The ATO has released guidance that shows the JobKeeper ‘schemes’ that will be audited. Businesses that are receiving JobKeeper payments should check that their payments are not at risk of being clawed back by the ATO.
Businesses that have a decline in turnover for a particular test period, but whose turnover is otherwise relatively stable, should be prepared for ATO review activity.
What is a JobKeeper ‘scheme’?
The term ‘scheme’ is broadly defined. A scheme does not need to be elaborate, artificial or contrived. It can include a simple arrangement or merely making a decision. For example, a scheme will include deciding to:
- not invoice customers in a particular period
- extend payment terms for customers
- reduce prices.
While each of these examples will be ‘schemes’, only some will be caught by the anti-avoidance provisions.
What JobKeeper schemes are caught by the anti-avoidance provisions?
For a JobKeeper scheme to be caught by the anti-avoidance provisions, the scheme must have been entered into for the sole or dominant purpose of either:
- receiving a JobKeeper payment
- receiving a greater JobKeeper payment than would otherwise have been the case.
The test for ‘sole or dominant purpose’ is not subjective. The legislation sets out eight factors that must be considered when determining whether, objectively, the business entered the scheme for the sole or dominant purpose of obtaining the JobKeeper payments.
What does ‘sole or dominant purpose’ mean?
Income tax cases deal with the phrase ‘sole or dominant purpose’ in the contex of the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936.
The High Court has held that ‘dominant’ means the ‘most influential and prevailing or ruling purpose’.
There will be cases where the sole or dominant purpose is obvious, for example:
- Consider a business that ordinarily invoices at the end of a calendar month, but then defers its invoicing for April 2020 to the first week of May 2020. If that decision results in a decline in turnover of 30% comparing April 2020 to April 2019, this would indicate, in the absence of other reasons, a sole or dominant purpose of obtaining JobKeeper payments.
- By contrast, consider a business that ordinarily invoices before providing services, and defers invoicing until May 2020 because it is unsure, as a result of government restrictions, whether it will provide its services in April or May 2020. If the decision to defer its invoicing results in a decline in turnover of 30% comparing April 2020 to April 2019, this would not indicate, in the absence of other reasons, a sole or dominant purpose of obtaining JobKeeper payments.
In most cases, the analysis will not be black and white. A business will make commercial decisions based on: the supplies it anticipates it will make, its customers, whether to continue to pay wages and whether it is entitled to JobKeeper payments. These considerations and others will all be part of the factual matrix. Out of that context, the business needs to ensure that obtaining JobKeeper payments is not the sole or dominant purpose of any decision.
What is the ATO looking at?
The ATO’s PCG 2020/4 indicates that they will audit businesses:
- that defer making supplies, invoicing or receiving payments to achieve a decline in turnover for a particular period
- that bring forward making supplies, invoicing or receiving payments to achieve a decline in turnover for a particular period
- transferring income-producing assets to achieve a decline in turnover for a particular period.
The ATO are particularly interested in businesses that access JobKeeper payments who have not been significantly affected by external environmental factors.
In its PCG 2020/4, the ATO correctly points out that the examples set out the types of arrangements where they will ‘apply compliance resources’, which euphemistically means ‘audit’. Those examples are not designed to show how the ATO will apply the legislation.
What are the consequences of the ATO concluding there was a JobKeeper scheme?
If the ATO determines that there was a scheme, then:
- the business was never entitled to the JobKeeper payments
- the business will have to pay back the JobKeeper payments – which may be problematic if the business has paid the same amounts to its eligible employees as wages
- the business will have to pay interest at the general interest charge rate – currently 7.89%
- the ATO may impose penalties for the business making false or misleading statements (as the business will have declared it was an eligible employer when it was not).
What evidence should businesses keep?
The critical evidence in these types of cases tend to be documents showing the commercial purpose of the scheme. Consider the following examples.
- A business with a monthly service agreement decided not to invoice customers in April 2020 as it provided no services in April 2020 because of the government restrictions. The objective evidence might include documents showing that no services were provided, or were able to be provided, because of the government restrictions.
- A commercial landlord decided to extend payment terms for its retail tenants because their cashflow was affected by COVID-19. The objective evidence might include documents showing: (a) the agreements reached with the tenants (b) the landlord’s obligation to comply with leasing principles (c) the effect that government restrictions had on the tenants’ turnover.
- A business decided to reduce fees charged to its long-term customers on the basis that it preferred reduced revenue in the short term to potential loss of a customer in the long term. The objective evidence might include documents showing the financial analysis between the short term reduction in revenue compared with losing a customer and documents showing the risk that the business would lose the customer if it did not reduce fees.
Contemporaneous evidence is generally more compelling than evidence obtained at a later date when responding to an ATO review. Businesses at risk of being reviewed should keep evidence about their decisions now, so they are ready to respond to any ATO reviews.