Following from the Treasurer’s media release on 24 April 2020, the Government has now released grouping rules to deal with in-house employment service entities in commonly owned groups, along with other JobKeeper measures. These measures are contained in the Coronavirus Economic Response Package (Payments and Benefits) Amendment Rules (No. 2) 2020.
The new Grouping Rules
A key dilemma that faced many employers operating within commonly owned groups was that the JobKeeper was only tested on an entity by entity basis. This meant that many businesses with employees held in service entities or similar structures could not qualify for the JobKeeper wage subsidy.
In particular, an in-house employment entity that did not derive any revenue, could not demonstrate any decline in revenue for JobKeeper purposes notwithstanding it may have supported other entities in a commonly owned group that have suffered a declined in turnover.
To rectify the above issue, a new ‘modified test’ has been introduced which allows employing entities that hire employees for the benefit of a commonly owned group to measure turnover based on other members’ turnover in that group. This is expected to benefit many service entities and administration companies that have been set up to provide labour support services within a commonly owned group.
How the new Modified Test works
In order for an employing entity (i.e. the entity that has employees) to apply a modified test in measuring its turnover, the employing entity must satisfy the following conditions:
- The employing entity is a member of a consolidated group, consolidatable group or a GST group. Broadly, this means that the employing entity must either be a member of a 100% commonly owned group which has an Australian corporate holding company as the parent or the service member must be part of GST registered group with the Tax Office
- The employing entity’s principal activity is supplying labour support services to other members in the group consisting of the performance of work performed by individuals employed by the employing entity
- The employing entity does not supply employee labour services outside the group (other than supplies that are considered incidental to its principal activity of supporting the group)
- The services provided by the employing entity are made to one or more members (test members) who have the principal activity of making supplies outside the group. This concept of test member then becomes important in determining the turnover that needs to be considered.
Broadly, where the above conditions have been satisfied, the employing entity can then combine the turnover of each test member (as referred to above) for the purpose of determining whether the employing entity has suffered a decline in turnover for JobKeeper purposes.
Consider the following example:
Having regard to the above diagram, assume the following:
- HoldCo is the head entity of a tax consolidated group comprising Service Entity, and subsidiary members Operating Company 1 and Operating Company 2
- HoldCo’s only revenue source is dividend income from Operating Company 1 and Operating Company 2
- Service Entity employs individuals and provides labour support services to other members of the group. Service Entity does not derive any revenue
- Operating Company 1 turnover for the June 2019 quarter was $500,000 and projected GST turnover for the June 2020 quarter is $300,000
- Operating Company 2 turnover for the June 2019 quarter was $100,000 and projected GST turnover for the June 2020 quarter is $90,000.
In applying the modified test, Service Entity uses the turnover for Operating Company 1 and Operating Company 2 for the purposes of determining whether it has suffered a decline in turnover under the JobKeeper rules. Holdco’s revenue is not counted as it does not have any principal activity of making supplies outside the group.
The above means that Service Entity’s GST turnover under JobKeeper is determined as follows:
- Current GST turnover = $600,000 ($500,000 + $100,000)
- Projected GST turnover = $390,000 ($300,000 + $90,000)
As Service Entity’s turnover under the modified test has declined by $210,000 ($600,000 – $390,000) representing a 35% decline, the company is eligible for JobKeeper.
The tests are quite restrictive in their application as they are limited to GST and consolidated groups and entities that principally provide employment services only. Many private groups have separate service entities which are not part of a consolidated or GST group and provide broader services rather than just employees. However, the ATO has provided further guidance so these entities can meet the basic test. We have explained this further below.
