Has receiving a JobKeeper payment put you in the Commissioner’s crosshairs?
By Mary Zachariah
By Michael Parker, Partner, Rachel Law, Senior Associate and Bradley White, Graduate Lawyer, Hall & Wilcox
With the announcement of the JobKeeper payment, a lot of struggling businesses were able to breathe a sigh of relief after accessing some of the billions in funding to (hopefully) get them through these trying times. However, for those businesses that have or are tempted to engage in schemes to artificially qualify for JobKeeper, the message from the ATO is simple, they see you and they are ready for you.
We anticipate there will be considerable audit activity in the coming months. Taxpayers will need to be prepared to defend their claims for JobKeeper, including demonstrating how they determined they met the fall in turnover requirements, as well as showing they did not engage in any schemes to artificially qualify.
In a joint statement made on 6 April 2020, the Tax Practitioners Board and the ATO stated:
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.
The Commissioner of Taxation has a power under s 19 of the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) (the Act) to protect the integrity of the JobKeeper payment regime. It targets taxpayers who may technically meet the JobKeeper eligibility criteria, but only do so because they implemented an arrangement for the sole or dominant purpose of accessing the JobKeeper payment.
On 1 May 2020, the Commissioner released Practical Compliance Guidance PCG 2020/4 ‘Schemes in relation to the JobKeeper payment’ which gives insight into when the Commissioner will apply compliance resources to investigate a particular arrangement in order to determine whether or not it breaches the integrity provisions.
While PCG 2020/4 does not tell us exactly what arrangements will breach the integrity provision in section 19 of the Act, it gives us a risk framework and tells us what factors the Commissioner will consider when deciding whether or not to investigate a particular arrangement.
The Commissioner’s powers
Section 19 of the Act provides the Commissioner with the power to address contrived schemes engaged in with the sole or dominant purpose of gaining (or increasing) the JobKeeper payment. The Commissioner can make a determination where the recipient will be treated as though they were never entitled to the payments. This means amounts received will have to be paid back in whole or in part. The Commissioner may also impose significant penalties and the general interest charge.
When making a decision under section 19, the Commissioner will take into account the following:
- how the scheme was entered into or carried out
- the scheme’s form, substance, duration and the time it was entered into
- the result that would be achieved by the scheme
- any change in the financial position of the recipient of the payment that resulted from or could be expected to result from the scheme
- any change in the financial position of an entity that is connected to the recipient (whether the relationship comes from a business, family or some other context) that resulted from or could be expected to result from the scheme
- the nature of any connection between the JobKeeper recipient and any connected person, and
- any other consequences for the recipient or the connected entity due to the scheme being entered into or carried out.
These are the same factors that the Commissioner considers when making a determination under the general anti-avoidance provisions in Pt IVA of the Income Tax Assessment Act 1936.
PCG 2020/4 does not tell us what arrangements will be a scheme that contravenes the anti-avoidance provisions in section 19 of the Act. Instead, it tells us whether certain entities and arrangements are at a high or low risk of being investigated by the Commissioner.
According to PCG 2020/4, there is a higher risk that the Commissioner will apply compliances resources where an entity receives a JobKeeper payment in the following circumstances:
- the entity’s business is not significantly affected by external environmental factors beyond its control (which includes COVID-19) and/or
- the payment was in excess of that which would maintain pre-existing employment relationships.
Conversely, there is a low risk that the Commissioner will apply compliance resources to review an entity that received a JobKeeper payment where it satisfies each of the following:
- the external operating environment is affected by factors beyond the control of the entity (and its related parties) (which would include COVID-19)
- that affected external operating environment significantly impacts the business of the entity (or another entity that the entity’s employees serve in)
- the entity enters a scheme in response to that impact and satisfies the decline in turnover test, and
- the JobKeeper payment the entity receives is for individuals who were employed and serving in the significantly impacted business prior to the time it was impacted, and remain employed because of JobKeeper.
PCG 2020/4 does not define ‘significantly affected’ and does not indicate how the Commissioner will determine whether an entity was affected by factors outside of its control. However, it seems that if an entity is in an industry that has broadly been able to continue operating despite the COVID-19 restrictions, it is at a higher risk of drawing the Commissioner’s attention.
Examples in PCG 2020/4
PCG 2020/4 sets out eight scenarios and the associated risk that the Commissioner will apply compliance resources to investigate them.
It is important to note that these examples do not indicate the likelihood that the Commissioner will ultimately make a determination on whether or not there was a scheme that contravenes the integrity provisions.
