Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No 2) 2020

The key amendment is to the basic 'decline in turnover test' by expanding its scope to allow it to cater for employer entities that operate in certain group structures.

Under the original formulation of the JobKeeper Rules, employer entities were ineligible to qualify for the JobKeeper Scheme as these entities often did not ordinarily have dealings external to the group of entities, and therefore were unable to demonstrate the requisite decline in turnover. This could be the case, even where there has been a significant decline in the turnover of the entities comprising the group, who used the employees of the employer entity.

The enactment of a modified "decline in turnover test" for group entities is a welcome development as it recognises that corporate groups have entities which carry out specific functionalities, such as employer entities, that principally service other operational entities of a group, and those employer entities should be eligible for the JobKeeper Scheme in circumstances where there has been a significant decline in turnover for group. There are however some points in the detail which need to be carefully considered by corporate groups in assessing their respective eligibility.

Eligibility to apply modified test

Entities are eligible to apply the modified test where:

• the entity is a member of a consolidated group, consolidatable group, or a GST group;
• the entity's principal activity is supplying other members of the group with employee labour services consisting of the performance of work by individuals the employer entity employs; and
• the Commissioner has not made a determination preventing the employer entity from applying a modified decline in turnover test. 

Modified test

The modified test will apply where an entity provides the services of its employees solely to one or more related entities where those related entities provide supplies to unrelated third parties. The modifications are designed to ensure that intragroup transactions are not included in the decline in turnover test. 

The usual decline in turnover test is modified so that the projected or current GST turnover is determined with reference to the combined projected/current GST turnovers of the related entities using the services of the employer entity.

Additional clarification is also provided where an entity is a member of more than one consolidated group, consolidatable group or GST group. In these circumstances, the employer is taken to satisfy the decline in turnover test if it satisfied that test in relation to any one of those groups.

Some observations

There are a number of points which need to be carefully considered when assessing eligibility for the modified test: First, is the requirement that the entity's principal activity is employee labour services to other entities in the group who make supplies to third parties. It would appear there is little room to move on this requirement with Treasurer's Explanatory Statement making it clear that the entity must not be an operating entity of the group, and must provide no more than incidental services to third parties. Entities that carry on a number of other operational activities within the confines of the corporate group may, as a question of fact, find themselves unable to say that their principal activity is confined to providing employee labour services.

Second, the calculation of the decline of turnover only captures the turnover of group entities to which the employee entity provides employee services. In larger corporate groups, care will need to be taken to ensure there is sufficient nexus between the services being provided and the relevant entities which are to be included in the calculation. This is an important question for finance teams considering any financial modelling of projected GST turnover.

Other features

The Commissioner has the power to determine that the modified test does not apply to an entity where the test is unsuitable having regard to the purpose of the JobKeeper scheme or there is a risk to the integrity of the Commissioner's administration of the JobKeeper scheme.

However, the Commissioner does not have the power to determine which entities comprise a group of entities for the purpose of the JobKeeper scheme. By not conferring on the Commissioner a power to determine the scope of a group, the intent appears to confine qualification for the JobKeeper Scheme under the new modified decline in turnover test to consolidated groups, consolidatable groups or GST groups under.

PCG 2020/4 ('PCG')

In determining whether to apply compliance resources, the ATO will consider the occasion for and result of the scheme in the context of the entity and its external operating environment. The Commissioner is particularly concerned with an entity that accesses or increases JobKeeper payments where the entity's business is not significantly affected by external environmental factors beyond its control, or would entitle the entity to JobKeeper payments in excess of its pre-existing employment relationships.

To determine whether a scheme has been entered into for the sole or dominant purpose of receiving a JobKeeper payment, the Commissioner will have regard to a range of factors including form and substance of the scheme and the result that would be achieved but for the scheme (which are the matters that the Commissioner must have regard to in applying the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (Cth)).

The PCG also provides a number of examples where resources would be allocated to investigate the scheme. The examples appear to be simplified in order to demonstrate the requisite purpose as the ATO does not have regard to:

• The role of third party customers in requesting a deferral of supplies (Example 1) or bringing forward the supplies (Example 2). This does not consider the impact of the drastically changed business environment on the third party customer and the supplier company catering to its client's circumstances;
• A pre-existing intention to restructure ahead of the JobKeeper legislation being introduced (Examples 3 and 4);
• Other commercial reasons for the parent company to determine a reduction in the management fee (Example 7) or the timing or that reduction (Example 8). 

Helpfully, the ATO has also provided examples where compliance resources are unlikely to be applied such as where there is a significant impact on the external operating environment of an entity or if there is a reasonable projection of a decline in GST turnover. 

What next steps should I take?

If you would like assistance in determining whether alternative decline in turnover tests could apply to your business and assist you in obtaining the JobKeeper payment, please contact any member of the MinterEllison team listed below.