We also have the following observations:
- An employing entity can apply the current alternative tests available to determine a test member’s current GST turnover, where the basic test does not provide a reasonable comparison. This means that, for example, if a test member has undergone a restructure, an alternative test can be used together with the new modified rules in determining a test member’s turnover
- There are now broadly two categories of tests that can be applied in determining JobKeeper eligibility:
- Entity by entity testing – using either the basic test or alternative test
- Group testing – using the modified test and combined either with the basic test or alternative test for group members
- Groups which have a trust as the head entity must effectively be registered as a GST group with the Tax Office in order to qualify for the modified test. Broadly, a GST group exists where there is 90% or more common ownership and one member of the group deals with all GST obligations of the group
- Other commonly owned groups, which do not have a holding corporate entity in Australia, must also be registered as a GST group in order to apply the modified test
- Based on the explanatory statement to the modified rules, intra-group transactions are to be ignored when determining turnover of test members. However, the legislative rules do not appear to be clear on this
- There may still be barriers for certain in-house employing entities satisfying the modified test, where they provide more than incidental services to entities outside the group or provide significant non-employment services such as provision of assets. In such situations, these entities may need to rely on the basic test
- The modified tests provide the Commissioner with a discretion to prevent the tests applying in certain situations, which may be deemed inappropriate such as risking the integrity of the JobKeeper scheme. This may be the case where significant restructuring is undertaken to bring a particular entity within the rules where the business is not otherwise significantly impacted by external economic factors.
What if my service entity does not meet the requirements for the new Modified Test?
The ATO has released guidance to address situations where internal entities adjust their related party fees or their structure to meet the Jobkeeper test. The key messages from the ATO in this guidance are:
- The ATO will look at schemes where a restructure or transaction is deliberately undertaken to access JobKeeper, and where the group’s business or employment relationships are not significantly impacted by economic factors outside the control of the business, and
- Where the restructure or transaction is in response to economic factors outside the control of the business, the ATO will generally not apply compliance resources to the entity.
We expect that where the service entity is not part of a tax consolidated or GST group it should be reasonably remunerated for its services. Therefore, it should be possible to adjust the inter-entity service fee in response to COVID-19 or other related economic impacts impacting the operating entity, such that it meets the basic test.
Service Company E and Operating Company E are not part of a consolidated or GST group. However, the only income Service Company E receives is service fees for employing staff provided to Operating Company E. Operating Company E has experienced a significant reduction in turnover due to economic factors. This is not reflected in the income of Service Company E, as it is remunerated on a cost-plus basis.
Where service company E reduces its services fee proportional to the reduction in Operating Company E revenue it will be eligible for the Jobkeeper concession
The ATO has stated that, given the reduction in the service fee is in response to the external economic factors impacting Operating Company E, there is a low risk it will apply compliance resources to consider the application of the anti-avoidance provision.
Bentleys advisors can help you properly document and structure your related party arrangements in line with commercial and ATO guidance to mitigate the risk of the anti-avoidance provision applying to your Jobkeeper claim.
Other JobKeeper measures announced
A summary of other JobKeeper measures announced include:
- One in all in principle: Confirming that the ‘one in all in principle’ applies. That is, an employer cannot select certain employees to be included in JobKeeper while excluding others. Employers who have already registered have until 8 May to notify eligible employees of their participation in the scheme if not already notified
- Charities and exclusions of Government revenue: Charities (other than schools and universities) are now able to elect to exclude government revenue from the JobKeeper turnover test. This is to ensure that charities are not adversely affected for JobKeeper where they are delivering significant services that are funded by government. The Charity can elect to exclude employees from the scheme where they are fully funded from that government revenue
- Religious practitioners not employees to be included: Payments to religious institutions in respect of religious practitioners (with the exception of those that are students only) are now able to qualify for JobKeeper, recognising that many religious practitioners are not ‘employees’ of their religious institutions
- Full time students who are 17 years or younger: Such students that are not financially independent are now excluded from JobKeeper. This amendment only applies for fortnights commencing from 11 May 2020, where those employees might already have received Jobkeeper benefits.
- International aid organisations: The changes allow entities that are endorsed under the Overseas Aid Gift Deductibility Scheme, or for developed country relief, to meet the requirement that not-for-profits pursue their objectives principally in Australia for the purpose of the JobKeeper rules.
- Universities: The JobKeeper rules now clarify that the core Commonwealth Government financial assistance provided to universities will be included in the JobKeeper turnover tests and the University must choose a six month period commencing from 1 January 2020 as the test period.
What do to next
These recent JobKeeper changes now add a greater level of complexity for taxpayers when assessing their options and determining their JobKeeper eligibility. For groups with employment entities or related party service charges, where JobKeeper eligibility was in doubt, eligibility should now be revisited in light of these recent announcements.
Please contact your local Bentleys advisor if you require further information or assistance.
We, at Bentleys, are doing everything we can to help businesses come out of this challenging time in good shape.
We will continue to update our COVID-19 resource hub with important developments, so please return soon.
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.