- A modified test to measure the decline in turnover is now available to employer entities in certain group structures
- Businesses should check that their group is eligible for the modified test
- The modified test to measure the decline in turnover for an employer entity can be applied in conjunction with the alternative tests applicable to other members in its group
A legislative instrument, Coronavirus Economic Response Package (Payments and Benefits) AmendmentRules (No. 2) 2020 (Amending Rules No. 2) has been registered to implement the refinements and clarifications to the JobKeeper Scheme that were announcedby the Treasurer on 24 April. The changes include providing a modified decline in turnover test for certain group structures.
One of the issues arising from the first Coronavirus Economic Response Package (Payments and Benefits)Rules 2020, was the basic decline in turnover test in section 8 did not cater for circumstances where an entity was an employer entity that operated in a group structure.
In such group structures, most or all of the employees may be employed by one entity, the ‘employer entity’, whose principal activity is to provide the services of the employees and potentially other services to other members of the group. As such these employer entities do not typically have significant dealings outside the group and their turnover may not reflect the overall performance of the group.
To address this issue, a modified decline in turnover test was introduced in section 8A of the Amending Rules No.2.
However, before considering whether the employer entity is eligible for the modified test to work out its decline in turnover, the employer entity, still needs to satisfy the other basic requirement to qualify for the JobKeeper scheme, i.e. on 1 March 2020 it carried on a business in Australia. The ATO website has guidance on carrying on a business and supporting information.
Eligibility for the Modified Test
The modified test applies if all of the following are satisfied (subsection 8A(1):
- the employer entity is a member of a consolidated group, consolidatable group or a GST group
- the employer entity’s principal activity is supplying other members of the group with services (employee labour services) consisting of the performance of work by individuals the employer entity employ.
- the Commissioner has not determined that the modified decline in turnover test does not apply to the employer entity.
The Explanatory Statement(ES) to Amending Rules No.2 provides that the principal activity is the main or predominant activity that the employer entity carries out. The employer entity may provide other services to the group but it must not be an operating entity of the group. It also must provide no more than incidental services to third parties.
The terms ‘consolidatable group’, ‘consolidated group’, ‘GST group’ and ‘member’ (in relation to being a member of a consolidatable group, consolidated group or a GST group) are defined in the Income Tax Assessment Act 1997 (the ITAA 1997), including by reference to the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act). In summary:
- a consolidated group consists of a head company and all the companies, trusts and partnerships that are resident in Australia and are wholly‑owned subsidiaries of the head company (see sections 703-5 and 703-15 of the ITAA 1997);
- a consolidatable group consists of the wholly owned group which is able to consolidate for income tax purposes (see section 703-10 of the ITAA 1997); and
- a GST group exists when the ATO has been notified of its formation and its members broadly have 90% or more common ownership (depending on the entity type) (see Division 48 of theGST Act and Division 48 of the A New Tax System (Goods and Services Tax) Regulations1999). One member of the group (the representative member) completes activity statements and accounts for GST on behalf of the whole group.
Where an employer entity is seeking to rely on its existing GST group which includes various structures such as discretionary trusts and partnerships, the entity should check that each member of the group still satisfies the membership requirements for the GST group before applying the modified test.
The Modified Test
An employer entity will satisfy the decline in turnover test if all of the following are satisfied at a test time:
- in a turnover test period in which the test time occurs, the employer entity:
- supplies employee labour services to one or more members of the group (each of which is a ‘test member’) for which their principal activity is making supplies to entities that are not members of the group, and
- only supplies employee labour services to entities that are members of the group other than supplies that are merely incidental to the principal activity of the entity
- the employer entity would satisfy the basic decline in turnover test in subsection 8(1) of the Rules at the test time if modifications were made.
The modifications to the test are, in applying the basic test:
- instead of using the employer entity’s projected GST turnover for the turnover test period, the sum of the projected GST turnovers for that period of each test member is to be used, and
- instead of using the employer entity’s current GST turnover for a relevant comparison period, the sum of the current GST turnovers for that period of each test member is to be used.
This ensures that the decline in turnover test is applied to group members that predominately undertake transactions with external entities on an arms-length basis rather than measuring the decline in intergroup transactions.
To avoid doubt, under subsection 8A(6), if the employer entity is a member of more than one of the following, a consolidatable group, a consolidated group, or a GST group, it may satisfy the modified test in relation to its membership of any of those groups. According to the explanatory statement, this addresses situations in which an entity may have both formed a consolidated group or is part of a consolidatable group and is part of a GST group also.
The ES sets out some examples of the application of the modified test.
Alternative test applies to a group member
The modified test also deals with circumstances in which an alternative decline in turnover test applies to another member of the group because there is not an appropriate relevant comparison period in 2019, for e.g. a new business that commenced in January 2020.
The basic test may not accurately reflect the downturn in activity that the business has suffered. The modified test is adjusted to account for the fact that these alternative tests are not applied by the employer entity.
Subsection 8A(4) provides that this is the case if:
- the Commissioner has determined (under subsection 8(6) of the Rules) that an alternative test applies to a test member, and
- the alternative test involves applying the basic test to the test member for the turnover test period, but using a different calculation instead of the test member’s current GST turnover for a relevant comparison period.
Where this is the case, that different amount determined under the alternative test is to be used.
Commissioner’s determination that the modified test does not apply
To address the risks to the integrity of the JobKeeper scheme, the Commissioner may determine in writing that the modified test does not apply to a particular entity. The Commissioner may make a determination under subsection 8A(5) if satisfied, having regard to the purpose of the JobKeeper scheme and any other matter the Commissioner considers to be relevant, of either or both of the following:
- that the modified test is unsuitable, in the circumstances of the group, for measuring the extent to which employees within the group are performing work in operations that have suffered a relevant decline in turnover. This might include, for example, where significant restructuring that affects turnover in 2020 results in the modified test being inappropriate to determine entitlement to the JobKeeper payment
- applying the modified test to the entity may, in the circumstances of the group (including the group’s history of compliance with its obligations under taxation laws), risk the integrity of the Commissioner’s administration of the JobKeeper scheme.
Should the Commissioner make such a determination, an entity may object against the determination in the manner set out in Part IVC of the Taxation Administration Act 1953 (deals with objections, reviews and appeals regarding particular actions of the Commissioner).