The decline in turnover test under the JobKeeper Rules requires a comparison of the entity's 'projected GST turnover' for a particular turnover test period (which occurs during a post COVID-19 period in 2020) with the entity's 'current GST turnover' in a comparison period (which occurs during an equivalent pre-COVID-19 period in 2019) to determine the percentage of the shortfall.
In preparing the calculation, the LCR has set out an approach based on three steps that must be followed in allocating supplies (and revenue) to a period, in order to calculate the relevant GST turnover.
As a general rule, the ATO considers that supplies should be allocated to a period based on the 'time of supply'.
As an alternative to using the 'time of supply', the Commissioner will allow alternative methods – based on accruals accounting, a GST attribution basis, or income tax accounting (if not registered for GST). If an alternative method is applied, Steps B and C below do not need to be applied.
The LCR has also confirmed the interpretation of the JobKeeper Rules that the decline in turnover test need only be satisfied once (i.e. retesting is not required) and that the ongoing monthly reporting requirements will not impact the ongoing eligibility of an entity to receive the JobKeeper payments.
Considering each of the steps:
Step A – what supplies are relevant when calculating projected GST turnover and current GST turnover?
The LCR confirms that the following items are to be included as a 'supply' for the purposes of calculating projected GST turnover and current GST turnover:
- Tax deductible gifts that are not received from an associate.
- Gifts of money/property that are not received from an associate.
- Government grants (where they give rise to a supply).
- Exports of goods/services.
The LCR confirms that the following items should not be included as a 'supply' for the purposes of calculating projected GST turnover and current GST turnover:
- The JobKeeper payment itself.
- Any Government grants that do not give rise to consideration for a supply, including cash flow boost payment, relief to childcare providers, and any other payment of a grants to an entity that does not have any binding obligations to do anything in return for the grant.
- Supplies that are input taxed – for example, financial supplies including the lending of money or provision of trade credit, and renting out residential premises.
- Supplies that are not connected with Australia – for example, supplies of services not made through a business you carry on in Australia.
- Supplies for which you are not the supplier but are responsible for the GST – for example, reverse charge arrangements, or acting as agent for a non-resident principal.
- Supplies not for consideration (and are not taxable supplies between associates).
- Supplies not made in connection with an enterprise that you carry on – for example, the sale of a private motor vehicle.
In order to cater for businesses that are making substantial changes to their structure, the LCR confirms that the following items should not be included as a supply only for the purposes of calculating projected GST turnover:
- Supplies made in winding up, or substantially (which in this context is >10%) and permanently (longer than 1-2 years) reducing the size or scale of your enterprise.
- Supplies of capital assets – for example, the transfer of ownership of a capital asset.
Step B – how you allocate supplies to relevant periods
In order to calculate current or projected GST turnover, supplies will need to be allocated to a comparison or turnover test period (as applicable). To make these allocations, the entity will need to determine when a supply was 'made' during a period, or is likely to be made in a future period.
The concept of when a supply is 'made' is not dealt with in the GST legislation, and will be determined on a case by case basis and based on the nature of the supply. Unless the entity chooses to apply an alternative method for calculating when a supply is made, the attribution rules in the GST legislation are not able to be applied. This means taxpayers can't simply rely on the revenue reported in the BAS during the relevant periods (as this is largely driven by the attribution rules)
The LCR indicates that the following principles will be accepted by the Commissioner to determine when a supply is made:
- Supplies not made on a periodic basis – the supply will be made when either the goods are removed, are available to the recipient, or when it has become certain that a supply has been made. For example, a supply of services is made when the services are performed.
- Supplies made on a periodic basis –supplies are ‘made’ on a continuous and uniform basis throughout each period (e.g. for a lease, a separate supply made every month).
- When a supply is likely to be made. This requires a determination of whether the supply is 'more likely than not' to be made. In making any prediction regarding future events that ATO will have regard to the reasonableness of the determination based on the business circumstances of the entity at the time of the determination. Relevant considerations impacting the likelihood of a supply could include customer cancellations or modifications to supply contracts since 1 March 2020 and government COVID-19 restrictions (refer Example 2), amongst other things.
Regarding the ATO compliance approach - the Commissioner accepts that actual turnover may differ from projected GST turnover. If there is a difference between actual turnover and projected GST turnover this will not result in a loss of access to the JobKeeper scheme unless the Commissioner determines that the calculation of projected turnover was not reasonable. Retaining records supporting the reasonableness of these calculations is essential.
Step C – how you determine the value of each supply that has been allocated to a relevant period
Once the supply has been allocated to the relevant period under Step B, the relevant value of the supply must be determined.
What should be done regarding change in value resulting from adjustments, bad debts, and other supplies?
The value of a supply can fluctuate due to subsequent events that change the value of that supply, such as refunds, discounts, or bad debts. Because this gives rise to practical difficulties in ascribing value, the LCR confirms that the following changes in value should be taken into account:
- For both the comparison period and the turnover test period, if the determination is made at the end of that period, only include the events that occur during that period even if subsequent events change the value of the supply (ignore adjustments made in that period that relate to supplies from prior periods).
- For the turnover test period, if the test time occurs prior to the end of the period, an objective assessment of value should be made based on events that are likely to occur, based on normal business practice and experience, that could impact the value of the supply.
Adjustments for bad debts should be ignored as there is no change in value of the supply.
Alternative methods
In order to cater for practical compliance difficulties in determining the time at which a supply is made or likely to be made, the ATO confirms that the following alternative methods may be used:
- Accrual accounting – the value of supplies that you made or a likely to make in an accounting period may closely align with the time revenue is or would be recognised for accounting purposes (i.e. accruals accounting).
- GST attribution basis – applies the attribution rules in GST Act (rather than when supply is ‘made’) to allocate the GST-exclusive value of supplies to a relevant period. If this approach is adopted all adjustments must be ignored (including those that occur in a subsequent period but relate to the relevant period) because this would change the value of the supplies during the relevant period.
- Income tax accounting – if an entity is not registered for GST it can use the same accounting method used for income tax purposes.
If the alternative methods are used the Commissioner requires that the same alternative method is used and applied consistently for relevant periods. Reasonable records should be kept to demonstrate which alternative method was chosen.
LCR examples
The LCR includes several simple examples generally regarding businesses that are required to be closed as a result of the COVID-19 measures. It is hoped that the ATO will incorporate some flexibility in applying the tests described in the LCR in the inevitably more difficult real world examples, or provide further detailed guidance to assist taxpayers.
Observations
The LCR does not provide any specific examples of errors in calculating projected GST turnover or in ascribing value and what is not considered likely or reasonable in the circumstances. In the absence of further guidance it is expected that the ATO will properly consider the significant difficulties faced by business during the COVID-19 crisis in later construing what is 'likely' or 'reasonable' (see comments by Deputy Commissioner Jeremy Hirschhorn: Senate Committee on COVID-19 on 7 May 2020). Aside from stating that further enquiries would be made regarding reasonableness, the LCR does not specifically address the consequences of making an error the calculation of projected GST turnover.
There are certain items that the LCR does not address, including:
- The alternative tests for the decline in turnover - alternative tests cater for situations where an entity is not able to satisfy the basic decline in turnover test;
- The amendments to the JobKeeper Rules that cater for employer entities which operate in certain group structures that do not satisfy the basic decline in turnover test; and
- The ability of the Commissioner to determine that an entity is not entitled to some or all of the JobKeeper payment where that entity entered into a scheme for the sole or dominant purpose of receiving a JobKeeper payment.
Please contact a member of our Tax team if you would like to discuss any aspect of this article in further depth.