The Commissioner of Taxation has released a practical compliance guide (PCG 2020/4) outlining the operation of its integrity rule (Section 19) and how he may deploy compliance resources to certain arrangements that enable an entity to obtain access to the JobKeeper payments.
Importantly, the ATO has labelled certain arrangements as a ‘low risk’ of deploying compliance resources where they are in response to entities being affected by COVID-19. This can include the reduction of a service fee by an employment entity where either the underlying entity has suffered a reduction in turnover due to COVID-19 or the employment entity has had to legitimately reduce the staff hours of the employees due to COVID-19. To the extent that the arrangements are not COVID-19 related (e.g. deferral of sales or invoicing), the ATO expects to deploy resources to those taxpayers.
In this bulletin, we summarise those cases contained in the PCG and also outline additional issues to consider before an employment entity reduces its service fee (e.g. does it carry on business, can it legally reduce the fee and will the arrangement result in a denial of deductions).
What is covered by the PCG?
PCG 2020/4 provides guidance on when the ATO will deploy compliance resources to certain arrangements that may otherwise provide access to the JobKeeper payment provisions. In particular, the PCG provides examples that would and would not attract compliance resources.
Generally, where the arrangement is due to external factors that are COVID-19 related or are due to real commercial circumstances, the ATO has stated that such cases are low risk. However, to the extent that the arrangements are not, the ATO has stated that it will be seeking to deploy compliance resources to such arrangements. A table of the examples contained in Section C below.
Is the PCG a sign off on certain cases?
The PCG does not sanction any actions or arrangements and only highlights the risk of the ATO deploying compliance resources. Care should be taken to rely on these examples as a safe harbour. In all cases, commercial decisions should be made by the client and the risks associated with the integrity provision need to be clearly outlined before a client makes any decision. Due to the penalties involved, we recommend significant care be taken by an entity in all cases (see Section H for further information about discussing your case with the ATO).
Summary of cases
Below is a summary of cases outlined in PCG 2020/4 and the risk of the ATO deploying compliance resources to such cases. Please ensure you read the sections below, which outline other issues to be considered.
| Case covers | Risk rating | |
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Deferring supplies
Supplies are deferred (e.g. invoicing deferred) to a later period by an entity so that JobKeeper payments can be obtained. There is no material impact of COVID-19 in the industry. |
High risk of resources being deployed |
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|
Bringing forward supplies
Supplies are brought forward to an earlier period (e.g. invoicing is brought forward) so that JobKeeper payments can be obtained in later months. There is no material impact of COVID-19 in the industry. |
High risk of resources being deployed |
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|
Transfer of business
A business is transferred to a relayed party (e.g. to a subsidiary in a consolidated group) where income is reduced dramatically. The entity is not otherwise significantly affected by COVID. |
High risk of resources being deployed |
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|
Employer entity reduces service fee
An employment service entity reduces its fee to other business entities in line with their reduction in revenue due to COVID-19. |
Low risk of resourced being deployed |
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|
Employer entity stands down employees
An employment service entity reduces staff hours, which causes an indirect reduction in fee (in a cost-plus agreement). The reduction of employment is due to COVID-19. |
Low risk of resourced being deployed |
|
|
Operating entity unable to pay service fee
The employment service entity charges the full rate to an operating entity, however the operating entity may be unable to pay the debt due to reductions in cash flow that are COVID-19 related. The employment service entity can include the ‘expected reduction’ in the service fee (e.g. through future credit notes) when estimating projected GST turnover. Please note that a bad debt may not reduce projected GST turnover and the reduction may need to be catered for by a credit note. |
Low risk of resourced being deployed |
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|
Parent company reduces management fees
Similar to example 4, the parent entity reduces its fee to the subsidiary entities affected by COVID-19. |
Low risk of resourced being deployed |
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|
Parent company changes timing of management fee
Similar to example 7, however the fee is not reduced or deferred due mainly to factors associated with COVID-19. |
High risk of resources being deployed |
Are there other issues you need to be concerned about before applying the integrity provisions?
