisers may also be the subject of closer inquiry.
In a joint statement made on 6 April 2020, the Tax Practitioners Board and the ATO made this point clear:
We ask that tax agents and businesses be mindful that it is not acceptable to backdate or artificially change a business structure or employment arrangements, including changing the characterisation of payments, in order to obtain a benefit or payment that would not otherwise have been paid. The TPB and ATO will take firm and swift action should this be the case.
Anti-avoidance déjà vu
As we highlighted in our article on the JobKeeper Scheme, the legislation contains an in-built anti-avoidance measure to tackle schemes entered into for the sole or dominant purpose of obtaining a payment, or an increased amount of payment under the Scheme.
These provisions are very similar to the well-known anti-avoidance provisions found in Part IVA of the 1936 Act, with which all tax practitioners are well acquainted.
The provisions can be found in section 19 of the Coronavirus Economic Response Package (Payments and Benefits) Act 2020, and are not replicated in this article.
On 1 May 2020, the Commissioner of Taxation issued Practical Compliance Guideline 2020/4 ‘Schemes in relation to the JobKeeper payment’ (PCG 2020/4).
In PCG 2020/4, the Commissioner has taken the customary approach of providing examples of schemes where there will be a low/high risk of the ATO applying compliance resources, as opposed to indicating schemes that will or won’t contravene the anti-avoidance provisions.
In this regard, a key factor is whether an entity’s business and operating environment is significantly affected by external factors beyond its control (ie COVID-19). For example, where a company attempts to defer income to artificially meet the decline in GST turnover test, PCG 2020/4 provides that:
Because Company A's business and operating environment is not significantly affected by external factors beyond its control and the scheme is not entered into in response to any such factors, there is a high risk the Commissioner would apply his compliance resources to consider the application of section 19.
The JobKeeper Scheme is largely administered on a self-assessment basis, where employers and the self-employed report to the ATO about their eligibility and their eligible employees (ie how many JobKeeper Payments they will receive).
However, the JobKeeper Scheme requires an entity to regularly notify the ATO:
- if there are any changes to previously reported eligible employees. For example, if an eligible employee ceases to be employed; and
- notify the ATO of their current GST turnover for the reporting month, and their projected GST turnover for the next month.
The information provided as part of this reporting does not impact an entity’s eligibility, including in respect of the decline in turnover test (which only needs to be satisfied once). However, that doesn’t stop the Commissioner from using the information as part of a review or audit of an entity’s eligibility for JobKeeper Payments; or as part of a data-matching program.
Australian businesses, their employees and the self-employed are understandably eager to participate in the JobKeeper Scheme if they are eligible. However, both by intention and inadvertently, some entities and individuals won’t be eligible.
Much like any arrangement or scheme aimed only at saving tax, entering into arrangements or scheme solely to meet the eligibility criteria, or to collect additional payments, is fraught with risk. This is the case even if an entity has been, or will be, drastically impacted by COVID-19, but still doesn’t otherwise qualify.
In relation to the JobKeeper Scheme, some of the more likely pitfalls are set out below:
- Was I employed on 1 March 2020? - The requirement that an employee was employed on 1 March 2020 is the primary criteria for testing whether an employee is an eligible employee.
Ordinarily this employment relationship would be reflected in a written agreement (although that isn’t mandatory), or at the very least reflected in an entity’s BAS, single-touch payroll reporting, general ledger or financial accounts.
- Business owners, are you really employees? - Eligible employees will include business owners who are an employees as at 1 March 2020, including a sole trader, adult beneficiary of a trust, or a director or shareholder of a company.
Ordinarily this employment relationship would be reflected in a written agreement (although that isn’t mandatory), or at the very least reflected in an entities BAS, single-touch payroll reporting, general ledger or financial accounts. If this isn’t the case, there is a risk in treating an individual as an employee for the purpose of collecting a JobKeeper Payment on their behalf. Some examples include shareholders who have been receiving dividends, and beneficiaries who have received trust distributions, but are not otherwise employees.
- Are the business’ contractors really employees? - Genuine contractors - those who operate in the own genuine commercial enterprise will not be ‘eligible employees’ of a business that engages them.
There may, however, be financial benefits to workers and cost savings to businesses to engage workers as contractors. However, if a business looks to reclassify their contractors as employers or restructure the ‘contractor’ arrangement as an employee relationship, the business may open itself to a risk on the historical positions it has taken eg not paying superannuation to its contractors when they may actually be employees.
- Decline in turnover - This test requires an entity to reasonably project their supplies for a test period based on the facts and circumstances applicable to their business. Given that testing can occur part way through a period, entities should consider what is expected to happen for the remainder of a period.
Employers should document their projections, and the facts and assumptions on which their projections are based. This will be important in demonstrating that a projection was made reasonably, particularly in circumstances where actual GST turnover is not consistent with the projection.
- Issuing invoices - Entities should continue issuing invoices in accordance with their normal procedures. In many cases, and in particular, for entities preparing BAS on an accruals basis, failing to issue an invoice won't impact the decline in turnover test. Moreover, any anomalies or large spikes in the monthly figures reported to the ATO may raise questions.
- Paying employees- Employers should continue to pay all of their employees who will participate in the JobKeeper Scheme a minimum of $1,500 per fortnight (before tax), for all fortnights for which they will receive a JobKeeper Payment. Simply waiting to collect JobKeeper Payments after the end of each month before paying employees is not sufficient.
The only exceptions to this payment obligation are as follows:
- For the first two fortnights (30 March – 12 April, 13 April – 26 April), the ATO will accept that the minimum $1,500 payment for each fortnight has been paid even if it has been paid late, provided it is paid by 8 May.
- If employees are usually paid monthly, the ATO will accept an allocation in a reasonable manner. For example, if employees are on a monthly pay cycle they must receive the monthly equivalent of $1,500 per fortnight.
- If an employer has accidentally underpaid an employee, the Commissioner has a discretion to treat a catch-up payment made in a subsequent fortnight as having been made in the previous fortnight.
If employers are experiencing cash flow difficulties and are unable to pay their employees, it is important that they take steps to be able to make those payments. This may include speaking to a bank to discuss options on how to seek credit in order to pay employees before JobKeeper Scheme payments are received.
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