On 21 July 2020, the Federal Government announced the extension of the JobKeeper Payment scheme by six months, from its original end date of 27 September 2020 to 28 March 2021.
While there has been much by way of Treasury releases and fact sheets since the July announcement, only this week has Treasury released the Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No. 8) 2020 (“New Regulations”), which includes the detailed eligibility rules for the JobKeeper payment for the extension period.
It is now imperative that business owners and their advisers reassess the requirements for accessing the JobKeeper scheme in light of the New Regulations. This is the case regardless of whether the entity in question has previously qualified for JobKeeper payments given that:
- entities that have previously qualified must now reassess their eligibility for the extension period; and
- entities that may not have previously qualified (for instance, due to an inability to satisfy the decline in turnover test in earlier periods) now have an opportunity to qualify for all or part of the remainder of the scheme to March 2021.
This Client Alert provides an overview of the operation and effect of the New Regulations (and related legislative instruments). It also comments on a number of critical practical issues for business owners and their advisers.
The key features of the New Regulations may be summarised as follows:
- To be eligible for JobKeeper payments in respect of fortnights from 28 September 2020 onwards, it is necessary to satisfy a new test known as the “actual decline in turnover test”.
- For the fortnights beginning on 28 September 2020 and ending on 3 January 2021 (“First Extension Period”), this test requires the entity to have had a 30% decline in current GST turnover in the September 2020 quarter relative to the September 2019 quarter (50% for entities with an aggregated turnover exceeding $1 billion).
- For fortnights beginning on 4 January 2021 to the end of the scheme on 28 March 2021 (“Second Extension Period”), the test requires the entity to have had a 30% decline in current GST turnover in the December 2020 quarter relative to the December 2019 quarter (50% for entities with an aggregated turnover exceeding $1 billion).
- Importantly, the alternative decline in turnover tests as determined by the Commissioner of Taxation (“Commissioner”), which allow entities to adopt a different comparison period than the same period in 2019 that would otherwise apply under the basic decline in turnover test, continue to be available when applying the actual decline in turnover test.
- Employees are now capable of qualifying as eligible employees if they were employed as late as 1 July 2020 (compared against the previous 1 March 2020 requirement). Further, the eligibility of long-term casual employees is assessed with reference to the 12 months ending on 1 July 2020, thereby broadening the scope of eligible casual employees. However, this change does not extend to persons who became eligible business participants after 1 March 2020 (i.e. to qualify, the individual must have been an eligible business participant on 1 March 2020).
- Two different JobKeeper payment rates have been introduced based on the relevant employee’s total hours of work or hours of paid leave, or in the case of eligible business participants, based on the total number of hours the individual was “actively engaged” in the business, during the applicable “reference period” (see further below).
- Where the “higher rate” applies, the JobKeeper payment will be $1,200 per fortnight over the First Extension Period and $1,000 per fortnight over the Second Extension Period.
- Where the “lower rate” applies, the JobKeeper payment will be $750 per fortnight over the First Extension Period and $650 per fortnight over the Second Extension Period.
- The above rates supersede the current flat JobKeeper rate of $1,500 per eligible employee or business participant per fortnight.
Actual Decline in Turnover Test
A number of observations can be made in relation to the operation of the actual decline in turnover test:
- Under the existing JobKeeper scheme, an entity that satisfies the decline in turnover test in a fortnight is taken to have satisfied that requirement for all subsequent JobKeeper fortnights. In contrast, the actual decline in turnover test must be satisfied at a time in the quarter applicable to the fortnight (i.e. in the September 2020 quarter for fortnights beginning in the First Extension Period and the December 2020 quarter for fortnights beginning in the Second Extension Period).
- The practical upshot of this is that an entity will not automatically be eligible for JobKeeper in the Second Extension Period if it is eligible in the First Extension Period. Instead, it will be necessary to reassess the actual decline in turnover test at the commencement of the Second Extension Period.
- On the other hand, a failure to qualify under the actual decline in turnover test in respect of the First Extension Period will not of itself preclude the entity from satisfying the test, and therefore qualifying for the JobKeeper payment, in respect of the Second Extension Period.
- It is not possible to apply the actual decline in turnover test by comparing turnover in two relevant months. Instead, the test is concerned only with comparing current GST turnover in the relevant quarters.
- In assessing the decline in turnover test for the JobKeeper extension period, entities will no longer be able to rely on a reasonable estimate of their projected GST turnover for a period (i.e. the supplies likely to be made by the entity). Instead, it is necessary to determine and assess the actual current GST turnover in both the turnover test period (being the September and December 2020 quarters) and the relevant comparison period at the end of those periods.
