Changes to PAYG have been introduced to assist small and medium businesses in response to COVID-19.
The new legislation was introduced into law with an integrity rule, which can result in an entity not being entitled to any amount of the cash flow boost where steps have been taken with the sole or dominant purpose of gaining access to the measure (or increasing the amount to be received under the measure).
The Australian Taxation Office (ATO) has stated it will be monitoring increases in PAYG withholding claims and backdated registrations and will be seeking to apply the integrity rule. This could also include the scenario where there is a change in the owner’s draw to a salary. Accordingly, taxpayers need to be critically mindful of actions taken in the March (or following) Activity Statement where they could potentially fall foul of this integrity rule.
What are the rules about?
The Boosting Cash Flow for Employers measure as part of the Federal Government’s economic response package to the COVID-19 allows eligible employers to access minimum tax-free payments of $20,000 (and up to $100,000) based on PAYG withheld as reported on the employer’s business activity statement (BAS) or instalment activity statement (IAS) from the March 2020 month or quarter.
Who do the rules apply to?
Generally speaking, eligible entities are those businesses whose aggregated turnover is less than $50m for the 2018-19 income year or is reasonably likely to be less than $50m for the 2019-20 income year who make any payments between 1 January 2020 and 30 June 2020 that are subject to PAYG withholding. Charities and not-for-profit entities of a similar size may also be eligible.
Payments subject to PAYG withholding can include payments of salary and wages to employees, payments of company director’s fees and payments to contactors where there has been a voluntary agreement to withhold. Payments will qualify even if there is no amount actually required to be withheld (e.g. where an amount of wages is below the relevant tax-free threshold).
To be eligible, entities need to have had an ABN on 12 March 2020 (or be an ACNC-registered charity any time between 1 January 2020 and 30 June 2020).
What is the integrity rule?
As the amount of the cash flow boost payments are based on PAYG withheld and eligibility is based on an entity making payments subject to withholding, the measures have the potential to be exploited in various ways. For example:
- An entity taking steps to qualify for the measure (and accessing the $20,000 minimum) by taking on an employee who is a related party, paying director’s fees or entering into voluntary withholding arrangements with contractors for the first time between 12 March 2020 and 30 June 2020 in response to the measure being announced.
- An entity increasing the amount of the relevant PAYG withholding payments in order to maximise their cash flow boost entitlement (e.g. up to the $100,000 maximum).
- For large and medium withholders who lodge a BAS or IAS monthly, bringing forward pay to the month of March 2020 as the cash flow boost is based on 300% of the amount for the month of March for such businesses (i.e. the amounts in January and February are not taken into account).
- An entity varying existing arrangements to increase the amount of PAYG withholding to maximise the cash flow boost (e.g. suspending salary sacrifice arrangements to increase PAYG withholding on salary or variations on withholding arrangements such as employees choosing not to claim the tax-free threshold or any upward variation more generally).
- A sole trader or partnership restructuring into an existing company such that the corporate entity is able to pay salary or director’s fees to the former sole trader or partner.
- Paying a bonus (for example, to an employee who is also a controller of a private group).
The integrity rule contained in the measures states that an entity will not qualify (for any amount of the cash flow boost) if the entity (or an agent or associate of the entity) entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of qualifying for the cash flow boost or increasing the amount of the cash flow boost.
Therefore, any arrangements in the nature of those set out above could result in the entity being disqualified from receiving any payment of the cash flow boost. Even though we expect most payments will be automatically processed by the ATO, payments made may have to be refunded (with interest) if the ATO applies the integrity rule upon conducting a review.
What has the ATO stated about the integrity rule?
The ATO has issued a warning (click here) that the integrity rule may apply where a business is restructured or the way in which workers are usually paid is changed so that the business becomes eligible for the cash flow boost or to maximise the cash flow boost. Therefore, any sudden spike in wages or PAYG withholding will attract the attention of the ATO.
Critically, the ATO will monitor any sudden changes to the character of payments to determine if they are in fact wages. This may further result in similar past payments being treated as wages with PAYG withholding, super guarantee and FBT consequences arising.
Is there anything else to be aware of?
As well as this specific integrity measure, there are also existing integrity rules that businesses need to be aware of when paying related entities.
For private companies, section 109 of the Income Tax Assessment Act 1936 may operate to deny the company a deduction for excessive remuneration paid to associates of the company’s shareholders.
For sole traders and partnerships, section 26-35 of the Income Tax Assessment Act 1997 applies to limit deductions to amounts paid to related entities that the Taxation Commissioner considers reasonable.
What are the next steps?
It is critical to consider your unique position and how the rules apply as the first cash flow boost is being determined based on the month or quarter ending 31 March 2020.
Contact Pitcher Partners to review your situation and determine what actions are appropriate in light of the potential application of the integrity rule.