May 5, 2020
Australian Jobkeeper new rules, ATO guidance and extensions require urgent action
New Australian Jobkeeper Payment (JKP) rules and guidance, issued on 1 May 2020, provide:
GEEs must have as their principal activity, supplying employee labor services to group entities within its Australian tax consolidated, consolidatable or Goods and Services Tax (GST) group.
EY Australia questioned the need for this narrow approach and put this view forward to Treasury during the consultation process. The policy reasons for the approach taken are unclear.
Those with GEEs need to urgently consider questions such as:
GEEs that include an operating business are unlikely to be eligible for this new test. These groups should urgently review the existing decline in turnover rules having regard to the Practical Compliance Guideline (PCG). The PCG allows some ability to adjust intercompany charges that reflect changed external conditions to assist in meeting the decline in turnover tests.
New rules were also introduced on 1 May 2020 that impact full-time students, charities, religious practitioners, universities and international aid organisations. The rules also confirm the “all in” rule for all eligible employees, including new notifications.
Extensions for employer enrollment and employee deadlines for the first two JKP fortnights
8 May 2020 is currently the critical date in an entity’s ability to claim the JKP for the first two fortnights (covering the period 30 March to 26 April):
Enrollment with the Australian Taxation Office (ATO) can be completed together with notification of eligible employees by 31 May 2020.
With these new rules being released after close of business on 1 May 2020, there are less than five working days to take the most urgent actions by 8 May 2020. EY has approached the ATO and policymakers requesting they urgently consider a deferral of the payment condition to 31 May 2020 in line with the other extensions granted recently but it remains to be seen whether this will be granted.
The date of 8 May 2020 is also the effective end of the third JKP fortnight, so the reconciliation and payments required to meet the wage condition for the third fortnight should factor this in.
Modified eligibility rules for some GEEs but issues for others
The Treasurer issued additional JKP rules late on 1 May 2020, to introduce for some but not all GEEs a modified way of measuring their decline in GST turnover (modified GEE decline in turnover rule).
However, the restrictive drafting of the modified GEE rule will mean that some significant employers will be ineligible to use the rule and will also not satisfy the other decline in turnover rules. This is despite extensive input and consultation provided to Treasury during the drafting stage.
The modified GEE decline in turnover rule adds a third option for an employer entity in addition to the:
An eligible GEE measures decline in the GST turnover test by reference to the combined GST turnover of all group entities receiving the labor services (not its own GST turnover).
The principal activity requirement requires a GEE to have the principal activity of supporting other operational entities by providing employee services.
Implications for some GEEs
The final rules which are designed to extend JKP payments to employers whose employees are engaged in the businesses of related entities will remain challenging for many groups, such as:
These and other limitations may mean that the Government does not achieve its desired coverage of the JKP scheme.
Adversely affected groups may consider adjusting the payments made to their GEEs in order for them to otherwise qualify. However, it is important that any such adjustments be reasonably proportionate and appropriate considering the business turnover of the business entities being served. The ATO’s PCG, discussed below, indicates there is a low risk of ATO compliance review where intra-group fee alterations are reflective of external turnover declines.
These issues are significant given the ATO has the power to deny a group’s use of the modified GEE rule if in the circumstances it is “unsuitable” or would risk the integrity of the administration of the JKP. This is in addition to the JKP anti-avoidance rule introduced in March. This new power is significant where groups seek to comply with the GEE rule.
While we welcome the Government’s changes to facilitate the use of GEEs, in the current tight economic environment jobs are in the balance and accordingly, this is not the time for laws which are unclear or have restrictive elements where the spirit of the JKP entitlement has been met. It is disappointing to have to deal with a series of minute and obscure technical issues outlined above such as what is a “principal activity” or “operating entity” or “incidental services.“
Actions for groups with GEEs
Careful and detailed consideration will immediately be required by impacted groups.
The narrow drafting of this modified GEE rule requires attention by any groups which have an entity providing employee labor services to associated or related entities, specifically:
ATO compliance and anti-avoidance law approach for group employment entities
The PCG and examples state that ATO actions are likely where entities reduce turnover by:
Further examples suggest the ATO is likely to accept reduced charges to related operating companies, and will not treat this as contrived, where:
In effect, the ATO will accept changes in intra-group charges as the basis for meeting turnover decline tests where this is reflective of an external decline in turnover. However, this will only assist groups where the employing entity in question was in receipt of such income in the prior period. In a consolidated environment this may be difficult to demonstrate.
Additional rule changes
Additional rules cover the other announcements of 24 April 2020 including:
Full-time students who are 16 or 17 years old and who are not financially independent will no longer be eligible for the JKP. The meaning of the terms “financially independent” and “full-time study” are taken from the Social Security Act 1991.
This change applies prospectively to JKP fortnights commencing 11 May 2020 onwards. JKPs to 16 and 17 years old which have already been processed will not be disturbed and such payments will still be required for the first three JKP fortnights.
This will introduce an additional step for employers with employees aged 16 or 17 years, with new employee nomination notice questions to address these issues.
Universities will need to include income from Commonwealth-supported places (e.g., funded by HECS-HELP) and research grant income in turnover tests. However, if full fee-paying students (including international students) are a significant source of income, a university may demonstrate a turnover decline that enables it to qualify. The turnover test period is the six months commencing 1 January 2020, i.e., universities are required to consider projected turnover in this period as opposed to a month or quarter and compare it to the corresponding period in 2019.
Many universities have wholly-owned entities which should also assess turnover on a standalone basis.
ACNC-registered charities will be provided with the ability to elect to apply a modified turnover rule which will disregard many grants and make it easier for charities to establish they have satisfied the 15% decline in turnover test where non-grant funding such as gifts and donations has declined. Charities which have already enrolled have until 8 May 2020 to notify the ATO of the election to apply the modified approach.
Modifications may apply to employee eligibility where charities have employees whose salary and wages are fully funded by government grants.
Giving effect to the “one-in, all-in” test
While mechanisms in the Fair Work legislation require employers to pay individuals who would otherwise be eligible but who are not receiving wages in a JKP fortnight, this was not clear within the JKP rules. A new process has been introduced to require employers to notify all potentially eligible employees that their consent to be nominated is sought, including information about the steps the individual can take to give the entity the nomination notice. Breaching this notification requirement will be a breach of tax law while failing to meet the payment condition will breach the Fair Work Act.
Employers who have already enrolled for JKP with the ATO will have until 8 May 2020 to comply. Employers who enroll after 1 May 2020 will have seven days from the date of enrollment to provide the notice.
However, the notice does not need to be given to an individual if the entity reasonably believes that the individual does not satisfy the 1 March 2020 requirements to be an eligible employee. This would apply where the entity reasonably believes that the individual:
In substance, employers who have already commenced or completed the nomination process should have satisfied this requirement as long as they gave all employees, including those stood down or on unpaid leave, the opportunity to nominate for JKP. If this did not occur, action should be taken immediately to contact those employees and, if they provide their nomination consent, to pay them by 8 May 2020.
Action required for employers claiming JKP
The AU$130 billion JKP requires urgent attention for businesses. This includes:
Action for JKP compliance
EY’s detailed JKP work program and practical approach can support business in managing this tight timeframe.
Our multidisciplinary approach addresses tax and legal requirements while also addressing the intricacies of employee communications and the interaction with the ATO reporting.
Processes where we can assist include:
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Sydney
Ernst & Young (Australia), Perth
Ernst & Young (Australia), Melbourne
Ernst & Young LLP (United States), Australian Tax Desk, New York
Ernst & Young LLP (United Kingdom), Australian Tax Desk, London