- Care should be taken in calculating current GST turnover for the purposes of the test in terms of both valuing supplies that have been made in accordance with the GST legislation and attributing those supplies to the appropriate turnover test period. For some taxpayers, this position may be affected by the Commissioner’s recent legislative instrument mandating that, in calculating current GST turnover for the purposes of the actual decline in turnover test, a supply is treated as being made in the period to which the supply is attributed under the GST legislation.
- Further, as the GST attribution rules attribute increasing or decreasing adjustments to tax periods outside the period to which the supply is attributed, the Commissioner adopts the view that increasing or decreasing adjustments have no role in determining the time a supply is made for the purposes of the actual decline in turnover test. The Commissioner’s position in Law Companion Ruling LCR 2020/1 that adjustments occurring outside a GST tax period should not be taken into account in calculating the current GST turnover for that period would appear to continue to apply.
- While sales of capital assets are excluded from the meaning of projected GST turnover, the shift under the New Regulations to requiring that current GST turnover is adopted is likely to result in these sales being included in GST turnover in the September and December 2020 quarters. This is likely to make the decline in turnover test more difficult to satisfy where an entity has disposed of capital assets. Note, however, that the making of input taxed supplies continues to be excluded from GST turnover.
- For completeness, business owners and their advisers should also ensure that appropriate attention continues to be given to the application of the alternative decline in turnover tests. In the authors’ experience, there are a number of situations where the basic decline in turnover test may not be capable of being satisfied but an alternative test (for instance, the test for entities having experienced a substantial increase in turnover) is able to be satisfied by virtue of the variations in GST turnover of the entity over the applicable comparison periods.
Which Payment Rate Applies?
It will be important for all businesses intending to participate over the extension period to carefully assess whether the higher or lower payment rate applies in respect of each eligible employee or eligible business participant. In particular:
- employers must continue to ensure that the wage condition is satisfied by paying at least the amount of the JobKeeper payment received in respect of an eligible employee each fortnight to the employee; and
- the New Regulations impose an obligation to notify the Commissioner as to whether the higher or lower rate applies to the individual in order to receive the payment (and also to issue a notice to the individual within seven days of giving that notice to the Commissioner stating whether the rate notified to the Commissioner was the higher or lower rate).
In the case of eligible employees, the higher rate will apply where the employee’s total hours of work, paid leave and paid absence on public holidays in the “reference period” for the individual was 80 hours or more. The reference period will be the 28-day period ending at the end of the most recent pay cycle that ended before either 1 March 2020 or 1 July 2020 (noting that if both reference periods apply in respect of an employee and the requirements are satisfied in either one of those periods, the higher rate will apply).
In broad terms, it will therefore be necessary for employers to review their records to determine whether each employee was engaged to work (or was on paid leave) for a total of 80 hours in the four week period ending on the last day of the employee’s pay period ending before both 1 March 2020 and 1 July 2020. Otherwise, subject to the comments below regarding the Commissioner’s determinations, the lower JobKeeper rate will apply in respect of the employee. This is a particularly significant issue in the context of part-time and casual employees.
In terms of eligible business participants, the higher rate will apply if the total number of hours the individual was “actively engaged” in the business carried on by the entity in the month of February 2020 (or any alternative reference period as may be determined by the Commissioner – see below) was 80 hours or more. To qualify, the individual must give the entity a notice to this effect (or give the notice to the Commissioner if the individual is a sole trader).
“Actively engaged” is not defined in the New Regulations. The Explanatory Statement to the New Regulations suggests that this will turn on an assessment of the hours that the business participant was actively operating the business. It would also include undertaking specific tasks in business development and planning, regulatory compliance or similar activities. Where an entity has not been active over the reference period, had all duties carried out by employees or if the participant held a separate full time job, Treasury has suggested that this test is unlikely to be satisfied.
Given the need to ensure the satisfaction of this requirement can be evidenced on any review or audit by the Commissioner, the authors consider that it is best practice to prepare contemporaneous documentation setting out the basis for satisfying this requirement. This may include, for instance, collating records of the activities of the eligible business participant over the month of February 2020 and preparing company or trustee minutes reflecting the basis for satisfying the requirement.
Significantly, under the New Regulations, the Commissioner has the ability to determine by legislative instrument that an alternative reference period applies to a specified class of individuals or that the higher rate should be taken to apply to a class of persons (where the above 80 hour requirement has not been satisfied). On 16 September 2020, the Commissioner released separate legislative instruments addressing both issues.