Yes. For example, although example 4 provides an appropriate basis for reducing the fee, there are at least three additional things to cover off before looking to apply this PCG.
Do I carry on business? Not all employment entities are seen to carry on business. Some simply charge their cost from year to year and have never made a profit or never make a profit. Some service entities do not have a written agreement. There may be risks associated with arguing an entity ‘carries on business’ in a case where:
o it has never made a profit,
o does not have an intention to do so, and
o has never entered into a written agreement covering the services.
Accordingly, first review the circumstances relating to the employment entity. If the entity has a high risk of not operating a business, the JobKeeper conditions may not be satisfied in the first place.
Can I reduce the fee? To the extent that there is an agreement between the parties, the agreement may not allow for a reduction in fee. Accordingly, the parties may need to consider agreeing to a specific change to the fee. To the extent that no agreement exists and you are relying on a verbal contract, it would be advisable to consider reducing any amendments to writing and to also consider closely the previous dot point.
Does a reduction impact on my deductions? The decisions in Ure v. Federal Commissioner of Taxation 81 ATC 4100 and Fletcher & ORS v FC of T 91 ATC 4950 may deny deductions where the costs are incurred by an entity (e.g. an employment entity) to provide support to a related party (where income is not otherwise earned on the expenses). This may be a risk for service entities that must be considered. Where the arrangement is made, to ensure that the entity (e.g. the employment) can continue to derive future income, it may be arguable that deductions are not denied. Furthermore, if the employment entity receives the JobKeeper subsidy, this amount may reduce the overall losses incurred by the employment entity. To the extent that the overall loss is expected to be material (after JobKeeper payments), we recommend running your situation by a Tax Partner.
What is the integrity provision?
The integrity provision (integrity provision) for JobKeeper payments is contained in Section 19 of the Coronavirus Economic Response Package (Payments and Benefits) Act 2020. The provision provides that, where schemes are entered into for the sole or dominant purpose of obtaining a JobKeeper payment, or an increased amount; the Commissioner may determine that the entity was never entitled to the JobKeeper payment (or may reduce the amount specified by the Commissioner in the determination). The provision allows the Commissioner to take into account factors similar to Part IVA.
What is the risk associated with the application of the integrity provision?
If the integrity provision applies, the entity may have a reduced entitlement to JobKeeper payments (including all or some of the amount), which can result in an ‘overpayment debt’ and the general interest charge on the debt. For example, an employer with 100 employees could have received $1.8M of JobKeeper payments over the 6-month period. This would represent a significant overpayment debt to the extent that the integrity provision is applied by the Commissioner.
Are legitimate arrangements a scheme?
The term ‘scheme’ has a very broad meaning. It covers any arrangement or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. An arrangement covers any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. Accordingly, almost all actions can come within the meaning of the term ‘scheme’, irrespective of whether they are legitimate or not. Whether the ATO will apply the integrity provision depends on the circumstances surrounding the scheme.
Should you approach the ATO with your case?
Yes, if you are concerned about the relevant arrangement and the potential application of section 19, we recommend requesting the ATO consider your circumstances. While this could delay your entitlement to JobKeeper, it could significantly reduce the risk of overpayment debt and joint and several liability on JobKeeper payments. Given the release of PCG 2020/4, it should be easier to demonstrate to the ATO which case your example falls in and to provide relevant evidence regarding your commercial circumstances that have resulted in a reduction in turnover. We note that the ATO is currently working with a number of taxpayers in reviewing their arrangements covered by situations similar to those in the examples in PCG 2020/4. We can assist in discussions with the ATO where you are concerned about the operation of the integrity provision.
What are the next steps?
It is important to consider your position and how the rules apply to your circumstances. Contact their Pitcher Partners representative to review your situation and to determine what action is required.
