The uptake of federal government stimulus has been high with around 780,000 businesses enrolling for JobKeeper payments, more than 650,000 applications for the early release of superannuation and advisors reporting the receipt of cash flow boost payments for many clients.
However, it is far from being all plain sailing. The integrity provisions for the COVID-19 government stimulus packages remove the entitlement to payment where a scheme is entered into for the sole or dominant purpose of creating an entitlement or increasing the amount of an entitlement. The consequences of being found to have entered into a scheme potentially include interest charges, penalties and convictions for offences under the Taxation Administration Act 1953 and the Criminal Code Act 1995 as well as sanctions under the Tax Agent Services Act 2009. The JobKeeper legislation also introduces joint and several liability for employers and employees for the repayment of JobKeeper amounts.
Schemes about which the ATO has raised concerns include:
- artificially restructuring or arranging the business to meet the eligibility criteria
- resurrecting dormant entities or phoenixing
- increasing wages paid in a particular month to maximise amounts
- changes to the characterisation of payments
- deferring or bringing forward the making of supplies, and/or
- making false statements or fraudulent attempts to create an entitlement.
This has created some uncertainty for advisors who are currently supporting their clients to survive COVID-19 impacts or where previously planned changes to business structures or certain payments have coincided with the stimulus packages. CPA Australia’s General Manager External Affairs Paul Drum says ‘for example, many tax agents are advising closely-held family businesses on their survival options where there are often good commercial reasons to make changes’.
The ATO has provided information on its view of schemes in its cash flow boost guidance material and in PCG 2020/4 Schemes in relation to the JobKeeper payment.
The approach laid out in PCG 2020/4 reflects the Commissioner’s compliance focus on entitlements paid to entities that are not significantly affected by external environmental factors beyond its control, and/or that are in excess of those that would maintain pre-existing employment relationships. Any scheme would be considered in the context of the entity and its external operating environment and the focus is on the substance of the outcome achieved, more than the type of arrangement being entered into.
When considering providing advice that may alter a client’s entitlement to stimulus payments, it would be prudent to be able to demonstrate that:
- the external operating environment is affected by factors beyond the control of the entity and its related parties, although it does not need to be specifically COVID-19 related
- the affected external operating environment significantly impacts the business of the entity or another entity in which the entity’s employees serve
- the entity enters into the scheme in response to that impact and satisfies the relevant eligibility criteria and tests, and
- the payment received by the entity is for individuals who were employed by the entity and serving in the significantly impacted business prior to that time and who remain employed.
Contemporaneous records should be kept that can demonstrate the commercial basis of decisions and which can be provided to the ATO if requested.
Advisors should also be mindful that if the characterisation of payments is changed (e.g. a shift from trust distributions to salary income), then the ATO may consider the characterisation of past payments, including whether they should have been subject to PAYG withholding, whether superannuation guarantee contributions should have been made and if there are unmet FBT obligations. Such a shift could trigger an ongoing liability to pay FBT, PAYG withholding, superannuation guarantee contributions and other employee-related costs.
The ATO indicated that they will take a reasonable and sympathetic approach to issues such as the turnover test calculations. The Commissioner able to exercise discretion on elements of the stimulus packages, such as the approach reflected in LCR 2020/1 JobKeeper payment – decline in turnover test.
Advisors should take the time to ensure that clients are properly informed about entitlements and that decisions are properly documented. Also, they should continue to contact clients who may not yet have considered accessing the stimulus packages or who require tailored advice.
To assist the profession and in response to overwhelming member feedback, CPA Australia is actively pursuing further lodgment deferrals and a reduction in the current 28-day deferral approval process. ‘This reflects the overwhelming workloads and resource-intensity resulting from the stimulus packages and a recognition that many advisors are currently unable to focus on their core tax business’ says Drum. ‘We will continue to push for administrative relief to help the government in rolling-out the stimulus payments.’