As to the applicable reference period, the Commissioner has determined that alternative reference periods may be applied in situations including:
- Where an employee’s total hours of work (plus paid leave or paid absence), or in the case of an eligible business participant, their hours of active engagement in the business, was less than 80 hours in the reference period despite typically working on average 80 hours or more over earlier 28 days periods. This might apply, for instance, where an employee has taken unpaid leave in the reference period or where an eligible business participant was not actively engaged in the business for all or part of February 2020 due to illness, injury or leave.
- Where the individual was not employed by the entity for all or part of the reference period or, in the case of eligible business participants, the person first began to be an eligible business participant after 1 February 2020 but before 1 March 2020.
- Where a business has changed owners during or after the reference period.
The second of the Commissioner’s determinations broadly provides that the higher rate will be taken to apply in respect of an employee where an employer does not have any record, or has incomplete records, of the employee’s total hours of work (plus paid leave and paid absence) during the reference period and either:
- the employee received salary, wages and similar payments totalling $1,500 or more in the reference period (not including any “top up” payments made for JobKeeper purposes);
- under the conditions of the individual’s employment, the employee was required to work 80 hours or more in the reference period; or
- if it can be determined, based on reasonable assumptions, that the employee’s hours in a reference period were 80 hours or more.
The above deeming rule might be expected to apply where, for example, an employee’s remuneration is not tied to an hourly rate or contracted number of hours such that the employer does not retain a record of the number of hours worked.
The above determinations by the Commissioner may be critical in establishing a basis for the entity receiving JobKeeper payments at the higher rate where the “basic” 80 hour test in the applicable reference period is not easily satisfied.
Practical Observations and Outstanding Issues
A number of other significant practical observations can be made in applying the New Regulations, namely:
- As the deadline to lodge a BAS for the September quarter or month is in late October, and the deadline for the December quarter (or month) is in late January (or February for quarterly lodgers), it will be necessary to assess eligibility for JobKeeper in advance of the BAS deadline in order to meet the wage condition (which requires entities to pay their eligible employees in advance of receiving the JobKeeper payment in arrears from the Commissioner). While it might be expected that the Commissioner will extend the time period for complying with the wage condition, internal accounting records will need to be relied upon to make an assessment of this issue.
- Despite the changes to the decline in turnover test, the other existing requirements for businesses to access JobKeeper remain in force. This includes, for instance, the need for the entity to have been carrying on a business in Australia on 1 March 2020. This leaves those businesses that commenced operations after 1 March 2020 without access to the scheme.
- In assessing the eligibility of casual employees, there remains a need to address whether their employment has been on a “regular and systematic basis” for a period of 12 months prior to 1 March 2020 or 1 July 2020 (as applicable). The New Regulations do not provide any further guidance on this issue and hence it remains necessary to consider the meaning of the phrase “regular and systematic” in the context of the case law and guidance issued by the Fair Work Commission.
- Consistent with the “one in, all in principle”, it remains necessary for employers to notify all eligible employees of the entity’s participation in the JobKeeper scheme. This extends to employees now eligible under the 1 July 2020 employment condition.
- The modification to the decline in turnover test for service entities that provide employees to related entities continues to apply under the actual decline in turnover test. However, care must be taken in applying this test. In the authors’ experience the application of this modification can be narrow in the context of private groups given that the entities in the group must either be an income tax consolidated group, a consolidatable group or have formed a GST group. Further, the employing entity’s principal activity must be supplying other members of the group with employee labour services (as opposed to other services such as the provision of premises or plant and equipment).
- It remains important that employers carefully consider whether they satisfy the new decline in turnover requirements and retain sufficient evidence to support the view reached. The consequences of an incorrect assessment in this regard are likely to be significant, including the need to repay any JobKeeper payments received plus the general interest charge and potential penalties in the event of an unfavourable finding on review or audit.
- Regrettably, many of the existing problems continue to exist with purchases of businesses and internal restructures and extreme care should be taken in this area.
- While the JobKeeper scheme is not accommodated by the existing Private Binding Ruling system, the authors have significant experience in obtaining non-binding comfort from the ATO for clients on a number of issues where an interpretation of the law requires clarity. This remains an option for taxpayers seeking to appropriately risk manage their position.
Further Support and Assistance
While it is pleasing that the Federal Government has extended its economic support for business by way of the JobKeeper scheme, it is clear that the New Regulations add another layer of complexity for business owners and their advisers in accessing their entitlements.