The below table provides a summary of the examples:
|The activity||Risk of ATO resources being applied|
|Company A projects that its GST turnover will not be materially impacted by COVID-19. It agrees with customers to defer making supplies. This artificially decreases its GST turnover below the 30% threshold, allowing it to qualify for the JobKeeper payment.||There is a high risk the Commissioner will apply compliance resources to investigate as Company A’s operating environment is not significantly affected by COVID-19.|
|Company B projects that its GST turnover will not be materially impacted by COVID-19. It agrees with customers to bring forward its supplies to artificially decrease its GST turnover for the next quarter and qualify for the JobKeeper payment.||There is a high risk the Commissioner will apply compliance resources to investigate as Company B’s operating environment is not significantly affected by COVID-19.|
|Company D leases assets to third parties. It has no anticipated decline in projected GST Turnover as a result of COVID-19. Company D transfers all assets to a newly incorporated subsidiary and withholds paying a dividend to Company D to decrease its GST Turnover. There has been no decline in external revenue.||There is a high risk the Commissioner will apply compliance resources to investigate as Company B’s operating environment is not significantly affected by COVID-19.|
|Service Company E receives a Service Fee from Operating Company E to pay wages. Operating Company E experiences a reduction in projected GST Turnover. Service Company E does not experience a reduction. Operating Company E reduces the Service Fee to Service Company E proportionate to its decline in GST Turnover, allowing Service Company E to access JobKeeper.||There is a low risk of the Commissioner applying compliance resources as the scheme was entered into in response to COVID-19’s significant impact on the group’s external operating environment.|
|The same circumstances as example 4 (ie. Operating Company E experiences a reduction in projected GST turnover). Service Company E stands down its employees resulting in a decrease in the Service Fee received (in accordance with the Service Agreement). The reduced Service Fee means that Service Company E now qualifies for the JobKeeper payment.||There is a low risk of the Commissioner applying compliance resources as the scheme was entered into in response to COVID-19’s significant impact on the group’s external operating environment.|
|In the same circumstances as example 4 but no fee renegotiation or standing down of employees is able to occur. Service Company E believes that it is reasonable to estimate that Operating Company E will not be able to afford to pay the Service Fee in full (or at all). Service Company E reduces its projected GST turnover and qualifies for JobKeeper.||Provided the estimate was reasonable, there would be a low risk of the Commissioner applying compliance resources. The evidence used to produce a reasonable estimate will demonstrate COVID-19’s significant impact on the group’s external operating environment.|
|Company F is a parent company that derives income from management fees paid by its subsidiary companies. Its subsidiary companies experience significant decline in GST turnover due to COVID-19 and would each individually qualify for JobKeeper. The annual management fee is waived or significantly reduced by Company F such that it qualifies for JobKeeper too. If the fees were reduced on a pro rata basis throughout the year Company F would not have qualified.||There is a low risk of the Commissioner applying compliance resources as the scheme was entered into in response to COVID-19’s significant impact on Company F’s external operating environment.|
|Company F is a parent company whose income is derived from management fees paid by its subsidiary companies. Its subsidiaries do not experience a decrease in turnover due to COVID-19. Company F alters the timing of the payment of management fees to qualify for JobKeeper.||There is a high risk the Commissioner would apply compliance resources as Company F’s operating environment is not significantly affected by COVID-19.|
|Company G projects that it will not qualify for JobKeeper. It engages subcontractors to perform some of its business activities. Company G defers the payments due to the subcontractors so that they are able to qualify for JobKeeper.||There is a high risk the Commissioner would apply compliance resources as JobKeeper is being used to finance Company G’s expenses rather than maintain existing employment relationships. Compliance resources may also be applied to investigate whether the subcontractors are eligible business participants on the basis that they are actually employed by Company G.|
|Company H enters into a scheme with its customers whereby it agree to defer, reduce or waive the consideration receivable from customers. This reduction means Company H now satisfies the decline in turnover test and qualifies for JobKeeper. Company H then uses the JobKeeper payment to finance the temporary deferral/reduction/waiver of consideration received from its customers.||There is a high risk the Commissioner would apply compliance resources as Company H is not receiving the JobKeeper payments to maintain pre-existing employment relationships and its operating environment is not significantly affected by COVID-19.|
Key takeaways from PCG 2020/4
PCG 2020/4 indicates that the critical consideration as to whether a scheme has a high or low risk of being reviewed by the Commissioner, is whether the external operating environment of the business adopting the scheme has been significantly affected by COVID-19. If COVID-19 has impacted the business and it changes the way it operates to qualify for a JobKeeper payment, there seems to be a low risk of investigative resources being applied.
By focusing their compliance resources in this way, the Commissioner seems to be providing flexibility to businesses. Under this approach, those affected by COVID-19 who have a legitimate purpose for changing their operations are less likely to run afoul of the Commissioner.
It is important that business who have or are intending to claim a JobKeeper payment maintain contemporaneous documentation to support their eligibility – particularly where they operate in an industry that has not been impacted as heavily by COVID-19.
Similarly, entities who have made changes to their management fees, service fees or have entered other arrangements that may decrease their GST turnover should be vigilant in maintaining contemporaneous documentation showing the that the changes were due to COVID-19. It is also important to show that the result of the change was ensuring the business’ sustainable operation, including the ability to maintain employees.
PCG 2020/4 does not assist us in determining whether or not an arrangement is likely to be found to contravene the anti-avoidance provisions. As there are significant penalties for receiving a JobKeeper payment when you are not entitled, if you are in doubt as to whether you are eligible, we recommend that you obtain legal advice to ensure your actions do not inadvertently breach section 19 of the Act.