Author: Tony Rule, Partner, TAG Financial Services
So its 2022 and hopefully COVID-19 is a distant memory. There is a knock at the door – it’s the ATO (with their hand sanitisers and masks – the new normal) and they have come to audit your 2020 JobKeeper claim. Are you safe or should you be worried?
The ATO have issued guidelines on how it will analyse JobKeeper claims, providing examples of what it believes are valid and invalid situations where JobKeeper has been accessed. Here are the things that you should do now to protect your future self…
Overall principles
We all know that there is no such thing as a free lunch – “The Commissioner will be able to recover any overpayments and will have the power to impose significant penalties and interest.” The ATO will be auditing situations where they believe there have been “contrived” or “artificial” arrangements that technically meet the eligibility requirements, but have been implemented for the sole or dominant purpose of accessing the JobKeeper payment.
In deciding whether there has been a scheme for an entity to access JobKeeper payments inappropriately, the Commission can reach a determination based on a range of factors including:
- The manner in which a scheme was entered into or carried out,
- The form and substance of the scheme,
- The timeframe and length of time of the scheme,
- The result achieved by the scheme,
- The change in financial position resulting from the scheme,
- The change in financial position of a connected party resulting from the scheme,
- Any other consequence for the entity or connected party resulting from the scheme, and
- The nature of any connection between the entity and a connected party.
What are they looking for?
The Commissioner will be looking to see that the external environment has caused a decline in revenue for the business and that the result has not been contrived or artificially arrived at. In determining whether a particular company should be selected for audit, it is likely that the Commissioner will revert back to one of his favourite tools – benchmarking.
Every month over the next six months, businesses that are participating in the JobKeeper programme will be providing actual sales for last month and expected sales for the coming month. In addition to this, the Commissioner will also have monthly and/or quarterly GST figures for the current year and previous years for all businesses in all industries. This information will help the commission to build an “average” picture of which industries have been effected and by how much. If you deviate negatively from this “average” picture by too much, you can expect to be audited to determine why your situation is so much worse than your competitors. This won’t be the only selection measure, but it will certainly be in the mix.
This deviation from the norm does not necessarily mean that you should not have claimed JobKeeper, but it will certainly mean that questions will be asked. And it is how you answer those questions that will determine your fate.
Importantly, you do not have to prove that COVID-19 was the factor beyond the control of the entity that caused the decline in revenue – you just need to show that decline was caused by external forces and was not contrived or artificial.
Thou Shall Not
The guidance issued by the ATO provides a number of examples of schemes that they will want to investigate and then act upon if necessary. These examples include:
- A company operating in an industry where a material impact on revenue is not expected, agrees with customers to defer (or accelerate) the supply of goods in order to meet the decline in revenue test. The ATO would argue that because the result was contrived (rather than being as a result of the external environment), the Commissioner would have issue with this arrangement. This issue would also extend to situations where supplies were made correctly, but the payment of cash or the issues of invoices was deferred or accelerated artificially.
- A company leases assets to third parties and there is no expected reduction in revenue. The company then transfers all of its assets (and future revenues) to a new subsidiary which results in the original company meeting the decline in revenue test to obtain the JobKeeper payment. As the company’s revenue was not affected by the environment and that the decline in revenue was artificial, it is likely that the Commissioner would have issue with this arrangement.
The examples also talk through a situation where a service company (employing employees) provides services to a related operating company that invoices external customers. Where the operating company suffers a decline in revenue due to the environment, and the service revenue charged by the service company is reduced accordingly to access the JobKeeper payment, then it is likely that the ATO will see this as a legitimate situation even though the related parties have a agreed to reduce the service revenue. This is because the change to the service fee revenue was in response to the decline in external revenue due to the external operating environment.
By inference, if a service company agrees to reduce the revenue charged to a related operating company in order to claim the JobKeeper payments and there has not been an decline in the external revenue due to a change in the environment, then it is likely that the Commissioner would have issue with this arrangement.
Key Actions Now (that will save you in the future)
So the actions that you need to take now are as follows:
- Document your current situation
Explain how your customers and suppliers are impacting your business and why your external environment has changed. This can be in the form of meeting minutes or a narrative which sets out why sales are falling (eg. customers have slowed or stopped activity, cancelled events, etc.) and what business actions you are taking to mitigate your loss (reducing team hours, new business opportunities, etc.). Set up a file with supporting documentation including backups of your payroll software.
- Do not artificially slow down or speed up
Delivery of products or services, or the invoicing or payment relating to these supplies. This will be seen as a manipulation of your situation in order to receive the JobKeeper payments and puts you at risk with the Commissioner.
- Do not collude
With suppliers or customers to help your situation or their situation. Be particularly careful in your dealings with related parties including related entities or relatives.
- Don’t be an outlier
Be particularly careful if your business has been hit harder that your competitors for whatever reason. The fact that you are standing away from the herd will put you at particular risk if the wolf in ATO clothing comes knocking at your door.
The Devil in no Detail
We note that the issued Practice Compliance Guideline (PCG 2020/4) is particularly brief. It provides some basic concepts (external environment is ok, manipulated or artificial is not ok) and then provides eight examples focusing on deferral and advancement of supplies, restructures, service entities and corporate groups.
There will obviously be many valid situations that business owners will face when trying to work out whether they should be applying for JobKeeper payments, and most of these situations will remain confusing following the release of this guidance. The vague nature of the release sets the scene for the Commissioner to write his own rules as he is assessing each situation.
From the start, we have advised our clients to set up an JobKeeper file that substantiates your calculations and methodology – this now appears to be more important than ever.
If you have any questions, please contact us on 03 9886 0800 or via email.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2020. Please do not reproduce without the expressed written consent of the author.